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)

Quarter-End Performance for FLXIX: As of 6/30/23, the 1 year, and since inception annualized performance for the Absolute Flexible Fund was 7.27% and 7.27% 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 Flexible Fund’s Total Annual Operating Expense ratio (gross) for Institutional Shares is 2.36% and the net expense ratio is 1.74% 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 1.49% 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.


The Fed Funds Rate (the federal funds rate) is the target interest rate range set by the Federal Open Market Committee (FOMC). This is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. The Russell 2000 Index is a market cap weighted indices that include the smallest,000 companies covered in the Russell 3000 universe of United States-based listed equities. The Russell is by far the most common benchmark for mutual funds that identify themselves as “small-cap.” A Basis Point (or bps) is 1/100th of a percent. The Risk-Free Rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. In practice, the risk-free rate of return does not truly exist, as every investment carries at least a small amount of risk.

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.

Absolute Convertible Arbitrage Fund, Absolute Investment Advisers and their logos are service marks of Absolute Investment Advisers LLC

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(888) 99-ABSOLUTE or (888) 992-2765
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