Calamos Investments Looks to Hedge Bitcoin's Volatility With New ETFs

11/22/2024 04:04

(Bloomberg) -- Exchange-traded funds that pledge to hedge the epic volatility of the world’s largest cryptocurrency may soon be coming to Wall Street, just after a triple-digit rally that’s taken speculative euphoria to a whole new level.Most Read from BloombergTrump Promises Could Have Seismic Impact on Washington EconomyParis to Replace Parking Spaces With TreesTokyo’s Scorching Summers Focus Public Anger Against Tree CuttingNYC Mayor Adams Names Jessica Tisch to Lead Police Head Amid ProbesNe

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Calamos Investments is looking to launch so-called “structured-protection” ETFs that will track a portion of Bitcoin’s returns while hedging as much as 100% of the downside via the options market, according to paperwork submitted to the US Securities and Exchange Commission Wednesday.

The Chicago-based firm filed three strategies this week that will offer full protection for over six months as well as 90% and 80% both for over one year. Calamos earlier this year filed for an ETF that will offer 100% hedging also for over one year. The ETFs do not have fees nor tickers listed yet.

While the options eco-system is still in its infancy – and regulatory hurdles remain before any launch date can be set — investors would be able to choose from the four strategies, if approved. They all have varying so-called cap rates, which refer to the maximum percentage return in a given time period, where the higher protection, the lower the cap rate. For instance, if traders choose to invest in the Calamos Bitcoin 90% Protection Strategy ETF, they will receive Bitcoin exposure with a maximum loss of 10% but with less upside than the lower protected fund.

The latest Calamos filings come just days after spot Bitcoin ETFs were given the green light by US regulators to list options, allowing investors to use derivatives to bet on or against the world’s largest digital asset.

The success of the new ETF to hedge downside risk could hinge on US regulators increasing position limits for ETFs that hold Bitcoin directly and making FLEX options — calls and puts with customized contract specifications — available, says Bloomberg Intelligence’s James Seyffart.

For now, Bitcoin ETFs with approved options have started with the smallest possible position limits of 25,000 compared to the 200,000 to 250,000 ceiling that most US ETFs have.

“I am fairly optimistic that the position limits will increase in the coming months,” the ETF analyst said. “The regulators are being extra cautious but it can only go up from here.”

To reap the full protection in the new Calamos ETFs, traders need to buy the funds on launch day and hold these throughout the entire outcome duration, no matter what. After that, a new defined period of cover kicks in. The ETFs will stay open and the options automatically roll over. The regulatory filings note there’s no guarantee the fund will be successful in providing the much sought-after downside protection.

The novel idea yet again is emblematic of the product machine that Wall Street issuers have turned into as they seek to churn out instruments amid a saturated $10 trillion US ETF universe and a crypto bull market that is seeing $100,000 well-within reach for Bitcoin.

“Every ETF entrepreneur with a pulse is looking at the Bitcoin space and asking themselves how can I get in? So, you will see every idea tried in non-crypto ETFs applied to crypto,” said Matt Hougan, chief investment officer at Bitwise Asset Management Inc. “We’re seeing crypto move from a crazy idea to a mainstream, institutionally adopted asset class.”

While new for the cryptocurrency space, the capital-protected strategy isn’t the first of its kind for Calamos. The investment firm already launched a suite of similarly-structured ETFs that primarily invest assets in equity derivatives by buying and selling a combination of call and put options to cushion against market volatility.

Still, some like Bryan Armour, director of passive strategies research for North America at Morningstar Inc, question the purpose of capping returns.

“If you want Bitcoin without volatility, then you don’t want Bitcoin,” he said. “These products cut off Bitcoin’s upside. If I were to invest in Bitcoin, I would want the upside. Simple as that.”

There are currently no similar products in the crypto ETF space but demand has been growing for more complex vehicles. The 2x Bitcoin Strategy ETF (ticker BITX) launched last year has gathered more than $3 billion in assets while the NEOS Bitcoin High Income ETF (BTCI), introduced last month, has thus far amassed $13 million. The ProShares Bitcoin ETF (BITO), one of the first funds to track Bitcoin futures incepted in 2021, has garnered nearly $3 billion.

Calamos has over $400 million in assets spread across 11 structured-protection ETFs. The firm, with roughly $40 billion in assets under management, specializes in options-based strategies across various fund wrappers including ETFs, separately managed portfolios and mutual funds.

--With assistance from Emily Graffeo.