UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-22442
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First Trust High Income Long/Short Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2014
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
FIRST TRUST
HIGH INCOME
LONG/SHORT FUND
(FSD)
ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2014
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TABLE OF CONTENTS
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2014
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 17
Statement of Operations..................................................... 18
Statements of Changes in Net Assets......................................... 19
Statement of Cash Flows..................................................... 20
Financial Highlights........................................................ 21
Notes to Financial Statements............................................... 22
Report of Independent Registered Public Accounting Firm..................... 29
Additional Information...................................................... 30
Board of Trustees and Officers.............................................. 35
Privacy Policy.............................................................. 37
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or MacKay Shields LLC ("MacKay" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust High Income Long/Short Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
MacKay are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2014
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust High Income Long/Short Fund (the "Fund"). This report provides detailed
information about the Fund, including a performance review and the financial
statements for the past 12 months. I encourage you to read this document and
discuss it with your financial advisor.
Although markets have seemed choppy over the past 12 months, the U.S. has shown
sustained growth over the period.
In fact, the S&P 500(R) Index, as measured on a total return basis, rose 17.27%
during the period. First Trust Advisors L.P. ("First Trust") believes that
staying invested in quality products through different types of markets can
benefit investors over the long term.
First Trust offers a variety of products that we believe could fit the financial
plans for many investors seeking long-term investment success. We invite you to
look at our investment products with your financial advisor to determine if any
of them might fit your financial goals. We believe that regularly discussing
your financial objectives and investment options with your financial advisor can
help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
"AT A GLANCE"
OCTOBER 31, 2014 (UNAUDITED)
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FUND STATISTICS
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Symbol on NYSE FSD
Common Share Price $17.19
Common Share Net Asset Value ("NAV") $19.47
Premium (Discount) to NAV (11.71)%
Net Assets Applicable to Common Shares $701,954,614
Current Monthly Distribution per Common Share (1) $0.1065
Current Annualized Distribution per Common Share $1.2780
Current Distribution Rate on Closing Common Share Price (2) 7.43%
Current Distribution Rate on NAV (2) 6.56%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/13 $17.62 $19.63
17.58 19.52
17.47 19.49
17.44 19.53
17.31 19.59
11/13 17.40 19.66
17.09 19.55
17.10 19.60
17.07 19.66
12/13 17.36 19.58
17.11 19.64
17.45 19.78
17.64 19.86
17.79 19.74
1/14 17.54 19.71
17.58 19.64
17.80 19.75
17.77 19.84
2/14 17.88 19.99
17.63 19.85
17.52 19.74
17.51 19.85
3/14 17.61 19.93
17.51 19.89
17.65 19.84
17.88 19.89
4/14 17.93 19.92
17.92 19.88
18.00 19.89
18.04 19.97
18.02 19.98
5/14 18.14 20.05
17.90 20.06
18.03 20.10
18.10 20.16
6/14 18.12 20.16
17.90 20.09
17.96 20.04
17.87 19.95
7/14 17.89 19.97
17.29 19.56
17.28 19.63
17.59 19.85
17.56 19.94
8/14 17.65 19.95
17.50 19.77
17.26 19.67
17.23 19.74
9/14 16.97 19.43
16.93 19.41
16.93 19.17
16.90 19.24
17.25 19.41
10/14 17.19 19.47
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PERFORMANCE
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Average Annual Total Return
1 Year Ended Inception (9/27/10)
10/31/14 to 10/31/14
FUND PERFORMANCE (3)
NAV 6.86% 8.74%
Market Value 5.12% 4.30%
INDEX PERFORMANCE
Bank of America Merrill Lynch
U.S. High Yield Master II
Constrained Index 5.85% 8.69%
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% OF LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS
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Basic Industry 13.5%
Energy 11.2
Banking 9.9
Healthcare 8.2
Services 7.3
Automotive 7.0
Telecommunications 6.9
Capital Goods 6.8
Insurance 5.7
Financial Services 4.4
Transportation 4.4
Technology & Electronics 4.1
Media 2.7
Leisure 2.5
Consumer Goods 2.5
Asset-Backed Securities 1.3
Utility 1.1
Collateralized Mortgage Obligations 0.5
Real Estate 0.0*
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Total 100.0%
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% OF LONG-TERM
ASSET CLASSIFICATION INVESTMENTS
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Corporate Bonds and Notes 61.5%
Foreign Corporate Bonds and Notes 18.4
Capital Preferred Securities 12.7
Senior Floating-Rate Loan Interests 3.3
Common Stocks 1.5
Asset-Backed Securities 1.3
Mortgage-Backed Securities 0.5
Foreign Sovereign Bonds and Notes 0.5
Warrants 0.3
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Total 100.0%
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% OF LONG
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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BBB- and above 11.7%
BB 44.4
B 32.9
CCC+ and below 10.3
NR 0.7
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Total 100.0%
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% OF TOTAL
COUNTRY EXPOSURE INVESTMENTS
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United States 76.3%
Luxembourg 7.3
United Kingdom 3.3
Canada 3.0
Netherlands 2.2
Cayman Islands 1.3
Jersey 1.0
Ireland 0.9
Liberia 0.8
Germany 0.6
France 0.6
Finland 0.5
India 0.5
Georgia 0.5
Brazil 0.4
Bermuda 0.4
Sweden 0.4
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Total 100.0%
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* Amount is less than 0.1%.
(1) Most recent distribution paid or declared through 10/31/2014. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 10/31/2014. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) The credit quality and ratings information presented above reflect the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings, or a comparably rated NRSRO. For situations in which
a security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the credit
worthiness of the issuers of the underlying securities in the Fund, and
not to the Fund or its shares. Credit ratings are subject to change.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2014
SUB-ADVISOR
MacKay Shields LLC is a registered investment adviser founded in 1938, and is
Sub-Advisor to First Trust High Income Long/Short Fund (the "Fund"). The Fund
trades under the ticker symbol FSD on the New York Stock Exchange. As of October
31, 2014, MacKay Shields had approximately $91.9 billion in assets under
management.
PORTFOLIO MANAGEMENT TEAM
DAN ROBERTS, PHD - EXECUTIVE MANAGING DIRECTOR, HEAD OF GLOBAL FIXED INCOME
DIVISION AND ITS CHIEF INVESTMENT OFFICER
LOUIS N. COHEN, CFA - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
MICHAEL KIMBLE, CFA - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
TAYLOR WAGENSEIL - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
MARKET RECAP
This report covers the Fund for the 12-month period ended October 31, 2014.
Global uncertainty stemming from a confluence of factors including anxiety over
the timing of the U.S. Federal Reserve's (the "Fed") rate hike, a contraction in
economic output from some major world economies such as Europe, Japan and China,
weakness in select developing market economies (Brazil, Argentina, Venezuela,
Ukraine and Russia) as well as worries surrounding Ebola defined the narrative
over the reporting period. These events led to a flattening of the yield curve
in a surprising fashion as U.S. Treasury rates fell, led by the longer-end. Risk
assets, however, also performed well with U.S. equities climbing nearly 17.3%,
as measured by the S&P 500(R) Index, investment-grade corporate bonds improving
by 6.3% (according to Barclays) and high-yield bonds returning 5.9% (as measured
by the Bank of America Merrill Lynch U.S. High Yield Master II Constrained
Index).
At the start of the reporting period, the Fed announced a reduction in the pace
of its asset purchases given the slow but steady improvements in the labor
market and diminished downside risks posed by U.S. fiscal policy. In conjunction
with this announcement, the Fed strengthened its forward guidance on short-term
rates and reiterated that it remains "data dependent" with future changes
contingent upon the evolution of incoming macroeconomic data. At the start of
the year, Janet Yellen replaced Ben Bernanke as the new Fed chair, although we
believe the Fed's stance on data dependency will not change under her
leadership.
The U.S. economy continued to improve over the reporting period, led by a
decline in unemployment, renewed business investment and stronger consumer
balance sheets that contributed to healthy spending patterns (in both housing
and autos). Alternatively, the European continent experienced slow growth and
low inflation which had the effect of both pushing down sovereign bond yields
and reducing the value of the Euro against major currencies, including the U.S.
dollar. European Central Bank Chief, Mario Draghi, stressed that the bank would
employ additional stimulus measures to spur the economy, including purchases of
securitized assets and possibly corporate bonds. Although the lack of demand for
credit and German opposition to Draghi's policies leave many skeptical as to how
successful these actions might be, we believe these measures should have a
positive impact on the European economy. Furthermore, the decline in the Euro
and oil prices would likely help stimulate consumer activity in the region, in
our opinion. Lastly, the European Central Bank stress test results released
recently revealed that all but 25 banks passed. The majority of the banks that
failed were comprised of smaller lenders in Italy that remain poorly
capitalized. Following years of de-risking by European banks, we believe lending
practices should improve.
Japan surprised the markets with an unexpected move to increase its asset
purchases to spur what has been very tepid economic growth over the past 12
months. More specifically, the Bank of Japan (BOJ) announced that it would
increase its purchases to 80 trillion yen. Economic activity in Japan has
faltered in 2014 as a controversial sales tax levy earlier in the year stunted
consumer demand, which in turn has prevented inflation from reaching the BOJ's
2% target. An additional tax levy is expected in 2015. Further providing a lift
to the global capital markets was an announcement by the $1.2 trillion
Government Pension Investment Fund of its intent to ramp up its allocation to
foreign investments, including U.S. stocks and bonds. In China, we have seen
increased concern that economic growth could fall short of the government's
target of 7.5% in 2014, despite first half GDP figures largely within the range.
Weaker residential real estate prices and industrial production have been the
principal culprits. However, the Chinese government continues to focus on
pro-growth reform and the People's Bank of China injected billions in liquidity
into the banking system in the form of 3-month, low interest rate loans to
stimulate growth.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2014
We believe China will continue to attempt the transition from infrastructure-led
to consumption-based growth, recognizing that this transition entails a degree
of challenges which Chinese politicians have been reluctant to accept. In the
short run, this dynamic should be positive for the global economy.
PERFORMANCE ANALYSIS
The Fund outperformed its benchmark, the Bank of America Merrill Lynch U.S. High
Yield Master II Constrained Index1 on a total gross return and NAV basis for the
12-month period ended October 31, 2014. The Fund returned 6.86% on an NAV basis,
compared with the benchmark, which gained 5.85%.
Throughout the year, the Fund maintained a portfolio beta above the market. The
principal sector and industries included financials, gaming, homebuilders,
building materials, and coal and steel companies. Based on overall contribution
to the Fund's performance, the top-performing names included AIG, Sprint, U.S.
Airways, HCA and First Data. The laggards during the period included coal
producers Arch Coal and Alpha Natural Resources, as well as Virgolino de
Oliveira, GM and Caesar's.
The Fund also sold short U.S. Treasury bonds, interest rate futures as well as
high-yield bonds. U.S. Treasury bonds and interest rate futures were used to
reduce the portfolio's exposure to interest rate risk, while also providing
leverage to purchase additional high-yield securities. The performance impact
from shorting Treasury bonds detracted from performance; however, the
reinvestment of the proceeds into high-yield bonds contributed to performance.
The impact from shorting Treasury futures was flat.
Within the high-yield market over the last year, higher-quality BB bonds
outperformed lower-quality CCC rated bonds. According to data compiled by JP
Morgan, new issue volume was nearly $314 billion year-to-date through the end of
October, with over 53% of the proceeds this year used for refinancing purposes.2
Since the second quarter of 2014, there have been significant outflows from
high-yield mutual funds; these outflows were traced to retail investors
redeeming out of ETFs; we have not seen any evidence that this relates to
institutional investors. As has been demonstrated in the past, retail investors
are easily unsettled by pullbacks in the market and may prematurely act based on
fears.
OUTLOOK
Despite the uptick in global uncertainty, the U.S. economy's growth trajectory
continues to improve, in our opinion. Third quarter GDP proved strong (3.5%)
driven by investments in the military and spending by businesses. Export growth
also increased, as did real personal consumption expenditures. Inventory levels
declined, which likely will point to a rebuild in 2015. We expect these
favorable fundamentals to persist for the foreseeable future, and therefore
believe that credit spreads are likely to tighten from current levels as any
increase in interest rates is likely to be modest. Accordingly, we intend to
continue to maintain a risk profile for the Fund above that of the market.
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1 The Bank of America Merrill Lynch U.S. High Yield Master II Constrained
Index tracks the performance of U.S. dollar denominated below investment
grade corporate debt publicly issued in the U.S. domestic market but caps
issuer exposure at 2%. Indexes are unmanaged and an investor cannot invest
directly in an index.
2 Source: JP Morgan. Credit Strategy Weekly Update: High Yield and Leveraged
Loan Research (as of 10/31/14).
Page 4
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES - 75.8%
AUTOMOTIVE - 5.4%
$ 334,000 Chrysler Group LLC/Chrysler Group Co-Issuer, Inc.............. 8.00% 06/15/19 $ 359,467
4,367,000 Chrysler Group LLC/Chrysler Group Co-Issuer, Inc. (a)......... 8.25% 06/15/21 4,901,957
2,376,000 Ford Motor Co. (a)............................................ 9.22% 09/15/21 3,165,999
553,000 Ford Motor Co. (a)............................................ 8.90% 01/15/32 779,246
2,000,000 Ford Motor Co. (a)............................................ 7.75% 06/15/43 2,646,374
2,480,000 Ford Motor Co. (a)............................................ 9.98% 02/15/47 3,950,055
7,335,000 Gates Global LLC/Gates Global Co. (a) (b)..................... 6.00% 07/15/22 7,151,625
1,400,000 Goodyear Tire & Rubber (The) Co............................... 6.50% 03/01/21 1,505,000
5,396,000 Goodyear Tire & Rubber (The) Co. (a).......................... 7.00% 05/15/22 5,895,130
21,432 Motors Liquidation Co. GUC Trust (Transferable) (c)........... N/A N/A 495,079
1,970,000 MPG Holdco I, Inc. (b)........................................ 7.38% 10/15/22 2,078,350
4,872,000 Navistar International Corp. (a).............................. 8.25% 11/01/21 5,026,686
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37,954,968
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BASIC INDUSTRY - 14.7%
4,515,000 AK Steel Corp................................................. 7.63% 10/01/21 4,537,575
4,500,000 AK Steel Corp. (a)............................................ 8.38% 04/01/22 4,612,500
3,095,000 Aleris International, Inc. (a)................................ 7.63% 02/15/18 3,207,194
2,160,000 Aleris International, Inc. (a)................................ 7.88% 11/01/20 2,257,200
2,965,000 Alpha Natural Resources, Inc. (a)............................. 6.00% 06/01/19 1,512,150
1,360,000 Alpha Natural Resources, Inc. (b)............................. 7.50% 08/01/20 1,091,400
1,255,000 Arch Coal, Inc................................................ 7.00% 06/15/19 514,550
1,428,000 Arch Coal, Inc. (a)........................................... 7.25% 10/01/20 692,580
1,125,000 Arch Coal, Inc................................................ 7.25% 06/15/21 421,875
4,405,000 Associated Materials LLC/AMH New Finance, Inc. (a)............ 9.13% 11/01/17 4,322,406
1,500,000 Axalta Coating Systems US Holdings, Inc./Axalta Coating
Systems Dutch Holding B B.V. (b)........................... 7.38% 05/01/21 1,631,250
6,500,000 Beazer Homes USA, Inc. (a).................................... 8.13% 06/15/16 7,003,750
4,000,000 Cemex Finance LLC (b)......................................... 6.00% 04/01/24 4,088,800
6,500,000 Hexion U.S. Finance Corp./Hexion Nova Scotia Finance ULC (a).. 8.88% 02/01/18 6,443,125
8,655,000 Huntsman International LLC (a)................................ 8.63% 03/15/21 9,477,225
1,873,000 K Hovnanian Enterprises, Inc. (b)............................. 7.00% 01/15/19 1,832,028
4,160,000 K Hovnanian Enterprises, Inc. (b)............................. 7.25% 10/15/20 4,399,200
3,479,000 KB Home....................................................... 7.50% 09/15/22 3,766,018
1,840,000 Momentive Performance Escrow Claim (d) (e) (f) (g)............ N/A N/A 2
1,840,000 Momentive Performance Materials, Inc. (d)..................... 4.69% 04/24/22 1,518,000
6,450,000 Novelis, Inc. (a)............................................. 8.75% 12/15/20 7,070,812
1,780,000 PulteGroup, Inc. (a).......................................... 7.63% 10/15/17 2,020,300
4,570,000 PulteGroup, Inc. (a).......................................... 7.88% 06/15/32 5,272,638
3,319,000 Shea Homes L.P./Shea Homes Funding Corp....................... 8.63% 05/15/19 3,551,330
5,500,000 Standard Pacific Corp. (a).................................... 8.38% 05/15/18 6,393,750
4,465,000 TRI Pointe Holdings, Inc. (b)................................. 5.88% 06/15/24 4,571,044
4,000,000 United States Steel Corp...................................... 7.38% 04/01/20 4,505,000
1,878,000 USG Corp. (b)................................................. 8.38% 10/15/18 1,968,707
4,000,000 USG Corp. (b)................................................. 5.88% 11/01/21 4,150,000
--------------
102,832,409
--------------
See Notes to Financial Statements Page 5
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
CAPITAL GOODS - 5.9%
$ 3,595,000 Ball Corp. (a)................................................ 4.00% 11/15/23 $ 3,469,175
2,000,000 Ducommun, Inc. (a)............................................ 9.75% 07/15/18 2,190,000
5,000,000 Manitowoc Co., Inc. (a)....................................... 8.50% 11/01/20 5,437,500
2,871,000 Mcron Finance Sub LLC/ Mcron Finance Corp. (b)................ 8.38% 05/15/19 3,071,970
2,945,000 Milacron LLC/Mcron Finance Corp. (b).......................... 7.75% 02/15/21 3,077,525
2,277,000 Mueller Water Products, Inc. (a).............................. 7.38% 06/01/17 2,322,540
7,500,000 Reynolds Group Issuer, Inc. (a)............................... 8.50% 05/15/18 7,809,375
2,085,000 Reynolds Group Issuer, Inc. (a)............................... 9.88% 08/15/19 2,275,256
1,775,000 Reynolds Group Issuer, Inc.................................... 8.25% 02/15/21 1,917,000
4,050,000 Terex Corp.................................................... 6.00% 05/15/21 4,232,250
4,540,000 TransDigm, Inc. (a)........................................... 6.00% 07/15/22 4,613,775
1,000,000 TransDigm, Inc................................................ 6.50% 07/15/24 1,035,000
--------------
41,451,366
--------------
CONSUMER GOODS - 1.0%
4,795,000 JBS USA LLC/JBS USA Finance, Inc. (b)......................... 5.88% 07/15/24 4,830,963
2,240,000 Smithfield Foods, Inc. (a).................................... 6.63% 08/15/22 2,452,800
--------------
7,283,763
--------------
ENERGY - 10.4%
1,150,000 Atlas Pipeline Partners L.P./Atlas Pipeline Finance Corp...... 4.75% 11/15/21 1,152,875
4,285,000 Atlas Pipeline Partners LP/Atlas Pipeline Finance Corp. (a)... 5.88% 08/01/23 4,467,113
1,280,000 Basic Energy Services, Inc.................................... 7.75% 02/15/19 1,254,400
4,540,000 Basic Energy Services, Inc. (a)............................... 7.75% 10/15/22 4,449,200
3,974,000 Berry Petroleum Co., LLC (a).................................. 6.75% 11/01/20 3,795,170
2,990,000 California Resources Corp. (b)................................ 6.00% 11/15/24 3,057,275
600,000 Chesapeake Energy Corp. (a)................................... 7.25% 12/15/18 690,750
1,970,000 Chesapeake Energy Corp. (a)................................... 6.63% 08/15/20 2,231,025
6,600,000 Chesapeake Energy Corp. (a)................................... 5.38% 06/15/21 6,913,500
600,000 Chesapeake Energy Corp........................................ 4.88% 04/15/22 616,650
2,040,000 CITGO Petroleum Corp. (b)..................................... 6.25% 08/15/22 2,085,900
4,135,000 EP Energy LLC/Everest Acquisition Finance, Inc. (a)........... 9.38% 05/01/20 4,538,163
3,000,000 Ferrellgas L.P./Ferrellgas Finance Corp. (a).................. 6.50% 05/01/21 3,037,500
800,000 Frontier Oil Corp. (a)........................................ 6.88% 11/15/18 827,974
1,000,000 Hornbeck Offshore Services, Inc............................... 5.88% 04/01/20 945,000
3,960,000 Hornbeck Offshore Services, Inc. (a).......................... 5.00% 03/01/21 3,544,200
2,636,000 Linn Energy LLC/Linn Energy Finance Corp...................... 6.25% 11/01/19 2,438,300
3,900,000 Linn Energy LLC/Linn Energy Finance Corp...................... 8.63% 04/15/20 3,929,250
3,715,000 Linn Energy LLC/Linn Energy Finance Corp...................... 6.50% 09/15/21 3,417,800
3,535,000 PHI, Inc...................................................... 5.25% 03/15/19 3,509,760
3,998,000 Samson Investment Co. (a)..................................... 9.75% 02/15/20 2,978,510
3,695,000 Swift Energy Co............................................... 8.88% 01/15/20 3,621,100
3,425,000 Targa Resources Partners L.P./Targa Resources Partners
Finance Corp. (a).......................................... 7.88% 10/15/18 3,576,984
5,800,000 Whiting Petroleum Corp........................................ 5.75% 03/15/21 6,133,500
--------------
73,211,899
--------------
Page 6 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
FINANCIAL SERVICES - 4.2%
$ 740,000 Ally Financial, Inc. (a)...................................... 8.00% 11/01/31 $ 944,425
3,285,000 Ally Financial, Inc. (a)...................................... 8.00% 11/01/31 4,188,375
6,155,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp. (a).... 6.00% 08/01/20 6,493,525
1,190,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp......... 5.88% 02/01/22 1,228,675
8,000,000 Navient Corp. (a)............................................. 8.00% 03/25/20 9,200,000
2,395,000 Springleaf Finance Corp. (a).................................. 6.00% 06/01/20 2,490,800
4,555,000 Springleaf Finance Corp. (a).................................. 7.75% 10/01/21 5,169,925
--------------
29,715,725
--------------
HEALTHCARE - 7.2%
5,074,000 Alere, Inc. (a)............................................... 7.25% 07/01/18 5,429,180
665,000 Alere, Inc.................................................... 6.50% 06/15/20 689,938
2,725,000 CHS/Community Health Systems, Inc............................. 5.13% 08/01/21 2,861,250
5,360,000 CHS/Community Health Systems, Inc............................. 6.88% 02/01/22 5,795,500
2,500,000 DaVita Healthcare Partners, Inc. (a).......................... 5.75% 08/15/22 2,659,375
5,600,000 HCA Holdings, Inc. (a)........................................ 7.75% 05/15/21 6,048,000
10,850,000 HCA, Inc. (a)................................................. 5.00% 03/15/24 11,216,296
3,150,000 Kinetic Concepts, Inc./KCI USA, Inc........................... 10.50% 11/01/18 3,480,750
6,814,000 MPH Acquisition Holdings LLC (b).............................. 6.63% 04/01/22 7,146,182
4,235,000 Tenet Healthcare Corp......................................... 8.13% 04/01/22 4,864,956
--------------
50,191,427
--------------
LEISURE - 4.5%
849,000 Caesars Entertainment Operating Co., Inc...................... 9.00% 02/15/20 645,240
7,783,000 Caesars Entertainment Operating Co., Inc. (a)................. 9.00% 02/15/20 5,876,165
2,600,000 Caesars Entertainment Resort Properties, LLC (b).............. 8.00% 10/01/20 2,535,000
3,500,000 Isle of Capri Casinos, Inc. (a)............................... 7.75% 03/15/19 3,692,500
9,175,000 MGM Resorts International..................................... 6.75% 10/01/20 10,092,500
4,130,000 Mohegan Tribal Gaming Authority............................... 9.75% 09/01/21 4,295,200
4,127,000 Pinnacle Entertainment, Inc................................... 7.75% 04/01/22 4,529,382
--------------
31,665,987
--------------
MEDIA - 3.3%
7,245,000 CCO Holdings LLC/CCO Holdings Capital Corp. (a)............... 5.75% 01/15/24 7,435,181
456,000 Clear Channel Worldwide Holdings, Inc......................... 7.63% 03/15/20 483,360
2,785,000 Clear Channel Worldwide Holdings, Inc. (a).................... 7.63% 03/15/20 2,976,469
541,000 Clear Channel Worldwide Holdings, Inc......................... 6.50% 11/15/22 562,640
559,000 iHeartCommunications, Inc. (a)................................ 5.50% 12/15/16 531,749
10,905,000 iHeartCommunications, Inc. (a)................................ 9.00% 03/01/21 10,945,894
--------------
22,935,293
--------------
See Notes to Financial Statements Page 7
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
SERVICES - 3.1%
$ 1,095,000 Ashtead Capital, Inc. (b)..................................... 6.50% 07/15/22 $ 1,188,075
900,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc. (b)...... 5.13% 06/01/22 891,450
4,915,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc........... 5.50% 04/01/23 4,964,150
4,125,000 Iron Mountain, Inc. (a)....................................... 8.38% 08/15/21 4,295,156
375,000 United Rentals North America, Inc............................. 7.38% 05/15/20 408,750
5,619,000 United Rentals North America, Inc............................. 8.38% 09/15/20 6,110,663
367,000 United Rentals North America, Inc............................. 7.63% 04/15/22 411,040
3,097,000 United Rentals North America, Inc............................. 6.13% 06/15/23 3,348,631
--------------
21,617,915
--------------
TECHNOLOGY & ELECTRONICS - 5.0%
3,780,000 CommScope, Inc. (b)........................................... 5.00% 06/15/21 3,789,450
9,050,000 First Data Corp. (b).......................................... 8.88% 08/15/20 9,819,250
2,621,000 First Data Corp............................................... 10.63% 06/15/21 3,033,807
2,950,000 Freescale Semiconductor, Inc. (b)............................. 5.00% 05/15/21 2,920,500
6,000,000 NCR Corp. (a)................................................. 6.38% 12/15/23 6,360,000
6,460,000 SunGard Data Systems, Inc..................................... 6.63% 11/01/19 6,718,400
2,085,000 Zebra Technologies Corp. (b).................................. 7.25% 10/15/22 2,199,675
--------------
34,841,082
--------------
TELECOMMUNICATIONS - 6.7%
1,550,000 Frontier Communications Corp.................................. 6.25% 09/15/21 1,605,219
2,500,000 Frontier Communications Corp. (a)............................. 9.00% 08/15/31 2,725,000
2,411,000 Hughes Satellite Systems Corp. (a)............................ 7.63% 06/15/21 2,694,292
5,450,000 Sprint Capital Corp. (a)...................................... 6.88% 11/15/28 5,327,375
7,660,000 Sprint Capital Corp. (a)...................................... 8.75% 03/15/32 8,598,350
6,000,000 Sprint Communications, Inc.................................... 9.25% 04/15/22 7,080,000
1,240,000 Sprint Communications, Inc.................................... 6.00% 11/15/22 1,241,550
1,700,000 T-Mobile USA, Inc............................................. 6.54% 04/28/20 1,799,875
2,750,000 T-Mobile USA, Inc............................................. 6.13% 01/15/22 2,860,000
7,900,000 T-Mobile USA, Inc............................................. 6.00% 03/01/23 8,156,750
1,000,000 T-Mobile USA, Inc............................................. 6.38% 03/01/25 1,030,000
2,428,000 ViaSat, Inc................................................... 6.88% 06/15/20 2,579,750
1,500,000 Windstream Corp............................................... 6.38% 08/01/23 1,516,875
--------------
47,215,036
--------------
TRANSPORTATION - 3.1%
3,714,732 Continental Airlines 2003-ERJ1 Pass Through Trust............. 7.88% 07/02/18 3,967,482
2,106,441 Continental Airlines 2005-ERJ1 Pass Through Trust............. 9.80% 04/01/21 2,353,948
1,467,086 Delta Air Lines 2009-1 Series B Pass Through Trust............ 9.75% 12/17/16 1,650,472
2,315,550 Northwest Airlines 2001-1 Class B Pass Through Trust.......... 7.69% 04/01/17 2,558,682
1,900,785 UAL 2009-2B Pass Through Trust (b)............................ 12.00% 01/15/16 2,076,608
6,453,460 US Airways 2000-3C Pass Through Trust......................... 8.39% 03/01/22 7,276,276
2,000,000 US Airways Group, Inc......................................... 6.13% 06/01/18 2,070,000
--------------
21,953,468
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
UTILITY - 1.3%
$ 6,660,000 Calpine Corp.................................................. 5.75% 01/15/25 $ 6,751,575
2,455,000 NRG Energy, Inc. (a).......................................... 8.25% 09/01/20 2,666,744
--------------
9,418,319
--------------
TOTAL CORPORATE BONDS AND NOTES...................................................... 532,288,657
(Cost $516,175,233) --------------
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (U.S. DOLLARS)
------------- -------------------------------------------------------------- -------- -------- --------------
FOREIGN CORPORATE BONDS AND NOTES - 21.4%
AUTOMOTIVE - 0.6%
4,120,000 Schaeffler Finance B.V. (USD) (b)............................. 4.75% 05/15/21 4,130,300
--------------
BANKING - 3.3%
3,500,000 Banco do Brasil S.A. (USD) (b)................................ 5.88% 01/19/23 3,652,950
2,200,000 Barclays Bank PLC (GBP)....................................... 10.00% 05/21/21 4,593,598
2,000,000 Belfius Financing Co. (GBP) (h)............................... 1.26% 02/09/17 3,087,408
4,350,000 Industrial Senior Trust (USD) (b)............................. 5.50% 11/01/22 4,339,125
3,000,000 Royal Bank of Scotland N.V. (EUR) (h)......................... 4.70% 06/10/19 3,985,012
3,700,000 Sberbank of Russia Via SB Capital S.A. (USD).................. 5.13% 10/29/22 3,341,766
--------------
22,999,859
--------------
BASIC INDUSTRY - 4.3%
2,648,000 ArcelorMittal (USD) (a)....................................... 6.75% 02/25/22 2,952,785
10,362,000 ArcelorMittal (USD)........................................... 7.50% 10/15/39 11,113,245
505,000 ArcelorMittal (USD)........................................... 7.25% 03/01/41 523,938
3,700,000 Severstal OAO Via Steel Capital S.A. (USD) (b)................ 5.90% 10/17/22 3,541,825
4,200,000 Stora Enso OYJ (USD) (b)...................................... 7.25% 04/15/36 4,263,000
6,785,000 Vedanta Resources PLC (USD) (b)............................... 8.25% 06/07/21 7,425,334
--------------
29,820,127
--------------
CAPITAL GOODS - 2.3%
3,000,000 Albea Beauty Holdings S.A. (USD) (b).......................... 8.38% 11/01/19 3,210,000
3,000,000 Ardagh Packaging Finance PLC (EUR)............................ 9.25% 10/15/20 4,041,404
900,000 Ardagh Packaging Finance PLC/Ardagh Holdings USA, Inc.
(USD) (b).................................................. 6.00% 06/30/21 889,875
2,480,000 Bombardier, Inc. (USD) (b).................................... 6.00% 10/15/22 2,549,750
5,525,000 Bombardier, Inc. (USD) (b).................................... 6.13% 01/15/23 5,704,562
--------------
16,395,591
--------------
CONSUMER GOODS - 2.0%
6,000,000 JBS Finance II Ltd. (USD) (b)................................. 8.25% 01/29/18 6,375,000
5,900,000 Minerva Luxembourg S.A. (USD) (b)............................. 7.75% 01/31/23 6,180,250
1,420,000 Virgolino de Oliveira Finance S.A. (USD) (b).................. 10.88% 01/13/20 872,874
3,000,000 Virgolino de Oliveira Finance S.A. (USD) (b).................. 11.75% 02/09/22 774,000
--------------
14,202,124
--------------
See Notes to Financial Statements Page 9
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (U.S. DOLLARS)
------------- -------------------------------------------------------------- -------- -------- --------------
FOREIGN CORPORATE BONDS AND NOTES (CONTINUED)
ENERGY - 1.8%
1,500,000 CGG S.A. (USD)................................................ 6.50% 06/01/21 $ 1,207,500
7,056,000 CHC Helicopter S.A. (USD)..................................... 9.25% 10/15/20 7,585,200
1,700,000 Precision Drilling Corp. (USD)................................ 6.63% 11/15/20 1,759,500
1,750,000 Precision Drilling Corp. (USD)................................ 6.50% 12/15/21 1,802,500
--------------
12,354,700
--------------
HEALTHCARE - 2.0%
6,650,000 Mallinckrodt International Finance S.A./ Mallinckrodt CB LLC
(USD) (b).................................................. 5.75% 08/01/22 6,974,188
6,550,000 Valeant Pharmaceuticals International, Inc. (USD) (b)......... 7.50% 07/15/21 7,033,062
--------------
14,007,250
--------------
INSURANCE - 0.8%
1,650,000 Aviva PLC (EUR) (i)........................................... 6.88% 05/22/38 2,394,188
3,500,000 Oil Insurance Ltd. (USD) (b) (h).............................. 3.22% (j) 3,275,717
--------------
5,669,905
--------------
LEISURE - 0.9%
5,755,000 Royal Caribbean Cruises Ltd. (USD) (a)........................ 7.50% 10/15/27 6,618,250
--------------
TELECOMMUNICATIONS - 1.6%
5,859,000 Intelsat Luxembourg S.A. (USD)................................ 7.75% 06/01/21 6,144,626
2,160,000 Intelsat Luxembourg S.A. (USD)................................ 8.13% 06/01/23 2,305,800
2,408,000 Unify Germany Holdings B.V. (EUR)............................. 10.75% 11/15/15 3,017,582
--------------
11,468,008
--------------
TRANSPORTATION - 1.8%
5,250,000 Hapag-Lloyd AG (USD) (b)...................................... 9.75% 10/15/17 5,460,000
3,000,000 Stena AB (USD) (b)............................................ 7.00% 02/01/24 3,000,000
5,230,000 Ukraine Railways Via Shortline PLC (USD) (b).................. 9.50% 05/21/18 3,845,096
--------------
12,305,096
--------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.............................................. 149,971,210
(Cost $147,609,095) --------------
PAR
AMOUNT
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (U.S. DOLLARS)
------------- -------------------------------------------------------------- -------- -------- --------------
CAPITAL PREFERRED SECURITIES - 15.5%
BANKING - 8.2%
2,975,000 Ageas Hybrid Financing S.A. (EUR) (i)......................... 5.13% (j) 3,793,359
1,400,000 Barclays PLC (EUR) (i)........................................ 6.50% (j) 1,717,741
5,500,000 Citigroup, Inc., Series M (USD) (a) (i)....................... 6.30% (j) 5,479,375
6,750,000 Deutsche Postbank Funding Trust IV (EUR) (i).................. 5.98% (j) 8,863,081
3,250,000 Dresdner Funding Trust I (USD) (b)............................ 8.15% 06/30/31 3,810,625
5,325,000 HBOS Capital Funding L.P. (GBP) (i)........................... 6.46% (j) 8,912,339
3,600,000 HSBC Holdings PLC (USD) (a) (i)............................... 6.38% (j) 3,676,500
Page 10 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PAR
AMOUNT
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (U.S. DOLLARS)
------------- -------------------------------------------------------------- -------- -------- --------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
BANKING (CONTINUED)
3,890,000 ICICI Bank Ltd. (USD) (i)..................................... 6.38% 04/30/22 $ 4,040,932
3,250,000 Mellon Capital III (GBP) (i).................................. 6.37% 09/05/66 5,430,358
3,000,000 National Westminster Bank PLC (GBP) (i)....................... 5.98% (j) 4,731,892
2,250,000 UT2 Funding PLC (EUR)......................................... 5.32% 06/30/16 2,874,918
4,095,000 Wells Fargo & Co. (USD) (i)................................... 5.90% (j) 4,220,307
--------------
57,551,427
--------------
CAPITAL GOODS - 0.1%
700,000 Textron Financial Corp. (USD) (b) (i)......................... 6.00% 02/15/67 647,500
--------------
FINANCIAL SERVICES - 1.1%
6,000,000 GE Capital Trust IV (EUR) (i)................................. 4.63% 09/15/66 7,847,903
--------------
INSURANCE - 6.1%
1,800,000 American International Group, Inc. (EUR) (i).................. 4.88% 03/15/67 2,366,195
5,000,000 Chubb Corp. (USD) (a) (i)..................................... 6.38% 03/29/67 5,475,000
3,500,000 CNP Assurances (EUR) (i)...................................... 5.25% (j) 3,815,837
11,000,000 Glen Meadow Pass Through Trust (USD) (b) (i).................. 6.51% 02/12/67 10,876,250
5,000,000 ING Groep N.V. (GBP) (i)...................................... 5.14% (j) 8,031,659
6,500,000 Liberty Mutual Group, Inc. (USD) (b) (i)...................... 7.00% 03/15/37 6,792,500
3,500,000 Lincoln National Corp. (USD) (a) (i).......................... 7.00% 05/17/66 3,605,000
1,800,000 Lincoln National Corp. (USD) (a) (i).......................... 6.05% 04/20/67 1,840,500
--------------
42,802,941
--------------
TOTAL CAPITAL PREFERRED SECURITIES................................................... 108,849,771
(Cost $97,975,101) --------------
PRINCIPAL STATED
VALUE DESCRIPTION RATE (k) MATURITY (l) VALUE
------------- -------------------------------------------------------------- -------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 4.0%
AUTOMOTIVE - 0.9%
$ 4,427,957 Allison Transmission, Inc. Term Loan B3....................... 3.75% 08/23/19 4,389,213
1,743,750 Navistar, Inc. Term Loan B.................................... 5.75% 08/17/17 1,747,028
--------------
6,136,241
--------------
CONSUMER GOODS - 1.0%
6,766,000 Aramark Corp. F Term Loan..................................... 3.25% 02/24/21 6,662,413
--------------
ENERGY - 0.8%
5,820,306 Meg Energy Term Loan.......................................... 3.75% 03/31/20 5,715,540
--------------
HEALTHCARE - 0.9%
6,294,225 Ortho-Clinical Term Loan B3................................... 4.75% 06/30/21 6,224,988
--------------
REAL ESTATE - 0.0%
183,269 Realogy Synthetic Letter of Credit............................ 4.26% 10/10/16 179,375
--------------
See Notes to Financial Statements Page 11
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
PRINCIPAL STATED
VALUE DESCRIPTION RATE (k) MATURITY (l) VALUE
------------- -------------------------------------------------------------- -------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
TRANSPORTATION - 0.4%
$ 2,970,000 US Airway Group Term Loan B1.................................. 3.50% 05/23/19 $ 2,898,393
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS............................................ 27,816,950
(Cost $28,091,755) --------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- ------ -------- --------------
ASSET-BACKED SECURITIES - 1.6%
2,954,270 Ace Securities Corp. Home Equity Loan Trust Series
2007-HE2, Class A2A (h).................................... 0.27% 12/25/36 1,722,123
1,629,218 Carrington Mortgage Loan Trust
Series 2006-NC4, Class A5 (h).............................. 0.21% 10/25/36 1,478,750
781,329 HSI Asset Securitization Corp. Trust
Series 2007-NC1, Class A1 (h).............................. 0.25% 04/25/37 740,844
1,832,923 Keycorp Student Loan Trust
Series 2000-A, Class A2 (h)................................ 0.55% 05/25/29 1,782,346
709,678 Morgan Stanley ABS Capital I, Inc. Trust
Series 2006-HE6, Class A2B (h)............................. 0.25% 09/25/36 399,539
9,242,164 Securitized Asset Backed Receivables LLC Trust Series
2006-FR4, Class A2A (h).................................... 0.23% 08/25/36 4,204,362
953,694 Soundview Home Loan Trust
Series 2006-EQ2, Class A2 (h).............................. 0.26% 01/25/37 651,150
--------------
TOTAL ASSET-BACKED SECURITIES........................................................ 10,979,114
(Cost $12,845,159) --------------
MORTGAGE-BACKED SECURITIES - 0.6%
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.6%
982,519 Morgan Stanley Mortgage Loan Trust
Series 2007-6XS, Class 2A1S (h)............................ 0.26% 02/25/47 933,148
1,635,991 Specialty Underwriting & Residential Finance Trust Series
2006-BC4, Class A2B (h).................................... 0.26% 09/25/37 797,783
2,941,252 Wells Fargo Mortgage Backed Securities Trust Series 2006-AR7
Trust, Class 2A4 (h)....................................... 2.61% 05/25/36 2,790,042
--------------
TOTAL MORTGAGE-BACKED SECURITIES..................................................... 4,520,973
(Cost $4,795,260) --------------
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
------------- -------------------------------------------------------------- -------- -------- --------------
FOREIGN SOVEREIGN BONDS AND NOTES - 0.6%
ENERGY - 0.6%
3,750,000 Georgian Oil and Gas Corp. JSC (USD) (b)...................... 6.88% 05/16/17 3,945,563
--------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES.............................................. 3,945,563
(Cost $3,731,294) --------------
Page 12 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------- --------------
COMMON STOCKS - 1.9%
AUTOMOTIVE - 1.3%
448,000 Ford Motor Co........................................................................ $ 6,312,320
84,412 General Motors Co.................................................................... 2,650,537
--------------
8,962,857
--------------
BANKING - 0.6%
75,700 Citigroup, Inc....................................................................... 4,052,221
--------------
TOTAL COMMON STOCKS.................................................................. 13,015,078
(Cost $13,968,453) --------------
WARRANTS - 0.3%
AUTOMOTIVE - 0.3%
81,728 General Motors Co., expiring 07/10/16 (g)............................................ 1,771,046
46,655 General Motors Co., expiring 07/10/19 (g)............................................ 665,767
--------------
TOTAL WARRANTS....................................................................... 2,436,813
(Cost $3,294,518) --------------
SHORT-TERM INVESTMENTS - 0.1%
988,262 Dreyfus Government Cash Management - Institutional Shares............................ 988,262
--------------
TOTAL SHORT-TERM INVESTMENTS......................................................... 988,262
(Cost $988,262) --------------
TOTAL INVESTMENTS - 121.8%........................................................... 854,812,391
(Cost $829,474,130) (m) --------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
U.S. GOVERNMENT BONDS SOLD SHORT - (21.0%)
$(119,200,000) United States Treasury Note................................... 0.88% 02/28/17 (119,805,298)
(27,500,000) United States Treasury Note................................... 2.00% 02/15/22 (27,366,790)
--------------
TOTAL U.S. GOVERNMENT BONDS SOLD SHORT............................................... (147,172,088)
(Proceeds $147,297,957) --------------
CORPORATE BONDS SOLD SHORT - (1.5%)
CONSUMER GOODS - (0.8%)
(5,350,000) ACCO Brands Corp.............................................. 6.75% 04/30/20 (5,711,125)
--------------
ENERGY - (0.7%)
(5,360,000) Rice Energy, Inc. (b)......................................... 6.25% 05/01/22 (5,209,250)
--------------
TOTAL CORPORATE BONDS SOLD SHORT..................................................... (10,920,375)
(Proceeds $10,871,700) --------------
TOTAL INVESTMENTS SOLD SHORT - (22.5%)............................................... (158,092,463)
(Proceeds $158,169,657) --------------
OUTSTANDING LOAN - (1.5%)............................................................ (10,619,159)
NET OTHER ASSETS AND LIABILITIES - 2.2%.............................................. 15,853,845
--------------
NET ASSETS - 100.0%.................................................................. $ 701,954,614
==============
See Notes to Financial Statements Page 13
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
(a) This security or a portion of this security is segregated as collateral
for investments sold short.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by MacKay Shields LLC, the Fund's sub-advisor (the
"Sub-Advisor"). Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is
determined based on security-specific factors and assumptions, which
require subjective judgment. At October 31, 2014, securities noted as such
amounted to $191,221,573 of total investments and $(5,209,250) of
corporate bonds sold short, or 27.24% and (0.74%) of net assets,
respectively.
(c) The Fund previously held non-transferable trust units that were originally
issued to facilitate distribution of General Motors common stock and
warrants pursuant to the General Motors Bankruptcy Plan of Reorganization.
The non-transferable trust units existed only for the purpose of receiving
residual cash, if any, from the General Motors Bankruptcy. These units
were received in exchange for the previously owned General Motors 8.375%
Corporate Notes that were scheduled to mature on July 15, 2033. On June
12, 2012, the holders of these units received new transferable General
Motors Unsecured Claim (GUC) Trust Units, which were created to hold and
administer the common stock and warrants of General Motors Company to be
contributed to the GUC Trust under the General Motors Bankruptcy Plan of
Reorganization.
(d) On October 24, 2014, Momentive Performance Materials, Inc. completed a
Bankruptcy Plan of Reorganization. As part of the Bankruptcy Plan of
Reorganization, the holders of Momentive Performance Materials, Inc.
Senior Secured Lien Notes ("Senior Secured Lien Notes") scheduled to
mature on October 15, 2020, received new Momentive Performance Materials,
Inc. Second Priority Senior Secured Notes maturing on April 24, 2022, in
an exchange for the existing Senior Secured Lien Notes, and received
Momentive Performance Escrow Claim ("Escrow Claim"). The Escrow Claim
represents a claim on any cash that remains in a Fee Reserve account. It
is unknown if any remaining cash held in the Fee Reserve account will be
available after future legal and financial costs are paid.
(e) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the Investment Company Act of 1940, as
amended. At October 31, 2014, securities noted as such are valued at $2 or
0.00% of net assets.
(f) This security has been determined to be illiquid by the Sub-Advisor.
(g) Non-income producing security.
(h) Floating rate security. The interest rate shown reflects the rate in
effect at October 31, 2014.
(i) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at October 31, 2014. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(j) Perpetual maturity.
(k) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests pay interest at rates which are periodically predetermined by
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the
prime rate offered by one or more United States banks or (iii) the
certificate of deposit rate. Certain Senior Loans are subject to a LIBOR
floor that establishes a minimum LIBOR rate. The interest rate shown
reflects the rate in effect at October 31, 2014. When a range of rates is
disclosed the Fund holds more than one contract within the same tranche at
varying rates.
(l) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(m) Aggregate cost for federal income tax purposes is $828,265,537. As of
October 31, 2014, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$46,892,285 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$20,345,431.
Currency Abbreviations:
EUR Euro
GBP British Pound Sterling
USD United States Dollar
Page 14 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 10/31/2014 PRICES INPUTS INPUTS
-------------------------------------------- ---------------- ---------------- ---------------- ----------------
Corporate Bonds and Notes:
Automotive............................. $ 37,954,968 $ 495,079 $ 37,459,889 $ --
Basic Industry......................... 102,832,409 -- 102,832,407 2
Other Industry Categories*............. 391,501,280 -- 391,501,280 --
Foreign Corporate Bonds and Notes*.......... 149,971,210 -- 149,971,210 --
Capital Preferred Securities*............... 108,849,771 -- 108,849,771 --
Senior Floating-Rate Loan Interests*........ 27,816,950 -- 27,816,950 --
Asset-Backed Securities..................... 10,979,114 -- 10,979,114 --
Mortgage-Backed Securities.................. 4,520,973 -- 4,520,973 --
Foreign Sovereign Bonds and Notes*.......... 3,945,563 -- 3,945,563 --
Common Stocks*.............................. 13,015,078 13,015,078 -- --
Warrants*................................... 2,436,813 2,436,813 -- --
Short-Term Investments...................... 988,262 988,262 -- --
---------------- ---------------- ---------------- ----------------
Total Investments........................... $ 854,812,391 $ 16,935,232 $ 837,877,157 $ 2
---------------- ---------------- ---------------- ----------------
Other Financial Instruments:
Forward Foreign Currency Contracts**........ 1,915,927 -- 1,915,927 --
---------------- ---------------- ---------------- ----------------
Total....................................... $ 856,728,318 $ 16,935,232 $ 839,793,084 $ 2
================ ================ ================ ================
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2014 PRICES INPUTS INPUTS
---------------- ---------------- ---------------- ----------------
U.S. Government Bonds Sold Short............ $ (147,172,088) $ -- $ (147,172,088) $ --
Corporate Bonds Sold Short*................. (10,920,375) -- (10,920,375) --
Futures Contracts........................... (110,038) (110,038) -- --
---------------- ---------------- ---------------- ----------------
Total....................................... $ (158,202,501) $ (110,038) $ (158,092,463) $ --
================ ================ ================ ================
* See the Portfolio of Investments for industry breakout.
** See the Schedule of Forward Foreign Currency Contracts for contract and
currency detail.
See Notes to Financial Statements Page 15
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
BEGINNING BALANCE AT OCTOBER 31, 2013
Corporate Bonds and Notes.............. $ --
Net Realized Gain (Loss).................... --
Net Change in Unrealized Appreciation/
Depreciation........................... --
Purchases
Corporate Bonds and Notes.............. 2
Sales....................................... --
Transfers In................................ --
Transfers Out............................... --
ENDING BALANCE AT OCTOBER 31, 2014
Corporate Bonds and Notes.............. 2
----------------
Total Level 3 holdings...................... $ 2
================
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2014.
OPEN FUTURES CONTRACTS AT OCTOBER 31, 2014 (see Note 2F - Futures Contracts in
the Notes to Financial Statements):
UNREALIZED
NUMBER OF EXPIRATION NOTIONAL APPRECIATION/
SHORT FUTURES CONTRACTS CONTRACTS MONTH VALUE (DEPRECIATION)
----------------------------------------------------------------------------------------------
U.S. Treasury 2-Year Notes 180 December-2014 $ 39,411,212 $ (110,038)
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS: (see Note 2D - Forward Foreign
Currency Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
--------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED + SOLD + OCTOBER 31, 2014 OCTOBER 31, 2014 (DEPRECIATION)
---------- ------------ -------------- -------------- ---------------- ---------------- --------------
12/03/14 JPM USD 47,368,534 EUR 36,217,000 $ 46,928,540 $ 45,395,037 $ 1,533,503
12/03/14 JPM USD 35,683,500 GBP 22,119,000 35,756,691 35,374,267 382,424
--------------
Net Unrealized Appreciation (Depreciation)....................................................... $ 1,915,927
==============
+ Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
JPM JPMorgan Chase
Page 16 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2014
ASSETS:
Investments, at value
(Cost $829,474,130)........................................................................... $ 854,812,391
Cash............................................................................................... 25,691
Foreign currency (Cost $194,994)................................................................... 192,971
Unrealized appreciation on forward foreign currency contracts...................................... 1,915,927
Restricted cash.................................................................................... 55,800
Receivables:
Interest...................................................................................... 14,474,786
Due from broker............................................................................... 366,805
Dividends..................................................................................... 56,757
Variation margin.............................................................................. 11,250
Investment securities sold.................................................................... 5,603
Prepaid expenses................................................................................... 15,795
--------------
Total Assets.................................................................................. 871,933,776
--------------
LIABILITIES:
Investments sold short, at value (proceeds $158,169,657)........................................... 158,092,463
Borrowings......................................................................................... 10,619,159
Payables:
Investment advisory fees...................................................................... 590,819
Interest on investments sold short............................................................ 470,279
Administrative fees........................................................................... 62,853
Audit and tax fees............................................................................ 57,200
Printing fees................................................................................. 35,008
Custodian fees................................................................................ 27,741
Legal fees.................................................................................... 14,493
Transfer agent fees........................................................................... 4,861
Trustees' fees and expenses................................................................... 2,630
Financial reporting fees...................................................................... 771
Other liabilities.................................................................................. 885
--------------
Total Liabilities............................................................................. 169,979,162
--------------
NET ASSETS......................................................................................... $ 701,954,614
==============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $ 684,571,906
Par value.......................................................................................... 360,561
Accumulated net investment income (loss)........................................................... 3,764,378
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts, foreign currency transactions, futures and investments sold short..................... (13,897,399)
Net unrealized appreciation (depreciation) on investments, forward foreign
currency contracts, foreign currency translation, futures and investments sold short............. 27,155,168
--------------
NET ASSETS......................................................................................... $ 701,954,614
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... $ 19.47
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)........ 36,056,159
==============
See Notes to Financial Statements Page 17
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2014
INVESTMENT INCOME:
Interest........................................................................................... $ 58,388,854
Dividends.......................................................................................... 302,999
Other.............................................................................................. 769,039
--------------
Total investment income....................................................................... 59,460,892
--------------
EXPENSES:
Investment advisory fees........................................................................... 7,127,986
Interest expense on investments sold short......................................................... 1,958,144
Margin interest expense............................................................................ 1,520,823
Short sale fees.................................................................................... 782,109
Administrative fees................................................................................ 602,654
Printing fees...................................................................................... 138,984
Custodian fees..................................................................................... 117,720
Audit and tax fees................................................................................. 58,904
Legal fees......................................................................................... 28,855
Trustees' fees and expenses........................................................................ 28,642
Transfer agent fees................................................................................ 27,115
Financial reporting fees........................................................................... 9,250
Other.............................................................................................. 71,431
--------------
Total expenses................................................................................ 12,472,617
--------------
NET INVESTMENT INCOME (LOSS)....................................................................... 46,988,275
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................... 16,012,573
Forward foreign currency contracts............................................................ 402,956
Foreign currency transactions................................................................. (278,944)
Futures....................................................................................... (284,695)
--------------
Net realized gain (loss)........................................................................... 15,851,890
--------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................... (24,911,131)
Forward foreign currency contracts............................................................ 4,195,839
Foreign currency translation.................................................................. (144,770)
Futures....................................................................................... 82,131
Short positions............................................................................... (500,866)
--------------
Net change in unrealized appreciation (depreciation)............................................... (21,278,797)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ (5,426,907)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 41,561,368
==============
Page 18 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2014 10/31/2013
-------------- --------------
OPERATIONS:
Net investment income (loss)..................................................... $ 46,988,275 $ 48,494,849
Net realized gain (loss)......................................................... 15,851,890 (12,110,327)
Net change in unrealized appreciation (depreciation)............................. (21,278,797) 35,330,690
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................. 41,561,368 71,715,212
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................ (47,413,849) (47,827,919)
Return of capital................................................................ -- (2,794,928)
-------------- --------------
Total distributions to shareholders.............................................. (47,413,849) (50,622,847)
-------------- --------------
Total increase (decrease) in net assets.......................................... (5,852,481) 21,092,365
NET ASSETS:
Beginning of period.............................................................. 707,807,095 686,714,730
-------------- --------------
End of period.................................................................... $ 701,954,614 $ 707,807,095
============== ==============
Accumulated net investment income (loss) at end of period........................ $ 3,764,378 $ 2,872,586
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................. 36,056,159 36,056,159
-------------- --------------
Common Shares at end of period................................................... 36,056,159 36,056,159
============== ==============
See Notes to Financial Statements Page 19
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ................. $ 41,561,368
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used in operating activities:
Purchases of investments................................................... (467,188,095)
Borrowed investments sold short............................................ 10,871,700
Sales, maturities and paydowns of investments.............................. 469,454,652
Net amortization/accretion of premiums/discounts on investments............ (499,183)
Net realized gain/loss on investments...................................... (16,012,573)
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts...................................................... (4,195,839)
Net change in unrealized appreciation/depreciation on investments
sold short.............................................................. 500,866
Net change in unrealized appreciation/depreciation on investments.......... 24,911,131
Restricted cash for futures contracts...................................... (10,800)
CHANGES IN ASSETS AND LIABILITIES:
Increase in due from broker................................................ (366,805)
Decrease in interest receivable............................................ 1,629,632
Increase in dividends receivable........................................... (11,200)
Increase in variation margin receivable.................................... (11,250)
Decrease in prepaid expenses............................................... 4,019
Increase in interest payable on investments sold short..................... 175,068
Decrease in investment advisory fees payable............................... (432)
Decrease in legal fees payable............................................. (14,581)
Decrease in printing fees payable.......................................... (3,775)
Increase in administrative fees payable.................................... 9,751
Decrease in custodian fees payable......................................... (66,784)
Increase in transfer agent fees payable.................................... 3,130
Decrease in Trustees' fees and expenses payable............................ (232)
Decrease in variation margin fees payable.................................. (5,625)
Increase in other liabilities payable...................................... 757
--------------
CASH PROVIDED BY OPERATING ACTIVITIEs............................................ $ 60,734,900
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............ (47,413,849)
Net proceeds from borrowing................................................ (13,422,344)
--------------
CASH USED IN FINANCING ACTIVITIES................................................ (60,836,193)
--------------
Decrease in cash and foreign currency (a)........................................ (101,293)
Cash and foreign currency at beginning of period................................. 319,955
--------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD....................................... $ 218,662
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................ $ 3,303,899
==============
-------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(144,770).
Page 20 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
10/31/2014 10/31/2013 10/31/2012 10/31/2011 10/31/2010 (a)
------------ ------------ ------------ ------------ --------------
Net asset value, beginning of period...... $ 19.63 $ 19.05 $ 17.82 $ 19.57 $ 19.10 (b)
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).............. 1.31 1.35 1.41 1.48 0.08
Net realized and unrealized gain (loss)... (0.15) 0.64 1.42 (1.72) 0.42
-------- -------- -------- -------- --------
Total from investment operations.......... 1.16 1.99 2.83 (0.24) 0.50
-------- -------- -------- -------- --------
Common Shares offering costs charged to ..
paid-in capital........................ -- -- -- -- (0.03)
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income..................... (1.32) (1.33) (1.44) (1.47) --
Net realized gain......................... -- -- (0.16) -- --
Return of capital......................... -- (0.08) -- -- --
-------- -------- -------- -------- --------
Total from distributions to Common
Shareholders........................... (1.32) (1.41) (1.60) (1.47) --
-------- -------- -------- -------- --------
Capital charge resulting from issuance ...
of Common Shares related to over
allotment.............................. -- -- -- (0.04) --
-------- -------- -------- -------- --------
Net asset value, end of period............ $ 19.47 $ 19.63 $ 19.05 $ 17.82 $ 19.57
======== ======== ======== ======== ========
Market value, end of period............... $ 17.19 $ 17.62 $ 18.78 $ 16.63 $ 20.01
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (c) 6.86% 11.32% 17.09% (1.27)% 2.46% (d)
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (c).... 5.12% 1.36% 23.69% (9.89)% 0.05%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)...... $701,955 $707,807 $686,715 $642,414 $662,604
Ratio of net expenses to average net
assets................................. 1.75% 1.72% 1.88% 2.09% 1.46% (d)
Ratio of net expenses to average net
assets excluding interest expense...... 1.26% 1.27% 1.32% 1.29% 1.33% (d)
Ratio of net investment income (loss)
to average net assets.................. 6.59% 6.93% 7.83% 7.78% 4.98% (d)
Portfolio turnover rate................... 28% 28% 24% 18% 0%
-----------------------------
(a) Initial seed date was August 20, 2010. The Fund commenced operations on
September 27, 2010.
(b) Beginning net asset value is net of sales load of $0.90 per share from the
initial offering.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) Annualized.
See Notes to Financial Statements Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014
1. ORGANIZATION
First Trust High Income Long/Short Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on June 18, 2010, and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund trades under the ticker symbol FSD on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to provide current income. The Fund's
secondary objective is capital appreciation. The Fund seeks to achieve its
investment objectives by investing, under normal market conditions, a majority
of its assets in a diversified portfolio of U.S. and foreign (including emerging
markets) high-yield corporate fixed-income securities of varying maturities that
are rated below-investment grade at the time of purchase. For purposes of this
strategy, "corporate fixed-income securities" include corporate bonds,
debentures, notes, commercial paper and other similar types of corporate debt
instruments, including instruments issued by corporations with direct or
indirect government ownership, as well as asset-backed securities, preferred
shares, senior floating-rate loan participations, commitments and assignments
("Senior Loans")1, payment-in-kind securities, zero-coupon bonds, bank
certificates of deposit, fixed time deposits, bankers' acceptances and
derivative instruments that provide the same or similar economic impact as a
physical investment in the above securities. Below-investment grade fixed-income
securities are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal. As part of its investment strategy, the Fund intends to
maintain both long and short positions in securities under normal market
conditions. The Fund will take long positions in securities that MacKay Shields
LLC ("MacKay" or the "Sub-Advisor") believes offer the potential for attractive
returns and that it considers in the aggregate to have the potential to
outperform the Fund's benchmark, the Bank of America Merrill Lynch U.S. High
Yield Master II Constrained Index (the "Index"). The Fund will take short
positions in securities that the Sub-Advisor believes in the aggregate will
underperform the Index. The Fund's long positions, either directly or through
derivatives, may total up to 130% of the Fund's Managed Assets. The Fund's short
positions, either directly or through derivatives, may total up to 30% of the
Fund's Managed Assets. "Managed Assets" means the average daily gross asset
value of the Fund (which includes the principal amount of any borrowings), minus
the sum of the Fund's liabilities. There can be no assurance that the Fund will
achieve its investment objectives. The Fund may not be appropriate for all
investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e., a regulated market) and are primarily obtained from third party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third party pricing service, or are
determined by the Pricing Committee of the Fund's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor") in accordance with
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
Corporate bonds, notes, U.S. government securities, mortgage-backed
securities, asset-backed securities and other debt securities are valued
on the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Fund's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
-----------------------------
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and
the London Stock Exchange Alternative Investment Market ("AIM")) are
valued at the last sale price on the exchange on which they are
principally traded or, for NASDAQ and AIM securities, the official closing
price. Securities traded on more than one securities exchange are valued
at the last sale price or official closing price, as applicable, at the
close of the securities exchange representing the principal market for
such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
The Senior Loans held in the Fund are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while
having grown substantially since its inception, generally has fewer trades
and less liquidity than the secondary market for other types of
securities. Some Senior Loans have few or no trades, or trade
infrequently, and information regarding a specific Senior Loan may not be
widely available or may be incomplete. Accordingly, determinations of the
market value of Senior Loans may be based on infrequent and dated
information. Because there is less reliable, objective data available,
elements of judgment may play a greater role in valuation of Senior Loans
than for other types of securities. Typically, Senior Loans are fair
valued using information provided by a third party pricing service. The
third party pricing service primarily uses over-the-counter pricing from
dealer runs and broker quotes from indicative sheets to value the Senior
Loans.
Exchange-traded futures contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded futures contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
Forward foreign currency contracts are fair valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by an independent pricing service.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
3) the interest rate conditions in the relevant market and
changes thereto (such as significant changes in interest
rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates)
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means ..
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2014, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method.
C. UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund did not have any unfunded delayed draw loan
commitments as of October 31, 2014.
D. FORWARD FOREIGN CURRENCY CONTRACTS:
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements to
exchange one currency for another at a future date and at a specified price. The
Fund uses forward foreign currency contracts to facilitate transactions in
foreign securities and to manage the Fund's foreign currency exposure. These
contracts are valued daily, and the Fund's net equity therein, representing
unrealized gain or loss on the contracts as measured by the difference between
the forward foreign exchange rates at the dates of entry into the contracts and
the forward rates at the reporting date, is included in "Unrealized
appreciation/(depreciation) on forward foreign currency contracts" on the
Statement of Assets and Liabilities. When the forward contract is closed, the
Fund records a realized gain or loss equal to the difference between the
proceeds from (or the cost of) the closing transaction and the Fund's basis in
the contract. This realized gain or loss is included in "Net realized gain
(loss) on forward foreign currency contracts" on the Statement of Operations.
Risks arise from the possible inability of counterparties to meet the terms of
their contracts and from movement in currency and securities values and interest
rates. Due to the risks, the Fund could incur losses in excess of the net
unrealized value shown on the Schedule of Forward Foreign Currency Contracts.
During the year ended October 31, 2014, the amount of notional values of forward
foreign currency contracts opened and closed were $1,556,496,927 and
$(1,512,479,096), respectively.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014
E. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates, have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received. The portion of foreign
currency gains and losses related to fluctuation in exchange rates between the
initial purchase settlement date and subsequent sale trade date is included in
"Net realized gain (loss) on investments" on the Statement of Operations.
F. FUTURES CONTRACTS:
The Fund purchases or sells (i.e., is long or short) futures contracts to hedge
against changes in interest rates (interest rate risk). Futures contracts are
agreements between the Fund and a counterparty to buy or sell a specific
quantity of an underlying instrument at a specified price and at a specified
date. Depending on the terms of the contract, futures contracts are settled
either through physical delivery of the underlying instrument on the settlement
date or by payment of a cash settlement amount on the settlement date. Open
futures contracts can also be closed out prior to settlement by entering into an
offsetting transaction in a matching futures contract. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue to be required
to maintain margin deposits on the futures contract. When the contract is closed
or expires, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed or expired. This gain or loss is included in "Net realized
gain (loss) on futures" on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures contacts
are marked to market daily with the change in value recognized as a component of
"Net change in unrealized appreciation (depreciation) on futures" on the
Statement of Operations. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin
and are included in "Variation margin payable or receivable" on the Statement of
Assets and Liabilities.
If market conditions change unexpectedly, the Fund may not achieve the
anticipated benefits of the futures contracts and may realize a loss. The use of
futures contracts involves the risk of imperfect correlation in movements in the
price of the futures contracts, interest rates and the underlying instruments.
Restricted cash in the amount of $55,800, as shown on the Statement of Assets
and Liabilities, is associated with collateral at the broker as of October 31,
2014.
During the year ended October 31, 2014, the amount of notional values of futures
contracts opened and closed were $158,159,996 and $(158,233,002), respectively.
G. SHORT SALES:
Short sales are utilized for investment and risk management purposes and are
transactions in which securities or other instruments (such as options,
forwards, futures or other derivative contracts) are sold that are not currently
owned in the Fund's portfolio. When a short sale is engaged in, the security
sold short must be borrowed and delivered to the counterparty. Short selling
allows the Fund to profit from a decline in a market price to the extent such
decline exceeds the transaction costs and the costs of borrowing the securities.
The Fund will pay a fee or premium to borrow the securities and is obligated to
repay the lenders of the securities. Any dividends or interest that accrues on
the securities during the period of the loan are due to the lenders. A gain,
limited to the price at which the security was sold short, or a loss, unlimited
in size, will be recognized upon the termination of the short sale. Any such
gain or loss may be offset, completely or in part, by the change in the value of
the long portion of the Fund's portfolio. The Fund is subject to the risk it may
be unable to reacquire a security to terminate a short position except at a
price substantially in excess of the last quoted price. Also, there is the risk
that the counterparty to a short sale may fail to honor its contractual terms,
causing a loss to the Fund.
The Fund has established an account with Pershing, LLC for the purpose of
purchasing or borrowing securities on margin. At October 31, 2014, the Fund had
$10,619,159 in borrowings associated with investments sold short and
$158,092,463 of investments sold short as shown on the Statement of Assets and
Liabilities. Interest is charged on these balances at a rate equal to the
Federal Funds rate plus 75 basis points and is charged on payable credit margin
balances at a rate equal to the Federal Funds rate less 40 basis points. At
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014
October 31, 2014, the Fund had a debit margin balance with an interest rate of
0.80%. For the year ended October 31, 2014, margin interest expense was
$1,520,823, as shown on the Statement of Operations. For the year ended October
31, 2014, the average margin balance and interest rate were $181,098,759 and
0.83%, respectively.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Level dividend distributions are declared and paid monthly to Common
Shareholders after the payment of interest and/or dividends in connection with
leverage. The level dividend rate may be modified by the Board of Trustees from
time to time. If, for any monthly distribution, net investment company taxable
income, if any (which term includes net short-term capital gain), is less than
the amount of the distribution, the difference will generally be a tax-free
return of capital distributed from the Fund's assets. Distributions of any net
long-term capital gains earned by the Fund are distributed at least annually.
Distributions will automatically be reinvested into additional Common Shares
pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are
elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future. Permanent differences
incurred during the fiscal year ended October 31, 2014, resulting in book and
tax accounting differences, have been reclassified at year end to reflect an
increase in accumulated net investment income (loss) by $1,317,366, and a
decrease in accumulated net realized gain (loss) on investments by $1,317,366.
Net assets were not affected by this reclassification.
The tax character of distributions paid during the fiscal years ended 2014 and
October 31, 2013 was as follows:
Distributions paid from: 2014 2013
Ordinary income....................................... $ 47,413,849 $ 47,827,919
Capital gain.......................................... -- --
Return of capital..................................... -- 2,794,928
As of October 31, 2014, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income......................... $ 4,471,712
Undistributed capital gains........................... --
------------
Total undistributed earnings.......................... 4,471,712
Accumulated capital and other losses.................. (14,007,437)
Net unrealized appreciation (depreciation)............ 26,557,872
------------
Total accumulated earnings (losses)................... 17,022,147
Other................................................. --
Paid-in capital....................................... 684,932,467
------------
Net assets............................................ $701,954,614
============
I. INCOME AND OTHER TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward
eight years and treated as short-term losses. As a transition rule, the Act
requires that post-enactment net capital losses be used before pre-enactment net
capital losses. At October 31, 2014, the Fund had no pre-enactment net capital
losses for federal income tax purposes. At October 31, 2014 the Fund had
post-enactment net capital losses for federal income tax purposes of $14,007,437
to be carried forward indefinitely.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership. During the
taxable year ended October 31, 2014, the Fund utilized post-enactment capital
loss carryforwards in the amount of $14,616,655.
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2011, 2012,
2013 and 2014 remain open to federal and state audit. As of October 31, 2014,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
J. EXPENSES:
The Fund will pay all expenses directly related to its operations.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
MacKay serves as the Fund's sub-advisor and manages the Fund's portfolio subject
to First Trust's supervision. The Sub-Advisor receives a portfolio management
fee at an annual rate of 0.50% of Managed Assets that is paid by First Trust
from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, The Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended October 31, 2014, were $239,052,045 and
$246,474,347, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the types of derivatives held by the Fund at
October 31, 2014, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
---------------------------------------- ----------------------------------------
DERIVATIVE RISK STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT EXPOSURE LIABILITIES LOCATION FAIR VALUE LIABILITIES LOCATION FAIR VALUE
------------------ ------------------ --------------------------- ---------- --------------------------- ----------
Futures Interest Rate Risk Variation margin receivable $ 11,250 Variation margin payable $ --
Forward foreign Currency Risk Unrealized appreciation on Unrealized depreciation on
currency contracts forward foreign currency forward foreign currency
contracts 1,915,927 contracts --
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
October 31, 2014, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION INTEREST RATE RISK CURRENCY RISK
------------------------------------------- ------------------ -------------
Net realized gain (loss) on futures $ (284,695) $ --
Net realized gain (loss) on forward foreign
currency contracts -- 402,956
Net change in unrealized appreciation
(depreciation) on futures 82,131 --
Net change in unrealized gain (loss) on
forward foreign currency contracts -- 4,195,839
The Fund does not have the right to offset financial assets and financial
liabilities related to forward foreign currency contracts and futures contracts
on the Statement of Assets and Liabilities.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On November 20, 2014, the Fund declared a distribution of $0.1065 per share to
Common Shareholders of record on December 3, 2014, payable December 20, 2014.
Page 28
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST HIGH INCOME LONG/SHORT
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust High Income Long/Short Fund (the "Fund"), including the portfolio of
investments, as of October 31, 2014, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2014 by correspondence with the Fund's
custodian, brokers, and agent banks. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
First Trust High Income Long/Short Fund as of October 31, 2014, and the results
of its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 23, 2014
Page 29
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2014, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 28, 2014, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund, First Trust High Income Long/Short
Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income
Fund, First Trust Intermediate Duration Preferred & Income Fund and First Trust
New Opportunities MLP & Energy Fund was held on April 23, 2014 (the "Annual
Meeting"). At the Annual Meeting, Robert F. Keith was elected by the Common
Shareholders of the First Trust High Income Long/Short Fund as a Class I Trustee
for a three-year term expiring at the Fund's annual meeting of shareholders in
2017. The number of votes cast in favor of Mr. Keith was 30,496,068, and the
number of votes against was 482,618 and the number of broker non-votes was
5,077,473. James A. Bowen, Richard E. Erickson, Thomas R. Kadlec and Niel B.
Nielson are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014 (UNAUDITED)
securities of companies in similar industries. Distressed securities frequently
do not produce income while they are outstanding. The Fund may be required to
incur certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Sub-Advisor seeks capital appreciation
through investment in distressed securities, the ability to achieve current
income may be diminished.
ECONOMIC CONDITIONS RISK: Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a high-yield issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Under adverse
market or economic conditions, the secondary market for high-yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer and these securities may become illiquid. As a
result, the Sub-Advisor could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded.
FIXED-INCOME SECURITIES RISK: Debt securities, including high-yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are reinvested at market interest rates that are below the portfolio's
current earnings rate; (iii) prepayment risk, which is the risk that during
periods of declining interest rates, the issuer of a security may exercise its
option to prepay principal earlier than scheduled, forcing the reinvestment in
lower yielding securities; and (iv) credit risk, which is the risk that a
security in the Fund's portfolio will decline in price or the issuer fails to
make interest payments when due because the issuer of the security experiences a
decline in its financial status.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
SHORT SELLING RISK: Short selling allows the Fund to profit from a decline in
market price to the extent such decline exceeds the transaction costs and the
costs of borrowing the securities. If a security sold short increases in price,
the Fund may have to cover its short position at a higher price than the short
sale price, resulting in a loss. The Fund may have substantial short positions
and must borrow those securities to make delivery to the buyer. The Fund may not
be able to borrow a security that it needs to deliver or it may not be able to
close out a short position at an acceptable price and may have to sell related
long positions before it had intended to do so. Thus, the Fund may not be able
to successfully implement its short sale strategy due to limited availability of
desired securities or for other reasons. Also, there is the risk that the
counterparty to a short sale may fail to honor its contractual terms, causing a
loss to the Fund. Because losses on short sales arise from increases in the
value of the security sold short, such losses are theoretically unlimited. The
use of short sales in combination with long positions in the Fund's portfolio in
an attempt to improve performance or reduce overall portfolio risk may not be
successful and may result in greater losses or lower positive returns than if
the Fund held only long positions. It is possible that the Fund's long
securities positions will decline in value at the same time that the value of
its short securities positions increase, thereby increasing potential losses to
the Fund.
By investing the proceeds received from selling securities short, the Fund could
be deemed to be employing a form of leverage, which creates special risks. The
use of leverage may increase the Fund's exposure to long securities positions
and make any change in the Fund's NAV greater than it would be without the use
of leverage. This could result in increased volatility of returns. There is no
guarantee that any leveraging strategy the Fund employs will be successful
during any period in which it is employed.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
Page 32
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014 (UNAUDITED)
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT AND SUB-ADVISORY AGREEMENT
The Board of Trustees of First Trust High Income Long/Short Fund (the "Fund"),
including the Independent Trustees, unanimously approved the Investment
Management Agreement (the "Advisory Agreement") between the Fund and First Trust
Advisors L.P. (the "Advisor") and the Investment Sub-Advisory Agreement (the
"Sub-Advisory Agreement" and together with the Advisory Agreement, the
"Agreements") among the Fund, the Advisor and MacKay Shields LLC (the
"Sub-Advisor"), at a meeting held on June 8-9, 2014. The Board of Trustees
determined that the continuation of the Agreements is in the best interests of
the Fund in light of the extent and quality of the services provided and such
other matters as the Board considered to be relevant in the exercise of its
reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs.
Following receipt of this information, counsel to the Independent Trustees posed
follow-up questions to the Advisor, and the Independent Trustees and their
counsel met separately to discuss the information provided by the Advisor and
the Sub-Advisor, including the supplemental responses. The Board applied its
business judgment to determine whether the arrangements between the Fund and the
Advisor and among the Fund, the Advisor and the Sub-Advisor are reasonable
business arrangements from the Fund's perspective as well as from the
perspective of shareholders. The Board considered that shareholders chose to
invest or remain invested in the Fund knowing that the Advisor and the
Sub-Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objectives and policies. With respect to the Sub-Advisory Agreement,
the Board noted the background and experience of the Sub-Advisor's portfolio
management team. The Board reviewed the materials provided by the Sub-Advisor
and considered the services that the Sub-Advisor provides to the Fund, including
the Sub-Advisor's day-to-day management of the Fund's investments. In light of
the information presented and the considerations made, the Board concluded that
the nature, extent and quality of services provided to the Fund by the Advisor
and the Sub-Advisor under the Agreements have been and are expected to remain
satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has
managed the Fund consistent with its investment objectives and policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, noting that the Advisor does not
provide advisory services to other funds with investment objectives and policies
similar to the Fund's, but does provide services to certain separately managed
accounts that may have investment objectives and policies similar to the Fund's.
The Board noted that the Advisor charges a lower advisory fee rate to the
separately managed accounts, as well as the Advisor's statement that the nature
of the services provided to the separately managed accounts is not comparable to
those provided to the Fund. The Board considered the sub-advisory fee and how it
relates to the Fund's overall advisory fee structure and noted that the
sub-advisory fee is paid by the Advisor from its advisory fee. The Board also
considered information provided by the Sub-Advisor as to the fees it charges to
other similar clients, noting that the sub-advisory fee rate is generally lower
than the fee rate charged by the Sub-Advisor to other similar clients. In
addition, the Board reviewed data prepared by Lipper Inc. ("Lipper"), an
independent source, showing the advisory fees and expense ratios of the Fund as
compared to the advisory fees and expense ratios of an expense peer group
selected by Lipper and similar data from the Advisor for a separate peer group
selected by the Advisor. The Board noted that the Lipper expense peer group
consisted of only three other funds and that the Lipper and Advisor peer groups
did not include any overlapping peer funds. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer
Page 33
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014 (UNAUDITED)
group for the Fund, including that (i) the Fund is unique in its composition,
which makes assembling peers with similar strategies and asset mix difficult;
and (ii) peer funds may use different amounts and types of leverage which have
different costs associated with them or may use no leverage, noting that the
Fund uses non-traditional leverage by shorting bonds and reinvesting the
proceeds. The Board took these limitations into account in considering the peer
data. In reviewing the peer data, the Board noted that the Fund's contractual
advisory fee was above the median of the Lipper peer group.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance and portfolio risk on an ongoing basis. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also received
data prepared by Lipper comparing the Fund's performance to a performance peer
universe selected by Lipper and to a benchmark. In reviewing the Fund's
performance as compared to the performance of Lipper performance peer universe,
the Board took into account the limitations described above with respect to
creating a relevant peer group for the Fund. The Board also considered the
Fund's dividend yield as of March 31, 2014 and information provided by the
Advisor on the Fund's leverage, including that leverage was accretive to the
Fund's total return in 2013. In addition, the Board compared the Fund's
premium/discount over the past eight quarters to the average and median
premium/discount of the Advisor peer group over the same period and considered
the factors that may impact a fund's premium/discount.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board determined that due to the Fund's
closed-end structure, the potential for realization of economies of scale as
Fund assets grow was not a material factor to be considered. The Board also
considered the costs of the services provided and profits realized by the
Advisor from serving as investment advisor to the Fund for the twelve months
ended December 31, 2013, as well as product-line profitability data for the same
period, as set forth in the materials provided to the Board. The Board noted the
inherent limitations in the profitability analysis, and concluded that the
Advisor's estimated profitability appeared to be not excessive in light of the
services provided to the Fund. In addition, the Board considered fall-out
benefits described by the Advisor that may be realized from its relationship
with the Fund, including the Advisor's compensation for fund reporting services
pursuant to a separate Fund Reporting Services Agreement.
The Board noted the Sub-Advisor's expenses in providing investment services to
the Fund and considered the Sub-Advisor's statement that it will not experience
significant economies of scale based on the current level of assets of the Fund
and the level of other assets under the management of the portfolio management
team. The Board considered that the sub-advisory fee rate was negotiated at
arm's length between the Advisor and the Sub-Advisor, an unaffiliated third
party. The Board also considered data provided by the Sub-Advisor as to the
profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board noted
the inherent limitations in the profitability analysis and concluded that the
profitability analysis for the Advisor was more relevant, although the
profitability of the Sub-Advisory Agreement appeared to be not excessive in
light of the services provided to the Fund. The Board considered fall-out
benefits realized by the Sub-Advisor from its relationship with the Fund, noting
that the Sub-Advisor did not identify any material fall-out benefits.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 34
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE (2) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three Year Term Physician; President, Wheaton Orthopedics; 111 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real
120 East Liberty Drive, o Since Fund Estate Limited Partnership; Member,
Suite 400 Inception Sportsmed LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three Year Term President (March 2010 to Present), Senior 111 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund (May 2007 to March 2010), Inc., ADM
Suite 400 Inception ADM Investor Services, Inc. Investor Services
Wheaton, IL 60187 (Futures Commission Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three Year Term President (2003 to Present), Hibs 111 Director of
c/o First Trust Advisors L.P. Enterprises (Financial and Management Trust Company
120 East Liberty Drive, o Since Fund Consulting) of Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 111 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June
2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee and o Three Year Term Chief Executive Officer (December 2010 111 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund 2010), First Trust Advisors L.P. and First
Suite 400 Inception Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as CEO of First Trust Advisors L.P., investment advisor of the Fund.
(2) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2017 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2015 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2016 annual meeting of shareholders.
Page 35
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 East Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief
Wheaton, IL 60187 Financial Officer, BondWave LLC (Software
D.O.B.: 11/57 Development Company/Investment Advisor) and
Stonebridge Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present),
120 East Liberty Drive, Officer and Chief Senior Vice President (April 2007 to
Suite 400 Accounting Officer o Since January 2012 Present), First Trust Advisors L.P.
Wheaton, IL 60187 and First Trust Portfolios L.P.
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., and
120 East Liberty Drive, Legal Officer First Trust Portfolios L.P. and Secretary and
Suite 400 o Since Fund Inception General Counsel BondWave LLC (Software
Wheaton, IL 60187 Development Company/Investment Advisor);
D.O.B.: 05/60 Secretary of Stonebridge Advisors LLC
(Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 East Liberty Drive, Senior Vice President, (September 2005 to
Suite 400 o Since Fund Inception July 2012), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel,
120 East Liberty Drive, and Assistant Secretary First Trust Advisors L.P. and
Suite 400 o Chief Compliance First Trust Portfolios L.P.
Wheaton, IL 60187 Officer Since
D.O.B.: 12/66 January 2011
o Assistant Secretary
since Fund Inception
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 36
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2014 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship.
We are committed to protecting the security and confidentiality of your personal
information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
MacKay Shields LLC
1345 Avenue of the Americas
43rd floor
New York, NY 10105
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless
of whether these individuals are employed by the registrant or a third
party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, that relates to one or more of the items set forth in
paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the last
two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements
or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for those fiscal
years were $52,000 for the fiscal year ended October 31, 2013 and $52,000
for the fiscal year ended October 31, 2014.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of the
audit of the registrant's financial statements and are not reported under
paragraph (a) of this Item were $0 for the fiscal year ended October 31,
2013 and $0 for the fiscal year ended October 31, 2014.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years for assurance and related services by
the principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported
under paragraph (a) of this Item were $0 for the fiscal year ended October
31, 2013 and $0 for the fiscal year ended October 31, 2014.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last two
fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $0 for
the fiscal year ended October 31, 2013 and $5,200 for the fiscal year
ended October 31, 2014. The fees for 2013 and 2014 were for tax return
preparation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $0 for
the fiscal year ended October 31, 2013 and $0 for the fiscal year ended
October 31, 2014.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of the
last two fiscal years for products and services provided by the principal
accountant to the Registrant, other than the services reported in
paragraphs (a) through (c) of this Item were $0 for the fiscal year ended
October 31, 2013 and $0 for the fiscal year ended October 31, 2014.
All Other Fees (Investment Adviser) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services reported
in paragraphs (a) through (c) of this Item were $0 for the fiscal year
ended October 31, 2013 and $0 for the fiscal year ended October 31, 2014.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the Registrant by its
independent auditors. The Chairman of the Committee authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the Registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the Registrant, if the engagement relates
directly to the operations and financial reporting of the Registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the Registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
Registrant that were not pre-approved pursuant to the de minimis exception, the
Committee will consider whether the provision of such non-audit services is
compatible with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the Registrant and the Registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's engagement
to audit the registrant's financial statements for the most recent fiscal
year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
registrant for the Registrant's fiscal year ended October 31, 2013 were
$5,200 for the Registrant and $3,000 for the Registrant's investment
adviser and for the Registrant's fiscal year ended October 31, 2014 were
$5,200 for the Registrant and $43,500 for the Registrant's investment
adviser.
(h) The Registrant's audit committee of its Board of Trustees has determined
that the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by, or
under common control with the investment adviser that provides ongoing
services to the Registrant that were not pre-approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
INFORMATION PROVIDED AS OF DECEMBER 17, 2014
MacKay Shields LLC ("MacKay Shields" or the "Sub-Advisor") is a registered
investment adviser founded in 1938, and serves as the sub-advisor to the
Registrant. As of October 31, 2014, MacKay Shields had approximately $91.9
billion in assets under management.
DAN ROBERTS, PHD, EXECUTIVE MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER AND HEAD
AND CHIEF INVESTMENT OFFICER OF GLOBAL FIXED INCOME DIVISION Mr. Roberts has 38
years of investment experience. During Mr. Roberts' career, he has served as a
Chief Investment Officer/Managing Director and head of several fixed-income
groups. His regulatory and government experience includes two years at the U.S.
Securities and Exchange Commission, serving at The White House with the
President's Council of Economic Advisors and as Executive Director (Chief of
Staff) of the U.S. Congress Joint Economic Committee. Mr. Roberts holds a BBA
and a PhD from University of Iowa. In October 2004, Mr. Roberts joined MacKay
Shields when the firm acquired the fixed income assets of Pareto Partners.
LOUIS N. COHEN, CFA, SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION Mr.
Cohen has 37 years of investment experience. During his career, Mr. Cohen has
served as a Core/Core Plus Portfolio Manager and was Co-Chairman of a Credit
Committee. He has extensive credit experience, beginning in a Commercial Banking
Department. He began to specialize in fixed-income in 1981, and became a
fixed-income credit manager at several major firms. With experience in the
fixed-income markets since 1978, Mr. Cohen is a past President of the Capital
Markets Credit Analyst Society and a member of the New York Society of Security
Analysts. Mr. Cohen received his BA and MBA from New York University. He also
holds the Chartered Financial Analyst designation. Mr. Cohen joined MacKay
Shields in October 2004 when the firm acquired the fixed income assets of Pareto
Partners.
MICHAEL KIMBLE, CFA, SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION Mr.
Kimble has 31 years of investment experience. During Mr. Kimble's career, he has
served as a fixed-income credit analyst, a high-yield bond analyst and a
portfolio manager. He has also been Co-Chairman of a Credit Committee. With
fixed-income experience since 1984, Mr. Kimble is a member of the Capital
Markets Credit Analyst Society, the New York Society of Security Analysts and
the New York and Louisiana State Bar Associations. Mr. Kimble received a BA from
Columbia University, an MBA from New York University and a JD from Fordham
School of Law. He also holds the Chartered Financial Analyst designation. Mr.
Kimble joined MacKay Shields in October 2004 when the firm acquired the fixed
income assets of Pareto Partners.
TAYLOR WAGENSEIL, SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION Mr.
Wagenseil has 36 years of investment experience. During his career, Mr.
Wagenseil has served as a specialist in troubled loan workouts and recoveries.
He headed a High Yield Commercial Paper Research department and has been a
managing director of a Financial Restructuring Group. He was a Senior Portfolio
Manager for High Yield and High Yield Arbitrage Portfolios. His public service
and military experience includes the U.S. Navy (Lieutenant) during the Vietnam
War and five years as the Commissioner, Department of Elderly Affairs for the
City of Boston. Mr. Wagenseil received a BA from Dartmouth College and an MBA
(finance) from the Harvard Business School. Mr. Wagenseil joined MacKay Shields
in October 2004 after the firm acquired the fixed income assets of Pareto
Partners.
(a)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
INFORMATION PROVIDED AS OF OCTOBER 31, 2014.
# of Accounts
Managed for Total Assets for
Total # of which Advisory which Advisory
Name of Portfolio Accounts Fee is Based Fee is Based on
Manager or Team Member* Type of Accounts* Managed Total Assets on Performance Performance
----------------------- ------------------------- ----------- ------------------ -------------- -----------------
1. Dan Roberts Registered Investment 12 $ 7,987,000,000 0 $0
Companies:
Other Pooled Investment 35 $16,364,000,000 7 $1,926,000,000
Vehicles:
Other Accounts: 144 $28,081,000,000 4 $1,936,000,000
2. Louis Cohen Registered Investment 12 $ 7,987,000,000 0 $0
Companies:
Other Pooled Investment 35 $16,364,000,000 7 $1,926,000,000
Vehicles:
Other Accounts: 144 $28,081,000,000 4 $1,936,000,000
3. Michael Kimble Registered Investment 12 $ 7,987,000,000 0 $0
Companies:
Other Pooled Investment 35 $16,364,000,000 7 $1,926,000,000
Vehicles:
Other Accounts: 144 $28,081,000,000 4 $1,936,000,000
4. Taylor Wagenseil Registered Investment 12 $ 7,987,000,000 0 $0
Companies:
Other Pooled Investment 35 $16,364,000,000 7 $1,926,000,000
Vehicles:
Other Accounts: 144 $28,081,000,000 4 $1,936,000,000
* The Global Fixed Income Team utilizes a team approach in all aspects of
investment management and decision-making. No one portfolio manager is
singularly responsible for any particular account. Information provided
are assets and number of accounts managed by the team.
POTENTIAL CONFLICTS OF INTERESTS
Most of our clients pay us an investment advisory or management fee that is
based on the amount of assets in the clients' accounts. These are commonly
referred to as "asset-based fees". Some of our clients pay us fees calculated as
a percentage of returns, or as a percentage of the increase in net asset value.
These fees may be tied to a client-directed benchmark and may be subject to a
loss carry forward. They are commonly referred to as "performance-based fees".
The Global Fixed Income team that manages the Fund provides portfolio management
services for other MacKay Shields accounts, including: mutual funds;
institutional managed accounts; private commingled funds; and hedge funds.
Managing accounts that have a performance-based fee at the same time that we
manage accounts that only have an asset-based fee is commonly referred to as
"side-by-side management." Except for distinctions based on investment
objectives, investment guidelines and cash flow, all accounts are treated the
same, regardless of fee structure. This creates a conflict of interest by giving
us an incentive to favor those accounts for which we receive a performance-based
fee because we will receive a higher fee if their performance exceeds the
applicable benchmark. Higher fees benefit our company as well as our employees
because the asset-based fees and performance-based fees we receive are included
in the pool from which we pay incentive bonuses to our employees. In addition,
the long-term incentive plan for our senior employees is based on our company's
financial results.
MacKay Shields has performance-based fee arrangements with "eligible clients"
(as that term is defined under Rule 205-3 of the Advisers Act) who have
requested such arrangements. Performance-based fees may be calculated as a
percentage of returns, or as a percentage of the increase in NAV, and may be
tied to a client-directed benchmark or loss carry forward. A portion of these
performance-based fees forms a part of the bonus pool for most MacKay Shields
employees. Of course, there are periods in which MacKay Shields does not earn
any performance fee.
Consistent with its policy not to favor any one client over another, MacKay
Shields has the following procedures, among others: (1) trade allocation
procedures that provide for the pro rata allocation of investment opportunities
among clients in a particular strategy, with certain exceptions; (2) a general
prohibition against same-day opposite direction transactions; and (3) short-sale
trade procedures requiring pre-approval of short sales and restricting certain
short sales.
The Trade Allocation Policy provides that: (1) no client will be favored over
any other client; (2) trades should be pre-allocated, subject to certain
exceptions, and allocations should be in writing; and (3) MacKay Shields'
Legal/Compliance Department conducts periodic reviews of client account
performance as a function of allocation to assure that no account or group of
accounts is being preferred systematically in the allocation process. The policy
contains a procedure for limited offerings, which provides that in a limited
offering, the allocations may be pro-rata based on size of the order or account
size and within a strategy pro-rata based on account size. Under this policy,
when determining which accounts will participate in a trade, the portfolio
managers will consider various objective criteria which may include but are not
limited to: client cash limitations, actual and anticipated account inflows and
outflows, duration and/or average maturity, account size, deal size, trade lots,
existing exposure to an issuer or industry type, other concentration limits,
specific investment objectives, borrowing capacity, and other practical
limitations. If the aggregated order is filled in its entirety, it will be
allocated among clients in accordance with the target allocation. If the order
is partially filled, it will be allocated pro rata based on the allocation
methodology recorded in the trade order management system.
Our Valuation Procedures provide, among other requirements, that any fair
valuation of a security recommended by a portfolio manager be approved by at
least two disinterested portfolio managers from one or more other distinct
portfolio management areas. In addition, on a monthly basis, a Fair Valuation
Committee meeting convenes to review all securities that are being fair valued.
The Firm's cross trading policy provides that all cross trades must be
pre-cleared by the Legal/Compliance Department and requires, among other things,
that the transaction (i) be a purchase or sale for no consideration other than
cash payments against prompt delivery of the security, (ii) be effected at the
independent market price of the security determined in accordance with
applicable methodology; and (iii) be effected with no brokerage transaction.
Special considerations pertain to situations where one investment strategy may
conflict with another. It is the policy of MacKay that no one client be favored
over another. For example, one strategy may focus on selling certain securities
short, with the expectation of profit in the event that the prices for such
securities decrease, while another strategy may involve acquiring securities
"long". As stated above, it is the policy of MacKay that no one client be
favored over another. To effect that policy in cases where investment strategies
compete or conflict with each other, MacKay has adopted the following
procedures:
a) Each portfolio manager will determine, separately from any other managers the
securities to purchase and sell on any given day with respect to the clients and
strategies for which they are responsible.
b) In the event that the same strategy purchases or sells the same security on
the same trading day, all accounts participating in the transaction for that
security shall be average-priced (same-day trades executed on behalf of
different strategies may not be average-priced), provided, however, that short
sales for a particular security shall not be average-priced with purchases of
the same security.
c) If a portfolio manager enters a buy or sell order for the same security for
more than one client or strategy, and the orders are worked concurrently and not
completely filled, each applicable client or strategy will be allotted
securities pro-rata, in proportion to the amounts specified in the portfolio
manager's orders as described above.
(a)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF OCTOBER 31, 2014.
MacKay Shields' approach to compensation is consistent with industry practices
and enables us to attract and retain high caliber talent. Salaries are
established at competitive levels, verified through industry surveys. A
significant percentage of the compensation program is incentive based and total
compensation varies based upon an individual's role, responsibility and
performance. Cash bonuses are paid annually and in general, most employees
participate in the cash bonus pool. Beginning January 1, 2010, MacKay Shields
adopted the MacKay Shields Equity Plan, which provides Phantom Equity to key
professionals. Phantom Equity awards are an integral portion of total
compensation for key professionals. Awards are determined by a formulaic
approach applied to total compensation for these professionals. The compensation
program at MacKay Shields is designed to remunerate and retain our employees and
align with the success of our clients and the firm overall.
MacKay Shields has performance-based fee arrangements with "eligible clients"
(as that term is defined under Rule 205-3 of the Advisers Act) who have
requested such arrangements. Performance-based fees may be calculated as a
percentage of returns, or as a percentage of the increase in NAV, and may be
tied to a client-directed benchmark or loss carry forward. A portion of these
performance-based fees forms a part of the bonus pool for most MacKay Shields
employees. In certain situations, a portion of these performance-based fees form
a part of the bonus pool. Of course, there are periods in which MacKay Shields
does not earn any performance fee.
MacKay Shields has a phantom equity program and awards are an integral component
of the firm's compensation structure. Awards vest and pay out after several
years. Thus, qualified professionals share in the results and success of the
firm.
The senior portfolio managers involved in managing the Fund's investments have
each entered into Executive Employment Agreements with MacKay, which include
provisions relating to base salary and incentive salary as described above. The
Executive Employment Agreements are renewable for one year terms and can be
terminated on 60 days' prior written notice. There is also a provision for
termination by MacKay for cause, as defined in the Agreements. The Agreements
contain restrictions regarding non-solicitation of clients and non-hiring of
employees following termination of the portfolio managers' employment. None of
the portfolio managers is subject to a non-compete agreement that could
potentially affect the portfolio manager's ability to manage the Fund.
The incentive bonus paid to MacKay Shields' portfolio managers is based on their
overall investment performance, not the performance of any specific portfolios.
MacKay Shields does not align the portfolio managers' compensation to the
investment performance of specific Funds or of other accounts they manage. The
compensation received by portfolio managers is based on both quantitative and
qualitative factors. The quantitative factors may include: (i) the portfolio
managers' overall investment performance; (ii) the assets under their
management; (iii) the overall profitability of the firm; (iv) the financial
results of the investment team; and (v) industry benchmarks. The qualitative
factors include, among others, leadership, adherence to the firm's policies and
procedures, and contribution to the firm's goals and objectives. To the extent
that an increase in the size of a Fund or another account managed by a portfolio
manager results in an increase in profitability, the portfolio manager's
compensation may also increase. There is no difference between the method used
in determining portfolio managers' compensation with respect to a Fund and other
accounts they manage. We do not believe the compensation structure provides an
incentive for an employee who provides services to a Fund to take undue risks in
managing the assets of the Fund.
(a)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF OCTOBER 31, 2014.
Dollar Range of Fund Shares
Name Beneficially Owned
-------------------------- -----------------------------
Dan Roberts $0
Taylor Wagenseil $0
Louis Cohen $50,001-$100,000
Michael Kimble $0
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust High Income Long/Short Fund
---------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 23, 2014
--------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 23, 2014
--------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 23, 2014
--------------------
* Print the name and title of each signing officer under his or her signature.