Performance Overview
The Absolute Convertible Arbitrage Fund (ARBIX) delivered a net return of +1.65% in the first quarter of 2026.

Once again, ARBIX demonstrated resilience during a challenging environment for both equity and fixed income markets. Stocks declined, interest rates rose, and credit spreads widened over the period. The S&P 500 Index returned -4.35% for the quarter, while the Bloomberg U.S. Aggregate Bond Index was essentially flat at -0.05%. Meanwhile, the iBoxx High Yield Index declined -0.44%, as credit spreads widened by approximately 50 basis points.

Market Commentary
The first signs of market stress emerged in mid-January, when software stocks began a sharp decline of roughly 25% over the following month. Concerns surrounding the AI trade led to a meaningful compression in equity multiples across the sector. However, many convertible-issuing software companies maintain strong balance sheets and robust cash flows. As a result, these equity declines often translated into profitable opportunities within convertible arbitrage positions.

The second major market event was the onset of the Iran war in late February. This conflict triggered a sharp spike in oil prices, which in turn led to an unexpected increase in interest rates. Entering 2026, most market participants anticipated a gradual decline in rates, driven by moderating inflation and the transition to a more accommodative Federal Reserve leadership. Instead, rising oil prices and interest rates negatively impacted both equity valuations and credit spreads, as markets re-calibrated toward higher inflation expectations and the possibility of a more restrictive monetary policy path.

Additionally, concerns around expanding fiscal deficits and increased government borrowing—particularly related to the “One Big Beautiful Act”—have contributed to upward pressure on interest rates beyond initial expectations for 2026.

The third key theme in the quarter was the evolving situation in private credit markets. In our Q1 2025 commentary, we noted that private credit—particularly in less liquid structures and among lower-quality borrowers—could be vulnerable in a stressed environment. Early 2026 has seen a rise in redemption requests from retail-oriented, semi-liquid private credit funds. The magnitude of these flows suggests that this trend may persist for several quarters, potentially accompanied by negative media attention.

To date, the impact on public credit markets has been limited. We continue to monitor the situation closely. It is possible that public credit spreads widen in response, although the opposite outcome—capital rotating from private to liquid credit markets—could also occur. In either scenario, periods of uncertainty reinforce the value of a transparent, liquid, hedged credit strategy such as ARBIX within a diversified portfolio.

Q1 Fund Performance Breakdown:
The fund’s gross Profit & Loss (P&L) contributions for the quarter were driven by the following factors:

New Issuance Remains Strong:
Convertible issuance remained robust during the first quarter of 2026. A total of 38 deals were priced, raising approximately $31 billion in proceeds. At this pace, 2026 has the potential to surpass the record issuance of $119 billion observed in 2025.

As highlighted in prior commentaries, AI-related companies continue to be a major driver of new issuance. According to Barclays Research, AI infrastructure companies, including large-cap names such as Oracle and Nebius were large issuers during the first quarter.

While this remains an exciting and opportunity-rich segment of the market, we continue to approach AI-related investments with discipline and rigorous risk controls, focusing on individual security selection rather than thematic exposure.

Strategy Perspective:
Market participants often focus on macroeconomic developments and their influence on investment performance. While factors such as interest rates, credit spreads, equity volatility, and supply-demand dynamics certainly affect short-term results, their impact on convertible arbitrage strategies is typically more muted relative to other asset classes. This is due to the strategy’s short duration, hybrid structure, and hedged nature, which collectively contribute to consistent, low-volatility returns.

Less frequently discussed, however, is what drives sustained outperformance within such a disciplined framework. At its core, performance is the result of rigorous bottom-up research, thoughtful security selection, and precise position sizing based on risk-reward considerations.

While most positions perform in line with expected return profiles, the strategy benefits from continuously identifying and capitalizing on new opportunities—particularly in high-growth sectors where innovation and disruption create mispricings. Select investments can generate outsized returns, meaningfully contributing to overall performance.

This dynamic is especially relevant in the current AI-driven environment, where rapid change creates both complexity and opportunity. Success ultimately depends on disciplined execution—driven by deep research, intellectual curiosity, and a consistent focus on individual securities.

(Definitions, supporting data and risk disclosure below)

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.