Performance Overview: In the third quarter of 2023, the Absolute Convertible Arbitrage Fund (ARBIX) achieved a positive return of +0.83%. This performance adds to the fund’s overall year-to-date return, which now stands at +3.69%.

Challenges Amidst Rising Interest Rates:
Investing in various bond strategies continued to be a challenge due to the persistently higher interest rates observed during the quarter. These rate increases were fueled by robust economic and inflationary indicators. Notably, the 5-year Treasury yield, which influences shorter-duration corporate bonds like convertibles, surged to 4.61%, marking a 45 basis point rise during the quarter and a remarkable 400+ basis points increase from 2020. This surge in rates during the third quarter had an adverse impact on bond strategy returns, as evidenced by the -3.23% decline in the Bloomberg AGG index during the period.

Distinctive Resilience of Convertible Arbitrage:
As discussed in the second quarter commentary, convertible arbitrage stands apart as a distinct/alternative bond strategy. The strategy is resilient because market forces like interest rates, credit spreads, and equity volatility, often counterbalance each other. This can result in consistent returns even in challenging market conditions. Despite the headwinds posed by higher rates and reduced volatility among smaller-cap stocks (as indicated by the drop in 30-day volatility for the Russell 2000), the strategy benefited from higher Fed Funds rates. Higher rates contributed to increased positive carry and helped to offset the broader market challenges.

Breakdown of Fund Performance:
Looking at the fund’s gross Profit & Loss (P&L) for the quarter, several key factors contributed to its performance:

•   Appreciation of convertible bond prices relative to underlying stock hedge added +11 basis points.
•   The interest rate hedge contributed +12 basis points.
•   Trading activities accounted for +11 basis points.
•   Yield/carry provided a significant boost with +79 basis points.
•   Notably, the improved yield/carry played a pivotal role in delivering positive returns.

Convertible New Issuance:
In the third quarter, there were 20 convertible deals priced, raising a total of $12.6 billion in proceeds. Year-to-date, there have been 71 deals completed, raising a cumulative total of $40.5 billion (source: Kynex). While new issuance was somewhat slower than expected due to factors such as lower stock prices and persistently low volatility among small/mid-cap stocks, it’s worth noting that 2023 issuance has already exceeded that of the entire previous year.

Lower stock prices and stubbornly low volatility among small/mid-caps is likely keeping issuance a bit lower than expected as companies have less ability to monetize the embedded equity call option associated with a convertible. It is difficult to know precisely what to expect for issuance in the fourth quarter and 2024. But if equity volatility picks up and/or long only investing in small/mid-caps awakens, more companies may choose to issue convertibles instead of straight bonds because of the high interest rate environment.

Market Outlook and Caution:
The Federal Reserve remains committed to addressing inflation concerns. While it’s possible that we are witnessing the peak (or near peak) of fed funds rates, the market anticipates that short-term rates will remain elevated for an extended period. Again, this environment has bolstered the carry return in our strategy, which has become increasingly significant.

However, we maintain a cautious stance in our portfolio positioning. Sustained higher rates can take time to impact the broader economy. It is reasonable to assume that such rates could eventually negatively affect company margins and refinancing costs, potentially resulting in heightened credit stress and increased default rates. Nevertheless, the wider credit spreads typically associated with such periods are often accompanied by higher realized equity volatility, which would provide a counterbalancing force.

Portfolio Positioning:
In response to these dynamics, we are committed to maintaining a well-diversified portfolio and gradually placing greater focus on heavily hedged, strong credit, higher carry investments that can thrive in a high-interest rate environment, benefit from higher realized equity volatility and also withstand potential economic slowdowns.

ARBIX continues to navigate the challenges presented by rising interest rates and evolving market conditions, challenges that could eventually mean a significant economic slowdown. With a focus on bottom-up credit research, prudent diversification and a disciplined hedged strategy, the fund remains poised to consistently navigate the shifting financial landscape with a focus on capital preservation.


(Definitions, supporting data and risk disclosure below)

Quarter-End Performance for ARBIX: As of 9/30/23, the 1 year, 5 year and 10-year annualized performance for the Absolute Convertible Arbitrage Fund was 5.70%, 4.24% and 4.05% 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.

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 Index is used as a benchmark for US small cap stocks and measures the performance of the 2,000 smallest companies in the Russell 3000 (3,000 of the biggest U.S. stocks).
The Fed Funds Rate (the federal funds rate) is the target interest rate range set by the Federal Open Market Committee (FOMC). This is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
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.

Distributor: Ultimus Fund Distributors, LLC

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(888) 99-ABSOLUTE or (888) 992-2765