Absolute CEF Opportunities (ACEFX) generated a net return of 2.8% in the second quarter of 2025, bringing the year-to-date return to 3.5%. The average net exposure was 44% for Q2.
The fund benefitted from a sell-off, and the subsequent quick rebound following “Liberation Day” in early April. As we have mentioned quite frequently, the Fund has been focused more on the special situations in the Closed-End Fund (CEF) space. However, both the first and second quarters of this year have offered ample relative value opportunities, as well.
Special situations still dominated the top performers list, in Q2. The top performer for the quarter is a CEF that is conducting a very large tender offer. The good news for ACEFX is that the tender still hadn’t closed as of the end of the quarter. That CEF was joined by three rights offerings (one was in the top three contributors) that closed before the end of June. In total for the quarter, we participated in five rights offerings, three tender offers, and four funds that converted to either an open-end fund or an ETF structure. All in all, that’s a very healthy number of special situations, in our view.
It was also good to see some relative value opportunities make the list for the second quarter in a row. From start to finish, the average discount didn’t move too much, but intra-quarter we saw some big swings. We entered the quarter with an average CEF discount of 4.4%. However, by April 7th the average CEF discount had dropped to 7.6% (Figure 2). We used this opportunity to sell some of our funds that did not see their discounts widen to pick up funds that saw dramatic discount swings. We also increased our gross exposure to add further. This led to five of the top ten performers for the quarter to be relative value trades. We have exited most of those positions already, as discounts swung back rapidly. Three in the top ten were hedges that kicked in during the Liberation Day sell-off.
As for detractors, almost all were hedges. Six of the bottom ten were ETFs we were using to hedge factor risks. One was a sector CEF investing in the healthcare sector (which was offset by one of the hedges listed in the top-ten), one was a credit fund and the other two were equity CEFs.
During the quarter, the positions in ACEFX were very similar to our hedge fund. Aside from the structural and fee differences between the two, the primary differences between the two funds were related to position sizes and leverage. Later in the second quarter we were able to utilize limited leverage in ACEFX which was largely concentrated opportunistically on special situations. ACEFX has diversification limits which limited some position sizes relative to the hedge fund. This could be remedied by making ACEFX a “non-diversified” fund which is something we might pursue at a later date.
Figure 2: Average Premium/Discount for All U.S.-Listed CEFs
More importantly, the stream of special situations looks quite strong for the foreseeable future. As of the end of June we had two rights offerings that were underway, and an additional one that was announced last week. There are two tender offers that have already been announced, one fund liquidation, and six additional liquidations that are up for a shareholder vote. Given that these funds historically trade at a discount, we believe all will be approved by shareholders. Lastly, there are thirteen fund merger proposals in front of shareholders involving forty funds.
Given the large number of special situations, we wanted to address one question we get frequently. Are all of these tenders/open-endings/mergers bad for the long-term viability of the product? The simple answer is, it’s not nearly as bad as it sounds. While the number of funds has been shrinking, market appreciation has helped increase the size of the surviving funds. In fact, while the number of funds listed in the U.S. has shrunk since we launched over ten years ago, the total assets has grown.
As for mergers, most of these involve small funds in the municipal bond space, so the outcome will be fewer funds, but more liquid ones. We would rather have a single billion dollar fund than five two-hundred million dollar ones. And, more importantly, all the rights offering we are mentioning help to grow assets. As of the end of June, there were 457 CEFs trading in the U.S., representing over $400 billion in total assets.
Last, while we haven’t seen any major CEF IPOs since 2021, that was a banner year in the space. We have been focusing on CEFs since 1992 and have seen several dry spells in new issuance. But, they always come back. The catalyst historically has often been some form of tax change. Examples include the taxation of the preferred shares on muni funds in the early 1990’s, the taxation on Master Limited Partnerships (MLP’s) and the taxation of qualified dividends in the early 2000’s. Given the current political environment, it is easy to imagine some form of tax code that could spur a wave of new CEFs. If there is money to be made, the fund advisors and investment bankers will find a way issue new funds.
As always, thank you for your continued trust in us. Please don’t hesitate to reach out to Patty or me with any questions.
– Kevin J. McNally, Portfolio Manager
(Definitions, supporting data and risk disclosure below)
On August 1, 2024, the Fund added Mr. McNally and Ms. Santorella as portfolio managers to the Fund and began utilizing CEFs as part of its non-principal investment strategy. On October 22, 2024, the Fund removed Mr. Compson, the Fund’s portfolio manager since inception, as a portfolio manager, and changed its strategy to utilize CEFs as the Fund’s principal portfolio investment. Different investment strategies may lead to different performance results. The Fund acquired all of the assets and liabilities of the Absolute Strategies Fund, a series of Forum Funds (the “Predecessor Fund”), in a tax-free reorganization on September 8, 2023. In connection with this acquisition, shares of the Predecessor Fund’s Institutional Class shares were exchanged for Institutional Class shares of the Fund. The Predecessor Fund had an investment objective and strategies that were, in all material respects, the same as those of the Fund, and was managed in a manner that, in all material respects, complied with the investment guidelines and restrictions of the Fund.
The Fund’s performance for periods prior to September 11, 2023 is that of the Predecessor Fund. The Fund is a continuation of the Predecessor Fund, and therefore, the performance information includes the performance of the Predecessor Fund.
Quarter-End Performance for ACEFX: As of 6/30/25, the 1 year, 5 year and 10-year annualized performance for the Absolute CEF Opportunities was 2.70%, -4.50% and -2.91% respectively.
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. To obtain performance information current to the most recent month-end, call the Fund at 888-99-ABSOLUTE. Returns include the reinvestment of dividends and capital gains. Some of the Fund’s fees were waived or expenses reimbursed; otherwise, returns would have been lower.
As stated in the prospectus, the Absolute CEF Opportunities (ACEFX) Total Annual Operating Expense ratio is 6.65% (gross) and 5.98% (net) through July 31, 2026. Absolute Investment Advisers LLC, the Fund’s Adviser, has contractually agreed to waive its fee and/or reimburse Fund expenses to limit Total Annual Fund Operating Expenses to 1.79% through July 31, 2026 (the “Expense Cap”). This Expense Cap, which excludes all taxes, interest, portfolio transaction expenses, dividend and interest expenses on short sales, acquired fund fees and expenses, broker charges, proxy expenses and extraordinary expenses, may only be raised or eliminated with the consent of the Board of Trustees.
DEFINITIONS:
Closed-end fund (CEF): A closed-end fund (CEF) is a type of investment company that issues a fixed number of shares through an initial public offering (IPO), and those shares are then traded on an exchange, like a stock.
Tender offers: A tender offer is a public invitation from a party to shareholders of a company (the target) to sell their shares at a specified price for a specific period. In the CEF market, the price is usually set at a small discount to NAV.
Rights offerings: A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.
MLP funds: Master Limited Partnerships (MLPs) are business ventures in the form of a publicly traded limited partnership. It combines the tax benefits of a private partnership with the liquidity of a publicly traded company. In the CEF market, these MLPs tend to focus in the energy sector and one oil and gas pipelines in particular.
IMPORTANT RISK INFORMATION
Closed-End Fund Risk
The Fund expects to invest primarily in CEFs, and may also sell CEFs short, the shares of which may trade at a premium or discount to their net asset value. CEFs differ from open-end investment funds in that holders of interests in a CEF do not have the right to redeem their interests on a daily basis at a price based on net asset value. The CEF shares in which the Fund may trade may be traded on one or more U.S. or foreign exchanges.
The Fund may also trade shares of CEFs that trade sporadically, are illiquid and may not be traded on an exchange. CEFs may be subject to various trading restrictions. The Fund will generally not have any control over the investments made by CEFs and will generally only have limited access to information about the CEFs and their investments. CEFs generally trade independently of each other and, at times, may hold economically offsetting positions. At times CEFs may make in kind distributions which could result in the Fund owning securities that were in a CEF’s portfolio. These securities may be illiquid and may take considerable time to sell. If a CEF converts to open-end status, such conversion may result in the Fund holding shares in an open-end fund. As a part of such conversion the new open-end fund’s withdrawal terms may have associated withdrawal fees, which often decline over time and consequently, if such open-end fund’s shares are held by the Fund, certain withdrawals by the Fund from such open-end fund may be subject to a withdrawal fee. Certain CEFs may also employ leverage, which may amplify investment gains and losses.
Rights may be considered more speculative than certain other types of investments in that they do not entitle a holder to dividends or voting rights with respect to the underlying securities. If a right held by the Fund is not exercised by the date of its expiration, the Fund would lose the entire purchase price of the right.
Asset allocation decisions may not always be correct and may adversely affect Fund performance. The Fund may leverage transactions which include selling securities short as well as borrowing for other than temporary or emergency purposes. Leverage creates the risk of magnified capital losses. Diversification does not prevent loss or enhance returns. Foreign investments present additional risk due to currency fluctuations, economic and political factors, government regulations, differences in accounting standards and other factors. Investments in emerging markets involve even greater risks. The Fund is actively managed and may experience high turnover. This may cause higher fees, expenses and taxes, which could detract from Fund performance.
These views are subject to change at any time based on market and other conditions, and Absolute Investment Advisers disclaims any responsibility to update such views. No forecasts can be guaranteed. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any Absolute Investment Advised investment product.
Investors should carefully consider the Fund’s investments objectives, risks, charges and expenses before investing. This and other information is in the prospectus, a copy of which may be obtained by calling (888) 992-2765 or visiting the Fund’s web site: www.absoluteadvisers.com. Please read the prospectus carefully before you invest.
Distributor: Ultimus Fund Distributors, LLC
Absolute Investment Advisers LLC is not affiliated with Ultimus Fund Distributors, LLC.
Absolute Convertible Arbitrage Fund, Absolute Investment Advisers and their logos are service marks of Absolute Investment Advisers LLC
4221 North 203rd Street, Suite 100, Elkhorn, NE 68022-3474
(888) 99-ABSOLUTE or (888) 992-2765
www.absoluteadvisers.com
20250722-4673743