Performance Overview:
In the first quarter of 2024, the Absolute Convertible Arbitrage Fund (ARBIX) delivered a positive return of +2.20%. Over the trailing 12 months, ARBIX has maintained a solid trajectory, posting a return of +6.23%. As highlighted in our previous reports, ARBIX’s forward return outlook remains promising, particularly in higher rate environments, buoyed by elevated coupon yields and improved short stock rebate rates associated with hedged equity strategies.

Market Movement and Impacts:
During the first quarter of 2024, credit spreads for non-investment grade bonds tightened approximately 40 basis points, bolstering convertible valuations. Although equity volatility remained relatively flat, equities continued their upward momentum, with significant gains observed. Notably, the Russell 2000 index showed some signs of life gaining +5.17%, fueling discussions about the relative attractiveness of small and mid-cap stocks compared to large caps. This trend may catalyze increased interest in convertibles tied to smaller companies, potentially enhancing ARBIX’s performance.

Interest rate movements posed challenges for bond valuations, with the 5-year Treasury yield climbing about 30 basis points during the quarter. Our cautionary remarks in the 4Q 2023 commentary regarding optimistic yield curve expectations were validated by persistent high inflation and economic indicators, leading to rising longer-term rates and diminishing expectations of imminent rate cuts. Consequently, bond strategies sensitive to interest rate fluctuations faced headwinds, underscoring the importance of long-term alternative strategies like ARBIX, which exhibit idiosyncratic traits and aren’t reliant on timing market movements.

Fund Performance Breakdown:
A breakdown of the fund’s gross Profit & Loss (P&L) for the quarter reveals several contributing factors:

  • Appreciation of convertible bond prices relative to underlying stock hedges: +125 basis points.
  • Interest rate hedge: +10 basis points.
  • Trading activities: +25 basis points.
  • Yield/carry: +90 basis points.

Convertible New Issuance and Increased Refinancings:
In the first quarter of 2024, 32 U.S. convertibles were priced, raising $19.6 billion (source: Kynex), marking a notable increase compared to the same period in 2023. Moreover, companies are increasingly opting for debt refinancings, issuing new convertibles, and repurchasing existing bonds with short remaining maturities. This refinancing trend accelerated in 1Q2024, reflecting companies’ proactive response to rising equity prices and interest rates. Increased convertible refinancings/new issues are expected to persist for the next 12-18 months as $130 billion of convertibles, representing 40% of the market, are set to retire (source: Bank of America).

Summary:
ARBIX and the convertible arbitrage strategy remain well-positioned for continued absolute and relative performance. With ongoing uncertainties surrounding inflation and interest rates, ARBIX’s strategy, which eschews rate speculation, stands out. Additionally, healthy supply-demand dynamics, with balanced participation from long-only funds and moderately leveraged hedge funds, underscore the strategy’s stability. Compared to high yield, non-investment grade convertibles maintain wider credit spreads, shorter durations, and historically lower default rates. Furthermore, the current higher interest rate environment augments returns from static carry, enhancing ARBIX’s consistency and resilience in delivering low volatility and low beta returns.

 

 

 

(Definitions, supporting data and risk disclosure below)

Quarter-End Performance for ARBIX:  As of 3/31/24, the 1 year, 5 year and 10-year annualized performance for the Absolute Convertible Arbitrage Fund was 6.23%, 4.49% and 4.11% 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 Convertible Arbitrage Fund’s Total Annual Operating Expense ratio (gross and net) for Institutional Shares is 1.35% through August 1, 2024. 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 July 31, 2025 (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 (Bloomberg Agg) 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 Russell 2000 is a market cap weighted index that includes the smallest 2,000 companies covered in the Russell 3000 universe of United States-based listed equities. The Russell is by far the most common benchmark for mutual funds that identify themselves as “small-cap.”

iBoxx High Yield Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the USD high yield corporate bond universe
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: www.absoluteadvisers.com. Please read the prospectus carefully before you invest.

Distributor: 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

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