The Absolute Flexible Fund (FLXIX) returned +1.74% in the second quarter of 2023 and ended its first year of existence (on June 30th) with a 1-year return of 7.38%.

With 20 years of experience managing a convertible arbitrage portfolio in both a hedge fund and mutual fund structure, we launched a new mutual fund called The Absolute Flexible Fund (FLXIX) on July 1, 2022, that offers some core distinctions to our original convertible arbitrage fund (ARBIX). 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.

Reflecting on the past year since the launch of FLXIX, it’s important to consider some macroeconomic factors that directly impact convertible valuations. Three measurements that are closely correlated to convertible valuations are the Fed Funds yield/rate, the implied credit spread for US high yield bonds, and the 30-day historical volatility of the Russell 2000 Index. Over the course of these 12 months, the Fed Funds rate increased from 1.58% to 5.08%, the implied high yield credit spread tightened from 584 bps over treasuries to 433 bps over treasuries, and the Russell 2000 30-day historical volatility declined from 32.3% to 19.7%. These movements imply that credit spreads were favorable for convertible valuations, while the risk-free rate and equity volatility acted as headwinds throughout our first year. The fund did not employ any portfolio hedges such as an interest rate hedge and ended its first year with an average equity hedge of 27%, compared to an average hedge of 58% in ARBIX. As for individual performance drivers during the past 12 months, the top 3 performers included a partially hedged small cap offshore drilling company that saw its underlying equity rise by 300%, an unhedged position in a mid-cap cloud tech company that was taken over by a private equity firm, and a partially hedged position in a small cap oncology company where the underlying stock rose by 50%.

Currently, the convertible market is in a healthier state for generating consistent and positive return as it now offers a higher positive carry while assuming a lower implied volatility. As always, the key to success will lie in selecting convertible securities with the best value potential, and FLXIX provides the opportunity to do this in a more concentrated manner. We have approximately 25 positions in the portfolio and plan to keep it that way throughout the coming year as we can remain prudent and patient when identifying the most undervalued securities within the US convertible universe.

Potential Attractive Risk-reward profile:
The asset class continues to offer a convex risk-reward profile. Over the next 12 months, for a +/-15% move in underlying equities, we estimate the asset class to return +7.7% and -2.2%, respectively.
– Barclays

(Definitions, supporting data and risk disclosure below)

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: www.absoluteadvisers.com. Please read the prospectus carefully before you invest.