Eric Hage, Managing Director, Absolute Investment Advisers & Portfolio Manager of the Absolute Convertible Arbitrage Fund

“…The positive carry in the portfolio continues to improve as new convertible deals get priced with much higher coupons than in recent years. And, equally as important, the rebates we receive on our stock short positions continue to improve in lockstep with rising fed funds rates. “

The Absolute Convertible Arbitrage Fund (ARBIX) returned +1.30% in the first quarter of 2023.

Despite the modest positive return for the first quarter, market conditions were not exactly boring, particularly late in the first quarter. Convertible buyers initially followed through with adding positions in the early weeks of 2023 as moderately lower interest rates underlying bond valuations continued to show signs of stabilization in January. But buyers quickly pulled back during February as interest rates spiked 75 basis points on higher inflation expectations. Then, unexpectedly, risk free rates dramatically reversed course and dropped 100 basis points in early March with the collapse of Silicon Valley Bank and a spillover of fears throughout the banking sector.

The banking crisis led to tighter credit conditions with high yield spreads widening about 100 basis points over a few weeks in March. During the height of the banking crisis, convertible participants were almost exclusively risk off sellers and the convertible market cheapened to more than 2% below fair value (Jefferies) before stabilizing and catching a bid in late March. And, average implied convertible credit spreads ended the quarter still 100 basis points wider than HY single B spreads at 565 over (Barclays).

From an overall gross Profit & Loss (P&L) perspective for the quarter, convertible bond price appreciation versus the underlying stock hedge had a positive impact of +77 basis points, while the interest rate hedge had a negative -8 basis points of impact, yield/carry contributed +71 basis points, and trading +20 basis points. As mentioned in the previous paragraph, convertible theoretical valuations cheapened in March and ended the quarter about 140 basis points below fair value on average.

After record years of convertible issuance in 2020 and 2021, issuance in 2022 was disappointing with about $33 billion in new convertibles priced on 70 new deals. Most convertible market participants expect a significant pickup in issuance in 2023 as more companies look to save on coupon costs. So far in 2023, there has been a modest pickup in the relative pace of issuance versus 2022 with $13 billion in proceeds on 25 new deals priced in the first quarter.

The positive carry in the portfolio continues to improve as new convertible deals get priced with much higher coupons than in recent years. And, equally as important, the rebates we receive on our stock short positions continue to improve in lockstep with rising Federal Funds Rates. Convertible valuations are currently below fair value and convertible spreads are significantly wider than high yield. With the markets in a place where it seems there is an equal chance of things going any which way, it is comforting to have an attractively priced, hybrid, idiosyncratic, hedged strategy with positive static carry that has a history of withstanding whipsaws from macro events like the ones experienced in the first quarter of 2023. Further, our specialization in this market, and our years of accumulated research in the companies we follow, enable us to take advantage of dislocations in credit that may increase if the Fed pushes the U.S.economy into recession.





(Definitions, supporting data and risk disclosure below)

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 Convertible Arbitrage Fund’s Total Annual Operating Expense ratio (gross) for Institutional Shares is 1.75% and the net expense ratio is 1.51% through August 1, 2023. 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 1.20% through August 1, 2023 (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.

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.

DEFINITIONS: The Bloomberg Aggregate Bond Index (Baclays Agg) is is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market. The Barclays High Yield Bond Index (Barclays High yield) measures the performance of high-yield debt issued by corporations domiciled in the US or Canada. A Basis Point (or bps) is 1/100th of a percent.

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 assur- ance 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 ad- versely affect Fund performance. The value of a convertible securi- ty 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 securi- ties involve greater risk and tend to be more sensitive to eco- nomic 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.

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