Absolute Flexible Fund [FLXIX]
June 30, 2022
Open-End Mutual Fund
Ultimus Fund Solutions, LLC
Ultimus Fund Distributors, LLC
The Absolute Flexible Fund [FLXIX] seeks to achieve positive absolute returns over the long-term with low volatility when compared to traditional market indices. The Fund invests in convertible securities that are generally trading below par and/or in securities where downside is limited by the credit/maturity of the convertible security.
The Fund is designed as a concentrated, best ideas convertible bond fund with added flexibility for individual security hedging. This strategy allows for meaningful potential upside asymmetry if the equity security increases in value (unhedged) versus our Convertible Arbitrage (ARBIX) strategy which maintains equity neutrality (hedging) day to day regardless of underlying convertible bond value. As such the performance and volatility of the portfolio will be more sensitive to security/credit selection, bond pricing, and equity volatility, but with the potential for much higher long term performance and upside equity asymmetry.
The Absolute Flexible Fund was launched in June 2022, as an higher risk/return alternative to the Absolute Convertible Arbitrage Fund. Like the Absolute Convertible Arbitrage Fund, the Fund is designed to complement either the alternatives or fixed income sleeve of a diversified portfolio.
The portfolio management team has its roots in Cooperstown, NY and is currently located in Wilton, CT. Brothers Eric and Dan Hage founded Mohican Financial Management in 2002 after working on the convertible bond desks at various Wall Street firms. Their experience encompasses all aspects of the convertibles market – research, sales, proprietary trading and fund management. In September 2021 Mohican was acquired by Absolute Investment Advisers LLC where they continue their singular focus on convertible bonds through the Absolute Convertible Arbitrage Fund & Absolute Flexible Funds.
Eric Hage - Absolute Investment Advisers LLC - 2021-Present - Managing Director & Portfolio Manager, Absolute Convertible Arbitrage Fund & Absolute Flexible Fund
2002-2021, Mohican Financial Management, LLC, Co-Founder, CIO & Portfolio Manager. Mohican was sub-adviser for the Absolute Convertible Arbitrage Fund.
1999-2002, Salomon Smith Barney, Director of Convertible Arbitrage
1994-1999, Salomon Smith Barney, Institutional Trader of Convertible Securities
1991-1994, Bear Stearns, Managing Director & Co-Head of Sales of Convertible Securities
1989-1991, Smith Barney, Assistant Trader of Convertible Securities
Columbia, University Business School, MBA, Cornell University, B.S. in Economics
Daniel Hage - Absolute Investment Advisers LLC - 2021-Present - Managing Director & Portfolio Manager, Absolute Convertible Arbitrage Fund & Absolute Flexible Fund
2002 – 2021 Mohican Financial Management, LLC, Co-Founder, CCO & Portfolio Manager. Mohican was sub-adviser for the Absolute Convertible Arbitrage Fund.
2000-2002, CIBC World Markets, Sales Manager of Convertible Securities
1998-2000, Fahnestock, Convertible Bond Broker1995-1997, Murphy & Durieu, International & Domestic Convertible Bond Broker
University of Albany, MBA, LeMoyneCollege, B.S. in Business Administration
Dakota Portfolio Manager Interview
December 2022 (15 min)
1:00: Intro to Strategy (relative to ARBIX)
2:50: Flexibility around hedging
4:40: Total Return
6:25: How issuance impacts performance
8:30: 2023 outlook
10:20: FLXIX vs high yield
12:50: Security selection
FLXIX Summary Prospectus
Absolute Funds Prospectus
Absolute Funds Statement of Additional Information (SAI)
How will the portfolio differ from Convertible Arbitrage (ARBIX)?
Both strategies have a fundamental, research driven investment process with a focus on credit and security analysis. However, the new strategy will focus on concentrated security selection of convertible securities that may be owned outright (unhedged) with a focus on bond values trading at or below par, or securities with shorter maturity profiles that do not require equity hedging. The portfolio will be much more concentrated with less than half the number of positions vs ARBIX. As such, the performance and volatility of the portfolio will be more sensitive to security/credit selection, bond pricing, and equity volatility, but with the potential for much higher long term performance and upside equity asymmetry.
Will there be times when the portfolio is hedged?
Yes, when there are few “busted” convertibles to choose from and when the majority of securities in the portfolio are trading above par, the portfolio is likely to be more hedged. However, it will not be as hedged or neutral as a traditional “arbitrage” portfolio. Most of the time there will be a balance between long-only and hedged positions. The portfolio may typically be 20-40% hedged, versus a traditional convertible arbitrage portfolio which is “fully hedged” at all times.
Will there be opportunities for the Fund to generate much higher returns?
Yes, during favorable market conditions the strategy may offer the potential for double-digit returns. When the convertibles market is experiencing overall pricing weakness, there will be opportunities to either buy new securities trading below par or opportunities to remove hedges on securities that were previously trading above par or have had high underlying equity volatility. Companies that have fallen out of favor may offer significant upside equity value with limited downside risk. This asymmetry will enable the portfolio to exhibit more of a long-only type positioning and higher returns. During times of distress in the bond market, the Fund may also be able to buy securities very cheaply, thus offering the potential for very high returns coming out of a distressed environment.
What is the expected beta and volatility of the portfolio?
The beta and volatility may be at least double that of the ARBIX portfolio, but is still expected to have less than half the beta of high yield, and less than half the volatility of the equity market. The overall portfolio is still expected to have a strong focus on risk management and capital preservation, but allowing for higher levels of risk versus a fully hedged convertible arbitrage portfolio. Convertible bonds have historically low default rates, and tend to have much lower rates than high yield during periods of distress (ex. 2008-2009)
What would constitute a “best idea” for the portfolio? Would these names also be held by ARBIX?
It can be expected that most “best idea” names will also be held in ARBIX; we will be leveraging our credit research already done for individual names for the ARBIX portfolio. However, there are times when a convertible issue could look very attractive from an outright risk/reward perspective but not necessarily “cheap” from a theoretical arbitrage perspective. Those may be the exceptions where the name would not be held in ARBIX too. We would consider a name a “best idea”, and a fit for the portfolio, if we feel very strong about not hedging the credit risk by shorting the stock and if the company’s equity story offers a significant chance for sizeable upside gains in the future. A typical “best idea” name would be a convertible that offers asymmetric risk/reward payoff where the downside is limited by the bond component of the convertible and the convertible is still able to capture most of an upside move in the underlying equity.
When looking at the upside in a security, how will you know when the time is right to hedge or sell? Is it a quantitative decision or PM discretion?
There are many factors in making sell and/or hedge decisions. Factors will include fundamental news/developments at the company related to its credit metrics and stock price; the price where the convertible is trading and its current percentage breakdown of asymmetric characteristics (i.e., its equity sensitivity); the theoretical cheapness of the convertible and its suitability as an arbitrage holding; the valuation of the equity (i.e., price to earnings, cash flow, book, sales, EV, etc..); the size of the position; other positions in the portfolio and their relative attractiveness to the name in question; other available convertible opportunities in the marketplace; and secondary trading markets/flow.
Would you expect more frequent trading with this strategy vs ARBIX, or less?
We would expect less frequent trading as the intention is to hold securities for the long term allowing the upside of the equity stories to play out over time.
Where would the strategy be expected to fit within an asset allocation framework?
This should be discussed with a member of the Absolute team on a case-by-case basis
Portfolio Commentary for the Absolute Flexible Fund is provided on an annual basis and can be found below along with other “discussion” articles that are relevant to the Fund. Additional information can be found within the shareholder letters in the Annual and Semi-Annual Reports. If you are a financial adviser and would like to be added to our e-mail distribution list, use the form at the bottom of the page or contact us by email.
Please note that this commentary provides a very detailed analysis of the Fund’s strategy. Some of this analysis may too technical for the average investor to fully understand. It is presented here for those who may have an interest in such a discussion and as always, we encourage investors to discuss questions with their financial adviser.
- Portfolio Commentary – June 30, 2023
“…The fund differs from ARBIX in that it concentrates on fewer positions and has less hedging against equity price movements. This approach will likely lead to potentially more volatile returns but also could offer more upside as evidenced by our first year in existence.” [read all]
Fund Distribution Information
The Fund distributes income semi-annually in June and December and distributes long and short-term capital gains in December. This page will be updated with distribution amounts when the data becomes available.
If you are a financial adviser and would like to be added to our e-mail distribution list contact us by e-mail.
|December – Income & Capital Gains Distributions per share|
|Class||Income||Long-Term Capital Gains||Short-Term Capital Gains|
|Class||FLXIX||Income||–||Long-Term Capital Gains||—––—–
||Short-Term Capital Gains||–|
|Class||Ex Date||Income||–||Long-Term Capital Gains||–||Short-Term Capital Gains||–|
|Class||Record Date||Income||–||Long-Term Capital Gains||–||Short-Term Capital Gains||–|
|June – Income Distributions per share.
|December – Income & Capital Gains Distributions per sha|
|Class||Income||Long-Term Capital Gains||Short-Term Capital Gains|
|Class||FLXIX||Income||$0.17337||Long-Term Capital Gains||$0.00
||Short-Term Capital Gains||$0.03924|
|Class||Ex Date||Income||12/30/22||Long-Term Capital Gains||12/13/22||Short-Term Capital Gains||12/13/22|
|Class||Record Date||Income||12/29/22||Long-Term Capital Gains||12/12/22||Short-Term Capital Gains||12/12/22|
|June – Income Distributions per share.
Investing in the Fund
Purchasing Through a Financial Adviser:
The Absolute Flexible Fund may serve as an important piece of a diversified portfolio. We encourage investors to consult their financial advisers for guidance on asset allocation and the role of the Fund. Financial Advisers should contact us directly for information on the Fund and how it may be purchased. Go to Contact Information Page
Direct Investment in the Fund:
Investors may purchase the Fund directly from the Fund using the applications below. Please complete the applications and follow the purchasing instructions. For additional information, please call the Fund’s shareholder servicing department at 1-888-99-ABSOLUTE
- New Fund Account Application
- Non-Qualified Transfer Application
- IRA Application
- Simple IRA Application
- IRA Transfer Application
- Coverdale Education Savings (ESA) Application
Important Fund Risks & Disclosure
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. A drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund. The S&P 500 Index, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is not possible to invest directly in an index.
Past performance does not guarantee future results.
The Fund is newly created and does not have a full calendar year performance record. Performance information will be included after the Fund has been in operation for one calendar year.
The Fund’s net asset value and investment return will fluctuate based upon changes in the value of its portfolio securities. There is no assurance 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 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. The Fund is new and has a limited history of operations.
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.
Alpha is the excess return on an investment after adjusting for market-related volatility. It is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return.