Statement of Additional Information (SAI)
Convertible Arbitrage & ARBIX Explained
Convertible Arbitrage: Where does it Fit?
The Core Strength of Convertible Arbitrage
Q222 Portfolio Commentary
The Absolute Convertible Arbitrage Fund utilizes an arbitrage strategy designed to isolate and access the debt of a niche group of companies within the convertibles market. Historically, convertible arbitrage has provided moderate returns, low volatility, low beta* to most asset classes, and a different source of return than other fixed-income strategies.
Key Takeaways on Convertible Bonds
• Convertible Bonds are hybrid securities – corporate bonds with an option to convert the bond into equity at or above a predetermined price.
• A simple view is that they are part bond and part stock.
• Why do they exist? Companies issue convertibles largely to save on interest cost. Investors will often accept lower yields than other bond markets in return for the conversion feature.
• The US convertibles market is $380+ billion in market cap – sizeable and liquid but still niche.
• Long only convertibles investors are often looking for a different way to play the equity of the issuing company.
• Arbitrageurs are often looking to access some combination of the credit, income, and volatility factors imbedded in the convertible bond.
Key Takeaways on Convertible Arbitrage
• Convertible Arbitrage is a pair trade that involves going long a convertible bond and shorting the equity of that same company. The amount of the short stock is formulated to negate the equity sensitivity that naturally exists in the long convertible bond position.
• The amount of the short equity position needs to be adjusted on a regular basis as the stock moves up or down. This active process limits large pools of capital from investing in convert arb passively. It requires a skilled manager.
• Returns for a convert arb trade may come from the implied credit spread of the bond narrowing, volatility increasing, income from the long bond or on the cash proceeds from the short stock, or from trading around positions(1).
• Historically, convertible arbitrage has exhibited market-neutral like performance with low sensitivity to most asset classes including equity markets, fixed income markets, interest rate sensitive investments, and other alternative strategies.
Key Takeaways on the Absolute Convertible Arbitrage Fund
• ARBIX’s Sub-Adviser, Mohican Financial, launched the strategy in a hedge fund structure in 2002. That fund was converted into the current mutual fund structure in 2017. 18+ year track record.
• ARBIX is solely focused on convertible arbitrage, not just as one of several co-mingled strategies.
• ARBIX focuses on small & mid-sized convertible issues, where greater mis-pricings may occur.
• ARBIX takes a flexible approach to sourcing value in more credit sensitive trades or more income producing trades or more volatility sensitive trades as the market changes over a cycle.
• ARBIX takes an opportunistic approach, balancing the pursuit of returns with risk management to mitigate losses.
*Definitions: Beta is the measure of a fund’s relative volatility as compared to the S&P 500 Index which by definition is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the Index in up markets and 10% worse in down markets.
Investors should carefully consider the Fund’s investment 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 by visiting the Fund’s web site at www.absoluteadvisers.com. Please read the prospectus carefully before you invest.
Registered representatives are associated with the Fund’s distributor, Foreside Fund Services, LLC. Absolute Investment Advisers LLC and its affiliates are not associated with Foreside Fund Services, LLC.
Mutual fund investing involves risk, including potential loss of principal. (click here to read all additional risks) 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 adversely affect Fund performance. The value of a convertible security 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 securities involve greater risk and tend to be more sensitive to economic 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
Foreside Fund Services, LLC, distributor
Absolute Strategies Fund, Absolute Investment Advisers and their logos are service marks of Absolute Investment Advisers LLC