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

“…We are proud of the fact that we were able to preserve capital in 2022 when most bond strategies were down double digits for the year…the great repricing of 2022 is mostly done which puts convertibles in a much better position”

The Absolute Convertible Arbitrage Fund (ARBIX) returned +1.94% in the fourth quarter of 2022. The fund return for all of 2022 was -0.53%.

Buyers finally returned to convertibles in the fourth quarter of 2022 as an attractively repriced market brought back some investors after 9 months of mostly selling. A more stable backdrop for interest rates, credit spreads and equity prices supplied much needed confidence for investors to put cash to work in repriced securities without feeling like they are catching a falling knife. After enduring terrible conditions for most of 2022 where there was almost no place to hide because of aggressive rate hikes by the Federal Reserve, there is now a sense that much of the pain is behind us in repricing risk assets. However, there is also a good chance that we could be experiencing a temporary lull and inflation could be more stubborn than we hope.

From an overall gross P&L perspective for the quarter, convertible bond price appreciation versus the underlying stock hedge had a positive impact of +159 basis points, while the interest rate hedge was flat, yield/carry contributed +49 basis points, and trading +16 basis points. Convertible theoretical valuations ended the quarter about 50 basis points below fair value on average, very close to where they began the quarter. As mentioned in the previous quarterly commentary, the repricing of the convertible market to much higher yields is expected to significantly enhance expected returns for the strategy going forward. We saw that start to take shape in the fourth quarter of 2022.

2022 was a tumultuous year in the markets, to say the least. Capital preservation skills became front and center in evaluating managers of all strategies, including convertible arbitrage. High yield spreads widened by 180 basis points in 2022, the 5 year treasury yield jumped almost 300 basis points and underlying equities for convertibles dropped by more than 30%. Non-investment grade convertible spreads widened even more than high yield ending the year close to 200 basis points wider than high yield despite having significantly lower historical default rates (Barclays). Essentially, risk free rates, credit spreads and equity prices were all dramatically repriced as the Fed raised the fed funds rate by 400 basis points.

We are proud of the fact that we were able to preserve capital in 2022 when most bond strategies were down double digits for the year (see table on reverse). At the start of 2022, we made it clear that we were concerned about the markets and were therefore going to be cautious in our approach. In our fourth quarter commentary of 2021, we said “we could be at a major inflection point for long only investments as they could face years of stiff headwinds from the Federal Reserve. Alternative, hedged, actively managed, niche, idiosyncratic strategies could quickly become the best way to preserve capital and make modest positive returns without “fighting the Fed.””

Even though much of the Fed’s work is now in the rear view mirror, there is no certainty that inflation has been conquered despite the treasury market recently acting as if the Fed should be done. Regardless, the great repricing of 2022 is mostly done which puts convertibles in a much better position to make returns in the years ahead. Average convertible yields (greater of ytm/ytp) have jumped more than 400 basis points in less than 2 years. Also, convertibles now reflect an underlying risk free rate that is 300 basis points higher too. Fed Funds rates at over 4% now greatly enhance the stock rebates received on our stock shorts adding an additional source of return that was actually negative just 2 years ago.





(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: A Basis Point (or bps) is 1/100th of a percent. The Bloomberg Aggregate Bond Index 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 iBoxx Investment Grade Bond Index tracks the investment results of an index composed of U.S. dollar-denominated, investment grade corporate bonds. The iBoxx High Yield Bond Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the broad USD high yield corporate bond universe.

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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