Performance Overview
In the first quarter of 2025, the Absolute Convertible Arbitrage Fund (ARBIX) achieved a net return of +2.05%. During this period, credit spreads widened by approximately 60 basis points, though a 40-basis-point decline in risk-free rates partially offset this shift, stabilizing underlying straight bond valuations. Equity volatility ticked up modestly, with the increase concentrated in the quarter’s final days as markets grew anxious over looming tariff announcements.
New Issuance
Convertible bond issuance began 2025 at a slower pace but gained momentum in March. Over the quarter, 23 deals were priced, raising $14.8 billion. Technology and healthcare firms dominated, accounting for more than half of the new issues. Refinancing remained a key driver of issuance, and ARBIX actively participated in a few such deals. We believe the fund’s growing assets under management have enhanced its ability to take larger positions in individual names without elevating risk, enabling greater involvement in refinancing trades. These opportunities, often reserved for the top 5-10 bondholders, allow ARBIX to sell existing bonds at a premium while securing discounted allocations in new issues.
Fund Performance Breakdown:
The fund’s gross Profit & Loss (P&L) for the quarter highlights several contributing factors:
- Appreciation of convertible bond prices relative to underlying stock
hedges: +124 basis points. - Interest rate hedge: -5 basis points.
- Trading activities: +26 basis points.
- Yield/carry: +90 basis points.
Outlook for 2025
In our prior commentary, we highlighted concerns about elevated equity valuations and tight credit spreads amid an increasingly uncertain market. As of mid-April 2025, the new administration’s aggressive push to slash federal spending and impose sweeping tariffs on all trading partners has intensified these risks. Markets have responded with sharp declines reminiscent of early 2020’s pandemic-driven sell-off.
The April 2 tariff announcement—dubbed “Liberation Day”—triggered a swift retreat from risk as investors reassess its implications for the U.S. economy. From a macroeconomic perspective, fears of slower growth or even recession have emerged, putting credit markets—recently priced near historic tights—at heightened risk. Private credit markets, which have surged in size and often involve lending to less creditworthy borrowers, appear especially vulnerable to a potential credit shock and rising defaults amid an economic slowdown. Unwinding exposure to illiquid private credit could prolong any resulting market disruption.
The unpredictability of these policy shifts introduces significant volatility across multiple factors—credit spreads, equity volatility, interest rates, inflation expectations, deflation risks, and potential redemptions in long-only funds. This could lead to substantial swings in convertible bond valuations. While no risk-off environment mirrors another precisely, our team’s three decades of experience in convertible markets provide a seasoned perspective. We feel ARBIX is well-equipped to navigate this turbulence, holding over 100 distinct convertible bond positions, each individually hedged with the underlying stock. Entering Q2 2025, we strategically maintained a cash position exceeding 11%, reflecting a cautious stance ahead of the tariff announcements. Most critically, market dislocations often create opportunities, enhancing the likelihood of finding attractively priced convertible bonds in names we’ve long targeted at better entry points.
(Definitions, supporting data and risk disclosure below)
Quarter-End Performance for ARBIX: As of 3/31/25, the 1 year, 5 year and 10-year annualized performance for the Absolute Convertible Arbitrage Fund was 7.38%, 4.93% and 4.74% 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:
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 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
20250409-4386425