Performance Overview:
In the fourth quarter of 2023, the Absolute Convertible Arbitrage Fund (ARBIX) delivered a positive return of +1.55%. For the entire year of 2023, ARBIX posted a gain of +5.30%. Over the past 5 years, amidst historical volatility in interest rates, ARBIX has generated a total return of +25.34% and an annualized return of +4.62% per annum. Notably, ARBIX consistently delivered on its objective by providing low volatility returns and maintaining low beta compared to stocks and bonds.

Market Movement and Impacts:
The fourth quarter witnessed a widespread market rally as inflation expectations eased, fostering heightened optimism for larger and sooner rate cuts by the Federal Reserve. This led to significant increases across various sectors, with the Bloomberg Aggregate Bond Index gaining +6.80%, the iBoxx High Yield Index up by +7.20%, and double-digit rises in equity markets. As ARBIX is a tightly hedged risk-controlled strategy, its positive returns were more measured due to the strategy’s low correlation and hedged attributes. Conversely, during the previous quarter’s rise in interest rates, while most bond strategies faced negativity, ARBIX managed to deliver positive returns. As we enter 2024, it’s imperative to observe if the heightened expectations for interest rate cuts in late 2023 could prompt a correction in bond strategies more sensitive to interest rates and market sentiment.

Fund Performance Breakdown:
Breaking down the fund’s gross Profit & Loss (P&L) for the quarter:

  • Appreciation of convertible bond prices relative to underlying stock hedges contributed +87 basis points.
  • The interest rate hedge reduced returns by -12 basis points.
  • Trading activities accounted for +18 basis points.
  • Yield/carry added +87 basis points, emphasizing its continued enhancement and role in providing a stable base for strategy returns.

Convertible New Issuance:
In the fourth quarter of 2023, 17 U.S. convertibles were priced, raising $13.2 billion. Throughout 2023, 91 convertible deals came to market, raising $53.8 billion, marking a 65% increase over 2022. Notably, small and mid-cap companies dominated issuances, representing about ⅔ of the deals. These segments continue to offer inefficiencies in convertibles, presenting better prospects for robust returns while enabling proper portfolio diversification. Forecasts anticipate increased convertible new issuance in 2024, primarily driven by accelerating refinancings, especially among small/mid-cap companies and non-investment grades aiming to reduce current higher coupon costs amid a looming maturity wall in the corporate bond market.

Market Outlook:
Previous insights in our third-quarter commentary hinted at a potential peak in fed funds rates. While the market swiftly adopted this sentiment in the fourth quarter, there’s now a growing risk that the yield curve might be overly optimistic, and the Fed could maintain its stance longer to avert premature rate cuts that might reignite inflation. Regardless of rate fluctuations, our portfolio of hedged convertible bonds exhibits generally neutral returns irrespective of market movements.

The Nature of Convertible Arbitrage:
Convertible arbitrage stands out for its resilience against market fluctuations and its minimal reliance on predictive market forecasting by managers. It functions as a bottom-up, meticulous strategy focused on individual securities and hedges, thereby largely sidestepping market noise. The strategy involves incrementally adjusting hedges based on stock movements, adhering to strategy requirements rather than attempting to forecast market directions.

Timing and Investment Strategy:
We are frequently asked whether it’s an opportune moment to invest in the strategy. Our response may differ from conventional expectations. Instead of scrutinizing market variables like interest rates, credit spreads, or equity volatility, the strategy’s fundamental soundness revolves more around the supply and demand dynamics within the convertible universe. As long as there’s a reasonable supply of convertible bonds from solid companies (particularly small/mid-cap firms with robust balance sheets), and demand stays controlled and balanced among participants, the strategy remains well-positioned for investors. Rather than focusing on macro factors, we believe investors should consider the strategy’s historical returns and its distinctive offerings. Apart from granting access to otherwise inaccessible corporate credit opportunities, the strategy provides a ballast for portfolios with its low volatility and correlation to other investments. Those looking for a guidepost for future returns can view the Fund’s historical proximity to High Yield asset class returns. This is a relationship we believe remains in place.



(Definitions, supporting data and risk disclosure below)

Quarter-End Performance for ARBIX:  As of 12/31/23, the 1 year, 5 year and 10-year annualized performance for the Absolute Convertible Arbitrage Fund was 5.30%, 4.62% 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.

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.

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: 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