Eric Hage, Chief Investment Officer
at Mohican Financial Management
and Portfolio Manager of the
Absolute Convertible Arbitrage Fund

The Absolute Convertible Arbitrage Fund (ARBIX) delivered a +9.29% return for investors in 2020. Our 2019 year-end commentary focused on the ability of ARBIX to deliver low standard deviation and low beta returns versus other strategies and asset classes. The Covid-19 pandemic tested that proclamation. In 2020, ARBIX continued to deliver low beta returns to other asset classes(1). Most importantly in 2020, ARBIX also delivered some of the lowest volatility, and highest Sharpe Ratio returns, of all market neutral mutual funds(2).

Our 1Q 2020 commentary emphasized the importance of capital preservation in delivering attractive returns for investors. Our conservative, disciplined, focused and hedged strategy keeps us in a liquid position of strength. Our positioning enables us to limit drawdowns and nimbly take advantage of unexpected market dislocations when they arise. We did just that in early 2020 allowing us to significantly exceed our pre-2020 return expectations.

2020 was an extraordinary year for the US convertible asset class. We continuously emphasize that investors should focus on the supply and demand dynamics of the convertible asset class. The asset class is healthiest when it has the right mix of long only and hedged investors, as it does today with approximately 60% of the buyers’ long only equity investors and 40% arbitrageurs. But the big story of 2020 was the supply side of the equation and the dramatic surge in convertible bond issuance. New issuance of convertibles exploded to a new record in 2020 as 182 deals were priced, raising $101.4 billion in proceeds (Source: Kynex). Companies from 41 different industries issued convertible bonds in 2020 with the traditionally active technology and healthcare sectors leading the way again. However, the consumer discretionary sector was equally active to healthcare in issuing new convertibles comprising about 20% of issuance. The speed of access to the convertible market led to consumer companies desperately accessing cash via the convertible market to shore up balance sheets in the midst of the pandemic. Because of the uncertainty surrounding the future credit worthiness of consumer discretionary companies, these convertible issues were priced extremely attractively for investors at issuance, helping to generate excess returns in 2020. According to Barclays, 1.4% of return in 2020 came from valuation improvement of new issues in the first day of secondary trading.

Barclays expects supply and demand conditions to remain favorable in 2021. On the demand side, they cite the importance of traditionally under-represented sectors issuing convertibles (i.e., consumer discretionary) attracting more investors, a mix of growth and recovery exposure industries allowing for diversification, strong returns for the asset class attracting attention, and better liquidity and trading volumes for convertibles. On the supply side, Barclays expects strong issuance to continue because of the speed of access available to issuers looking for liquidity, a broader issuer base, some well-known recent issuers making the market more mainstream, and high equity valuations driving companies to issue equity linked debt. In addition, as the market sees periods of equity volatility, we expect companies to monetize this uptick by issuing convertible securities with more attractive terms because of the embedded equity call option within each convertible.

As have convertibles, investment grade and high yield corporate bonds have experienced very strong issuance. With risk free interest rates still close to zero, investment grade spreads at less than 100 basis points and high yield spreads less than 400 basis points, investors are in a tough spot on how to allocate to fixed income. On the one hand, if interest rates rise, investment grade bonds will struggle. On the other hand, if spreads widen, high yield will struggle. We believe convertible arbitrage, and ARBIX in particular, offers a compelling option to both investment grade and high yield. ARBIX has generated positive returns in every rising interest rate period going back to 2002(3). Convertible bonds trade at wider implied credit spreads than high yield despite significantly lower default rates. Furthermore, convertible arbitrage offers investors long equity volatility exposure during a time of elevated equity valuations which acts as an offset to credit widening events. Given the unique return characteristics of convertible arbitrage, and a marketplace that is growing in size with favorable conditions, we believe investors are well positioned with ARBIX as their fixed incoime alternative.

(Definitions, supporting data and risk disclosure on reverse)

“…investors are in a tough spot on how to allocate to fixed income. On the one hand, if interest rates rise, investment grade bonds will struggle. On the other hand, if spreads widen, high yield will struggle. We believe convertible arbitrage, and ARBIX in particular, offers a compelling option to both investment grade and high yield.”

Quarter-End Performance for ARBIX: As of 12/31/20, the 1 year, 5 year and 10 year annualized performance for the Absolute Convertible Arbitrage Fund was 9.29%, 6.74% and 4.74% respectively. Performance data quoted rep- resents 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 capi- tal 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 Convertible Arbitrage Fund’s Total Annual Operating Expense ratio (gross) for Institutional Shares is 1.67% and the net expense ratio is 1.49% through August 1, 2021. However, 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 1.40% through August 1, 2021 (the “Expense Cap”) and to 1.20% when the Fund reach- es $250 million in assets under management. 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.

As of 12/31/20:
(1) ARBIX beta to the S&P 500 was 0.08, and to the Barclays’ Agg: 0.21 (since conversion to a mutual fund on 8/14/17)
(2) ARBIX 3yr standard deviation (volatility) of 2.43 is lowest in category of 39 market neutral funds
(3) ARBIX Sharpe Ratio of 1.4 is the 3rd highest of 39 market neutral funds (3yr data)

DEFINITIONS – Standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance and is used to measure volatility. Beta is the measure of a fund’s relative volatility as compared to the S&P 500 Index which by definition is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the Index in up markets and 10% worse in down markets. Sharpe Ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. It is used to measure the return of an investment compared to its risk. A drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund. Basis points are a unit of measurement to describe percentage change in value. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

HEDGE FUND CONVERSION – In August 2017, a hedge fund managed by Mohican Financial Management LLC reorganized into the Fund. The Fund’s performance for periods prior to the commencement of operations is that of the hedge fund and is based on calculations that are different from the standardized method of calculations adopted by the SEC. The performance of the hedge fund was calculated net of the hedge fund’s fees and expenses. The performance of the hedge fund is not the performance of the Fund, has not been restated to reflect the fees, estimated expenses and fee waivers and/or expense limitations of the Fund, and is not necessarily indicative of the Fund’s future performance. If the performance of the hedge fund had been restated to reflect the applicable fees and expenses of the Fund, the performance may have been lower. The hedge fund was not registered under the Investment Company Act of 1940 (“1940 Act”) and was not subject to certain investment limitations, diversification requirements and other restrictions imposed by the 1940 Act and the Internal Revenue Code of 1986, which, if applicable, may have adversely affected its performance.

Past performance does not guarantee future results. The Fund’s net asset value and investment return will fluctuate based upon changes in the value of its portfolio securities. There is no assurance that the Fund will achieve its investment objective, and an investment in the Fund is not by itself a complete or balanced investment program. For a complete description of the Fund’s principal investment risks please refer to the prospectus.

Asset allocation decisions may not always be correct and may adversely affect Fund performance. The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on a convertible security’s investment value. Debt securities have interest rate, inflation and credit risks and are subject to prepayment and default risk. High yield and junk securities involve greater risk and tend to be more sensitive to economic conditions and credit risk. Short sales may be considered speculative and it may be difficult to purchase securities to meet delivery obligations. 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. Small, mid and large cap stocks are subject to substantial risks such as market, business, size volatility, management experience, product diversification, financial resource, competitive strength, liquidity, and potential to fall out of favor that may cause their prices to fluctuate over time, sometimes rapidly and unpredictably. 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: Please read the prospectus carefully before you invest.

Absolute Convertible Arbitrage Fund, Absolute Investment Advisers and their
logos are service marks of Absolute Investment Advisers LLC

Three Canal Plaza, Suite 600, Portland, Maine 04101
(888) 99-ABSOLUTE or (888) 992-2765
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