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: April 30, 2013
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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
SEMI-ANNUAL REPORT
For the Six Months Ended
April 30, 2013
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TABLE OF CONTENTS
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
SEMI-ANNUAL REPORT
APRIL 30, 2013
Shareholder Letter .......................................................... 1
At A Glance.................................................................. 2
Portfolio Commentary ........................................................ 3
Portfolio of Investments .................................................... 6
Schedule of Forward Foreign Currency Contracts............................... 16
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
Additional Information....................................................... 29
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's
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 Notes to
Financial Statements 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)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2013
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust High Income Long/Short Fund (the "Fund").
The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust Advisors L.P. ("First Trust").
The six months covered by this report have been positive for the U.S. markets.
In fact, the S&P 500 Index, as measured on a total return basis, rose 14% during
the period and many economists and investors have felt positive about the
current market environment. Of course, past performance can never be an
indicator of future performance. As I have written many times, however, First
Trust believes that staying invested in quality products through up and down
markets and having a long-term horizon can help investors reach their financial
goals.
As you know, First Trust offers a variety of products that we believe could fit
many financial plans to help investors seeking long-term investment success. We
encourage you to talk to your advisor about the other investments First Trust
offers that might also fit your financial goals and to discuss those goals with
your advisor regularly so that he or she 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. I look forward to
the remainder of 2013 and to the next edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees of First Trust High Income Long/Short Fund and
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST HIGH INCOME LONG/SHORT FUND
"AT A GLANCE"
APRIL 30, 2013 (UNAUDITED)
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FUND STATISTICS
Symbol on NYSE FSD
Common Share Price $19.10
Common Share Net Asset Value ("NAV") $19.92
Premium (Discount) to NAV (4.12)%
Net Assets Applicable to Common Shares $718,296,675
Current Monthly Distribution per Common Share (1) $0.1155
Current Annualized Distribution per Common Share $1.3860
Current Distribution Rate on Closing Common Share Price (2) 7.26%
Current Distribution Rate on NAV (2) 6.96%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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COMMON SHARE PRICE NAV
4/12 18.20 18.38
17.92 18.34
17.98 18.30
17.17 17.86
5/12 17.36 17.83
17.20 17.55
17.20 17.70
17.32 17.72
6/12 17.72 17.91
17.65 18.00
17.97 17.96
18.01 18.04
17.98 18.18
7/12 18.11 18.19
18.25 18.25
18.21 18.36
18.32 18.43
8/12 18.38 18.50
18.36 18.51
18.26 18.64
18.82 18.98
18.79 19.02
9/12 18.74 18.81
18.61 18.86
18.73 18.95
18.75 19.13
10/12 18.56 19.05
18.65 18.97
18.27 18.93
17.91 18.79
11/12 17.88 18.97
17.91 19.13
17.81 19.20
17.82 19.35
18.05 19.43
12/12 17.81 19.33
18.69 19.58
18.66 19.78
18.91 19.82
1/13 19.03 19.88
18.70 19.60
18.82 19.54
18.76 19.60
2/13 18.87 19.61
18.93 19.54
18.87 19.71
18.84 19.77
18.98 19.73
3/13 18.98 19.74
18.85 19.65
19.13 19.76
18.80 19.70
19.09 19.84
4/13 19.10 19.92
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PERFORMANCE
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Average Annual Total Return
6 Months Ended 1 Year Ended Inception (9/27/2010)
4/30/2013 4/30/2013 to 4/30/2013
FUND PERFORMANCE (3)
NAV 8.63% 17.62% 10.23%
Market Value 5.65% 13.90% 6.54%
INDEX PERFORMANCE
Bank of America Merrill Lynch U.S. High Yield
Master II Constrained Index 7.26% 14.01% 10.97%
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% OF LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS
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Services 17.0%
Basic Industry 12.5
Energy 11.3
Banking 10.9
Insurance 8.6
Financial Services 7.2
Automotive 6.1
Capital Goods 5.9
Telecommunications 5.3
Technology & Electronics 4.8
Utility 2.2
Healthcare 2.2
Consumer Non-Cyclical 2.2
Asset-Backed Securities 1.5
Media 1.5
Mortgage-Backed Securities 0.8
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 69.5%
Foreign Corporate Bonds and Notes 24.1
Senior Floating-Rate Loan Interests 2.3
Asset-Backed Securities 1.5
Common Stocks 1.5
Collateralized Mortgage Obligations 0.8
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 19.4%
BB 27.1
B 44.2
CCC+ and below 8.2
NR 1.1
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Total 100.0%
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% OF TOTAL
COUNTRY EXPOSURE INVESTMENTS
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United States 75.9%
Luxembourg 5.2
United Kingdom 3.8
Netherlands 3.4
Cayman Islands 1.5
Canada 1.4
France 1.3
Germany 1.2
Ireland 0.9
Jersey 0.9
Australia 0.8
Liberia 0.8
Mexico 0.6
Venezuela 0.5
Finland 0.5
Georgia 0.5
Austria 0.4
Bermuda 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 4/30/2013. 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 4/30/2013. 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 reflects 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
SEMI-ANNUAL REPORT
APRIL 30, 2013
SUB-ADVISOR
MacKay Shields LLC ("MacKay Shields" or the "Sub-Advisor") 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 April 30, 2013, MacKay Shields had
approximately $78.8 billion in assets under management.
FIRST TRUST HIGH INCOME LONG/SHORT FUND
The Fund's primary investment objective is to provide current income. As a
secondary objective, the Fund seeks capital appreciation. The Fund is designed
to give investors a portfolio for varying market cycles and economic conditions.
In an expanding economy, the strategy of buying U.S. and foreign (including
emerging markets) high-yield corporate securities that are rated below
investment-grade is designed to generate monthly income and capital appreciation
(total return over the long term). However, if the market takes a downturn, the
"short" strategy of having sold borrowed securities that the Global Fixed-Income
Division of MacKay Shields believes could decline in price, may help lessen the
impact of a significant net asset value ("NAV") decline.
PORTFOLIO MANAGEMENT TEAM
DAN ROBERTS, PHD
SENIOR MANAGING DIRECTOR, HEAD OF GLOBAL FIXED-INCOME DIVISION AND ITS CHIEF
INVESTMENT OFFICER
Mr. Roberts is Head of the Global Fixed-Income Division and its Chief Investment
Officer. In October 2004, Mr. Roberts came to MacKay when the firm acquired the
high-yield and global high-yield assets of Pareto Partners. He was the Chief
Investment Officer and an equity shareholder at Pareto Partners. Mr. Roberts
assembled the U.S. fixed-income team while serving 10 years at UBS Asset
Management, most recently as Managing Director and head of the fixed-income
group. Prior to its acquisition by UBS, he was a Financial Economist for Chase
Manhattan Bank, NA and later was head of Global Interest Rate and Currency Swaps
Trading. In 1997, Mr. Roberts' fixed-income group was lifted out of UBS by
Forstmann-Leff International and was subsequently purchased by Pareto Partners,
effective February 2000. His regulatory and government experience included a
two-year stint at the U.S. Securities and Exchange Commission, serving at The
White House with the President's Council of Economic Advisors and as an
Executive Director (Chief of Staff) of the U.S. Congress Joint Economic
Committee. Mr. Roberts holds a BBA and a PhD from the University of Iowa.
LOUIS N. COHEN, CFA
MANAGING DIRECTOR, GLOBAL FIXED-INCOME DIVISION
Mr. Cohen is a Senior Portfolio Manager for the Global Fixed-Income Division. He
joined MacKay Shields in October 2004 as a Director of Research and portfolio
manager for Core Plus Opportunities after MacKay acquired the high-yield and
global high-yield assets of Pareto Partners, where he was an equity shareholder.
He joined Dan Roberts' fixed-income team at UBS in 1991 as a Core/Core Plus
Portfolio Manager and was Co-Chairman of the Credit Committee while at UBS. Mr.
Cohen's extensive credit experience began at Bankers Trust in 1978 where he was
in the Commercial Banking Department. In 1981 he moved to specialize in
fixed-income as a Fixed Income Credit Analyst at Kidder Peabody. He furthered
his fixed-income credit experience as a fixed-income credit manager at several
major Street firms, namely, Shearson, Drexel Burnham Lambert and Paine Webber,
prior to his move into portfolio management at UBS. With experience in the
fixed-income markets since 1978, Mr. Cohen received his BA and MBA from New York
University and is a past President of the Capital Markets Credit Analyst
Society, and a member of the New York Society of Security Analysts.
MICHAEL KIMBLE, CFA
MANAGING DIRECTOR, GLOBAL FIXED-INCOME DIVISION
Mr. Kimble is a Senior Portfolio Manager for the Global Fixed-Income Division.
He joined MacKay Shields in October 2004 as Director and Co-Head of High-Yield
portfolio management when MacKay Shields acquired the high-yield and global
high-yield assets of Pareto Partners. Previously the Co-Head of Pareto Partners'
High-Yield Investments, Mr. Kimble began his investment career with positions at
Citicorp and E.F. Hutton as a fixed-income credit analyst. In 1988 he moved to
Home Insurance Company as a High-Yield Bond Analyst and Portfolio Manager.
Shortly thereafter Mr. Kimble was recruited by Dan Roberts to join the UBS team
in the same capacity. While at UBS, he was Co-Chairman of the Credit Committee.
He received a BA from Columbia University, an MBA from New York University and a
JD from Fordham School of Law. 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.
TAYLOR WAGENSEIL
MANAGING DIRECTOR, GLOBAL FIXED-INCOME DIVISION
Mr. Wagenseil is a Senior Portfolio Manager for the Global Fixed-Income
Division. He became Director and Co-Head of High-Yield portfolio management
after MacKay Shields acquired the high-yield and global high-yield assets of
Pareto Partners, where he was Co-Head of High-Yield Investments and an equity
shareholder. He began his investment career with Citibank in 1979,
Page 3
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PORTFOLIO COMMENTARY - (CONTINUED)
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specializing in troubled loan workouts and recoveries. In 1986, Mr. Wagenseil
moved to Drexel Burnham Lambert as a Senior Vice President to head High-Yield
Commercial Paper Research. He remained at Drexel through the bankruptcy and then
joined Bear Stearns as a Managing Director in the Financial Restructuring Group.
He was recruited to join UBS in 1993 as a Senior Portfolio Manager for
High-Yield and High-Yield Arbitrage Portfolios. Mr. Wagenseil's 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. He received a BA from Dartmouth College and a MBA (Finance) from
the Harvard Business School and has experience in the High Yield market since
1979.
MARKET RECAP
This report covers the Fund for the six-month period ending April 30, 2013.
Risk assets were nicely rewarded during the past six months due to the overall
positive tone within the macroeconomic environment. International equities were
the top performer for the period, with the MSCI EAFE Index up 17.18%,
benefitting from the reduced anxieties surrounding the Europe debt crisis. U.S.
equities closely followed; the Russell 2000 Index rose 16.58% and the S&P 500
Index returned 14.42%. High yield corporate bonds, as measured by the Merrill
Lynch High Yield Master II Constrained Index, gained 7.26%, while U.S.
investment-grade corporate bonds only rose 1.49%, according to Barclays. The
10-year Treasury also modestly returned 1.53%, while its yield started and ended
the period at 1.68%.
Reflecting back on the fourth quarter of 2012, market participants were focused
on the impending U.S. "fiscal cliff." These negotiations dominated headlines in
November and December, and markets clearly expected that a resolution would
eventually unfold. As the deadline neared, the markets became somewhat more
volatile, but at the final hour, predictably, a near-term solution was agreed to
and finalized on January 1, 2013. Investor risk appetites were reinvigorated in
the first quarter following this eleventh hour resolution. The agreement to
moderately tighten fiscal policy removed a significant market overhang whereby
investors initially feared that widespread tax hikes would stifle new
investments, consumer spending and growth opportunities. The next obstacle that
was cleared was passage of the $1.2 billion sequestration. It was believed these
budget cuts, if unaltered, could trim as much as 0.50% from GDP. The U.S. dollar
strengthened against most currencies due to a combination of a strengthening
U.S. economy and resolution to the above-mentioned concerns.
The U.S. macro picture maintained its slow growth posture. Consumer spending,
employment, residential investment and capital expenditures are expanding, but
at a moderate rate. The residential housing market continued to be a clear
bright spot in the recovery with both new and existing sales activity being
fairly robust. The improvement has led to a slight pick-up in new supply as
brisk sales, higher prices, low mortgage rates and an improving labor market
have all incentivized mobility across the U.S. residential housing market.
Supporting consumer confidence and spending behavior was a release that U.S.
household net worth was at its highest level since 2007, buoyed in large part by
the recent rise in housing prices and the performance of the stock market, which
officially erased the losses of the 2008 downturn. Meanwhile, inflation remains
in check with core CPI, which excludes the more volatile food and energy
components, coming in at 2.0% year-over-year during the first quarter. Inflation
is still below the Fed's stated threshold of 2.5%, which represents the level
that could prompt tightening in monetary policy. The Federal Reserve reaffirmed
its pledge to keep monetary policy accommodative while remaining committed to
balance sheet expansion. This statement proved critical as minutes to a previous
Federal Open Market Committee meeting signaled dissension among some of the Fed
governors, who questioned the continuation of the current quantitative easing
program after 2013.
We were reminded during the period that Europe continued to be a challenge. Much
of the Eurozone remains entrenched in a deep recession with economic activity
contracting across the board and unemployment rising to staggering levels in
some countries. Markets did not react favorably to Troika(1) demands that Cyprus
impose a levy on all bank deposits as a precondition to receiving bailout funds.
In the end, the levy was scrapped and a deal was announced that would split the
island nation's largest bank, Laiki Bank, into a "good" bank and "bad" bank. The
assets associated with the "good" bank would be rolled into the Bank of Cyprus
where all uninsured deposits would remain frozen. Furthermore, all uninsured
depositors, or account balances above 100,000 euros, would receive a haircut,
along with the senior creditors. In all likelihood, all unsecured creditors and
equity holders of the bank will see their interests wiped out. While concerns
seem under control, many fear that this could be a template for future bank
bailouts and that such fears could prompt capital flight from the peripheral
euro economies. Additionally, following several weeks since the Italian
elections failed to produce a government, a new prime minister--left-leaning
Enrico Letta--was finally elected in April. The new prime minister was tasked
with lifting Italy out of a debilitating economic recession and improving its
electoral system to prevent similar political instability. Italy, like some of
its European Union peers, is an example of the difficulty in balancing austerity
and pro-growth reforms. The markets, however, welcomed the re-election with
10-year Italian government bond yields plummeting on renewed investor
confidence. Government bond yields in Spain and Portugal also rallied. Despite
the economic hardships, we maintain our view that the European Union will remain
intact and not create a "left tail" (defined as an investment's most extreme
downside performance) event as both the political and economic costs would be
far too expensive to absorb.
1 Troika represents the three organizations which have the most power over
Greece's financial future: the European Commission (EC), the International
Monetary Fund (IMF), and the European Central Bank (ECB).
Page 4
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PORTFOLIO COMMENTARY - (CONTINUED)
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Manufacturing activity in China slipped and equities retreated as the government
looked to balance growth and inflation risks. The rapid rise in residential
housing prices has been of particular concern to officials, and recent
discussions have taken place with respect to the enforcement of property curbs
that would reign in this growth. Tensions on the Korean peninsula were renewed
late in the first quarter with war rhetoric between the new leaders of the North
and South, as well as the United States. The North has had a long history of
saber rattling and provocation in an effort to lift economic sanctions against
the country, and it is believed this time is no different. Nonetheless, these
types of externalities are likely to create pockets of volatility in the
short-term. Lastly, in what was viewed as a surprise to the markets, in April,
the Bank of Japan (BOJ) announced, under new leadership, it would further expand
its monetary base twofold by purchasing Japanese government bonds of any
maturity in addition to stocks and property-linked assets. The goal of the
program, according to the BOJ, is to stimulate growth and raise the inflation
rate to 2% as the country has battled a difficult deflationary cycle for nearly
two decades. The Nikkei Index rallied 12.4% (local) in April on the quantitative
easing announcement.
PERFORMANCE ANALYSIS
FSD gained 8.63% on an NAV basis during this six-month period, outperforming its
benchmark, the Bank of America Merrill Lynch U.S. High Yield Master II
Constrained Index, which gained 7.26%. The top-performing industries in the
high-yield market during the period included insurance, technology, banking,
basic industry and utilities. The industries that did not perform as well
included media, telecommunications, real estate, consumer non-cyclicals and
energy. New issue supply has been very strong with companies continuing to come
to the market for financing needs. The relative stability of the U.S. market and
low yields have provided an attractive backdrop for issuers.
We continue to maintain a portfolio beta slightly above the market, which helped
the Fund during the period. The principal sectors we favor continue to include
financials, gaming, homebuilders, building materials and coal and steel
companies. The top-performing names held in the Fund were autos: Ford and GM; as
well as European financials: ABN Amro, Republic of Portugal and Deutsche Post
Finance. The laggards during the period included Mexican home and infrastructure
builders: Urbi Desarrollos Urbanos, Desarrolladora Homex, and Empresas ICA. In
late 2012, the Mexican government made drastic changes to subsidies within
housing which created a major cash drain for homebuilders; subsidies were
re-directed to multiple dwelling apartment buildings, which require a larger
amount of upfront working capital, instead of new single family homes. This
unanticipated change halted cash flow to these builders who are currently
working to restructure and save their businesses. The bottom performers also
included OGX and Intergen.
With respect to the short positions in the Fund, the Fund sold short U.S.
Treasury bonds in order to reduce the Fund portfolio's exposure to interest rate
risk, while at the same time purchasing additional high-yield securities that
would otherwise be unavailable on an unlevered basis. The Treasury short
detracted from returns as Treasury yields fell modestly across the curve during
the period. This was more than offset, however, as the additional high-yield
long positions generally rallied in the positive high-yield market environment.
It is important to note that leverage can magnify both the portfolio's gains as
well as its losses.
OUTLOOK
Our base case scenario calls for a moderate, slow growth economic environment in
the U.S., which is more than adequate to support a healthy high-yield market. We
continue to reiterate our belief that the high-yield asset class is not trading
in a "bubble" for a number of reasons: 1) current spreads, while having traded
through their long-term average, remain wide to their record levels set in 2007;
2) yields trading at record lows is much more a function of Treasury rates; and
3) credit fundamentals point to a healthy issuer base while declining default
rates suggest continued low credit costs. Moreover, when interest rates do begin
to rise, current spreads in high yield will likely provide a greater cushion
against rising rates than is typically the case, resulting in a longer period of
price stability.
High-yield issuers have benefited materially from the receptive new issue market
of the past several years by extending maturities and strengthening their
liquidity position. In fact, the majority of new issuance has been for this
purpose. Although we have seen a slight easing in credit standards for recent
new issues, this is not atypical at this stage in the credit cycle. We stated in
our previous letter that absolute quality is surprisingly strong, and leverage,
as measured by net debt-to-EBITDA, is well below the historical average. More
importantly, low rates have helped improve interest coverage ratios, which
reflect a company's ability to service their debt payments. In summary, we
expect further spread compression, and we do not expect to reduce the Fund's
portfolio beta significantly until at least later in the year.
This material contains the opinions of the Global Fixed-Income team of MacKay
Shields LLC but not necessarily those of MacKay Shields LLC. The opinions
expressed herein are subject to change without notice. This material is
distributed for informational purposes only. Forecasts, estimates, and certain
information contained herein are based upon proprietary research and should not
be considered as investment advice or a recommendation of any particular
security, strategy or investment product. Information contained herein has been
obtained from sources believed to be reliable, but not guaranteed. No part of
this document may be reproduced in any form, or referred to in any other
publication, without express written permission of MacKay Shields LLC. (c)2013,
MacKay Shields LLC.
Page 5
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ---------------------------------------------------------------- -------- ---------- -------------
CORPORATE BONDS AND NOTES - 82.9%
AUTOMOTIVE - 4.4%
$ 334,000 Chrysler Group LLC/Chrysler Group Co-Issuer, Inc. .............. 8.00% 06/15/19 $ 375,750
4,367,000 Chrysler Group LLC/Chrysler Group Co-Issuer, Inc. .............. 8.25% 06/15/21 5,032,967
2,376,000 Ford Motor Co. (a).............................................. 9.22% 09/15/21 3,206,006
553,000 Ford Motor Co. (a).............................................. 8.90% 01/15/32 761,402
3,000,000 Ford Motor Co. (a).............................................. 7.75% 06/15/43 3,668,295
2,480,000 Ford Motor Co. (a).............................................. 9.98% 02/15/47 3,785,946
21,432 General Motors Unsecured Claim Trust Units (Transferable) (b)... N/A N/A 654,748
1,400,000 Goodyear Tire & Rubber (The) Co. ............................... 6.50% 03/01/21 1,471,750
5,396,000 Goodyear Tire & Rubber (The) Co. (a)............................ 7.00% 05/15/22 5,861,405
4,872,000 Navistar International Corp. (a)................................ 8.25% 11/01/21 5,097,330
1,682,000 Tomkins Inc., LLC .............................................. 9.00% 10/01/18 1,877,532
-------------
31,793,131
-------------
BANKING - 3.8%
740,000 Ally Financial, Inc. (a)........................................ 8.00% 11/01/31 969,400
2,285,000 Ally Financial, Inc. (a)........................................ 8.00% 11/01/31 3,019,056
5,610,000 Bank of America Corp. (a)....................................... 7.63% 06/01/19 7,191,398
6,750,000 Deutsche Postbank Funding Trust IV (EUR) (c) (d)................ 5.98% (e) 8,548,951
3,250,000 Dresdner Funding Trust I (f).................................... 8.15% 06/30/31 3,428,750
4,000,000 Fifth Third Capital Trust IV (a) (d)............................ 6.50% 04/15/37 4,027,480
-------------
27,185,035
-------------
BASIC INDUSTRY - 8.9%
4,500,000 AK Steel Corp. (a).............................................. 8.38% 04/01/22 3,915,000
5,250,000 Aleris International, Inc. (a).................................. 7.63% 02/15/18 5,696,250
3,450,000 Alpha Natural Resources, Inc. .................................. 6.00% 06/01/19 3,243,000
1,255,000 Arch Coal, Inc. ................................................ 7.00% 06/15/19 1,170,288
1,428,000 Arch Coal, Inc. ................................................ 7.25% 10/01/20 1,320,900
1,125,000 Arch Coal, Inc. ................................................ 7.25% 06/15/21 1,035,000
4,405,000 Associated Materials LLC (a).................................... 9.13% 11/01/17 4,773,919
3,635,000 Boise Paper Holdings LLC/Boise Finance Co. (a).................. 9.00% 11/01/17 3,934,887
267,000 Century Aluminum Co. ........................................... 8.00% 05/15/14 268,001
3,600,000 Cloud Peak Energy Resources Corp., LLC (a)...................... 8.25% 12/15/17 3,888,000
6,500,000 Hexion U.S. Finance Corp./Hexion Nova Scotia Finance ULC (a).... 8.88% 02/01/18 6,922,500
8,655,000 Huntsman International LLC (a).................................. 8.63% 03/15/21 9,996,525
2,255,000 Momentive Performance Materials Inc ............................ 10.00% 10/15/20 2,395,938
3,245,000 Polypore International, Inc. (a)................................ 7.50% 11/15/17 3,520,825
5,150,000 Texas Industries, Inc. (a)...................................... 9.25% 08/15/20 5,761,562
4,000,000 USG Corp. (a)................................................... 6.30% 11/15/16 4,280,000
1,878,000 USG Corp. (f)................................................... 8.38% 10/15/18 2,084,580
-------------
64,207,175
-------------
CAPITAL GOODS - 6.0%
2,000,000 Ducommun, Inc. (a).............................................. 9.75% 07/15/18 2,220,000
5,000,000 Manitowoc Co., Inc. (a)......................................... 8.50% 11/01/20 5,725,000
3,625,000 Mcron Finance Sub LLC/ Mcron Finance Corp. (f).................. 8.38% 05/15/19 4,005,625
2,945,000 Milacron LLC/Mcron Finance Corp. (f)............................ 7.75% 02/15/21 3,077,525
3,760,000 Mueller Water Products, Inc. (a)................................ 7.38% 06/01/17 3,882,200
Page 6 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ---------------------------------------------------------------- -------- ---------- -------------
CORPORATE BONDS AND NOTES - (Continued)
CAPITAL GOODS - (Continued)
$ 7,500,000 Reynolds Group Issuer, Inc., LLC (a)............................ 8.50% 05/15/18 $ 8,025,000
2,085,000 Reynolds Group Issuer, Inc., LLC (a)............................ 9.88% 08/15/19 2,345,625
4,050,000 Terex Corp. .................................................... 6.00% 05/15/21 4,374,000
4,000,000 Transdigm, Inc. (a)............................................. 7.75% 12/15/18 4,450,000
4,650,000 Triumph Group, Inc. (a)......................................... 8.63% 07/15/18 5,184,750
-------------
43,289,725
-------------
CONSUMER NON-CYCLICAL - 0.4%
2,240,000 Smithfield Foods, Inc. (a)...................................... 6.63% 08/15/22 2,492,000
-------------
ENERGY - 9.6%
2,535,000 Atlas Pipeline Partners L.P./Atlas Pipeline Finance Corp. (f)... 5.88% 08/01/23 2,611,050
3,540,000 Basic Energy Services, Inc. .................................... 7.75% 10/15/22 3,743,550
3,974,000 Berry Petroleum Co. (a)......................................... 6.75% 11/01/20 4,341,595
600,000 Chesapeake Energy Corp. (a)..................................... 7.25% 12/15/18 697,500
1,970,000 Chesapeake Energy Corp. (a)..................................... 6.63% 08/15/20 2,238,412
6,600,000 Chesapeake Energy Corp. ........................................ 5.38% 06/15/21 6,897,000
3,275,000 EP Energy LLC/EP Energy Finance, Inc. .......................... 9.38% 05/01/20 3,831,750
3,000,000 Ferrellgas Finance Corp., L.P. (a).............................. 6.50% 05/01/21 3,172,500
800,000 Frontier Oil Corp. (a).......................................... 6.88% 11/15/18 871,000
3,960,000 Hornbeck Offshore Services, Inc. (f)............................ 5.00% 03/01/21 3,989,700
2,636,000 Linn Energy LLC/Linn Energy Finance Corp. (f)................... 6.25% 11/01/19 2,767,800
4,240,000 Linn Energy LLC/Linn Energy Finance Corp. ...................... 8.63% 04/15/20 4,759,400
5,500,000 PHI, Inc. (a)................................................... 8.63% 10/15/18 6,043,125
5,900,000 Plains Exploration & Production Co. ............................ 6.50% 11/15/20 6,608,000
3,499,000 Regency Energy Partners L.P./Regency Energy Finance Corp. (a)... 9.38% 06/01/16 3,688,821
3,248,000 Samson Investment Co. (f)....................................... 9.75% 02/15/20 3,467,240
4,750,000 Swift Energy Co. ............................................... 8.88% 01/15/20 5,189,375
3,425,000 Targa Resources Partners L.P./Targa Resources Partners
Finance Corp. (a)........................................... 7.88% 10/15/18 3,784,625
-------------
68,702,443
-------------
FINANCIAL SERVICES - 7.0%
1,665,000 CIT Group, Inc. (a)............................................. 5.00% 05/15/17 1,823,175
10,000,000 CIT Group, Inc. ................................................ 4.25% 08/15/17 10,637,500
10,500,000 GE Capital Trust IV (EUR) (c) (d)............................... 4.63% 09/15/66 14,018,032
410,000 General Electric Capital Corp. (EUR) (c) (d).................... 5.50% 09/15/67 567,876
7,500,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp. (a)...... 8.00% 01/15/18 8,081,250
8,000,000 SLM Corp. (a)................................................... 8.00% 03/25/20 9,278,248
5,000,000 Springleaf Finance Corp. (a).................................... 6.90% 12/15/17 5,228,125
700,000 Textron Financial Corp. (d) (f)................................. 6.00% 02/15/67 647,500
-------------
50,281,706
-------------
HEALTHCARE - 2.6%
665,000 Alere, Inc. .................................................... 9.00% 05/15/16 699,497
5,074,000 Alere, Inc. (f)................................................. 7.25% 07/01/18 5,492,605
2,500,000 Davita Healthcare Partners, Inc. ............................... 5.75% 08/15/22 2,675,000
See Notes to Financial Statements Page 7
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ---------------------------------------------------------------- -------- ---------- -------------
CORPORATE BONDS AND NOTES - (Continued)
HEALTHCARE - (Continued)
$ 5,600,000 HCA Holdings, Inc. ............................................. 7.75% 05/15/21 $ 6,363,000
3,150,000 Kinetic Concepts, Inc./KCI USA, Inc. ........................... 10.50% 11/01/18 3,551,625
-------------
18,781,727
-------------
INSURANCE - 7.9%
2,450,000 American International Group, Inc. (EUR) (c) (d)................ 8.00% 05/22/38 3,831,502
1,800,000 American International Group, Inc. (EUR) (c) (d)................ 4.88% 03/15/67 2,259,097
3,050,000 American International Group, Inc. (GBP) (c) (d)................ 8.63% 05/22/38 5,827,402
10,950,000 American International Group, Inc. (GBP) (c) (d)................ 5.75% 03/15/67 16,596,710
5,000,000 CHUBB Corp. (d) (a)............................................. 6.38% 03/29/67 5,587,500
11,000,000 Glen Meadow Pass Through Trust (f) (d).......................... 6.51% 02/12/67 10,683,750
6,500,000 Liberty Mutual Group, Inc. (f) (d).............................. 7.00% 03/15/37 6,743,750
3,500,000 Lincoln National Corp. (d) (a).................................. 7.00% 05/17/66 3,613,750
1,800,000 Lincoln National Corp. (d) (a).................................. 6.05% 04/20/67 1,831,500
-------------
56,974,961
-------------
MEDIA - 1.8%
3,895,000 CCO Holdings LLC/CCO Holdings Capital Corp. .................... 5.75% 01/15/24 4,065,406
3,931,000 Clear Channel Communications, Inc. (a).......................... 5.50% 12/15/16 2,908,940
1,800,000 Clear Channel Communications, Inc. (a).......................... 9.00% 03/01/21 1,768,500
456,000 Clear Channel Worldwide Holdings, Inc. ......................... 7.63% 03/15/20 489,060
3,193,000 Clear Channel Worldwide Holdings, Inc. ......................... 7.63% 03/15/20 3,456,423
-------------
12,688,329
-------------
SERVICES - 17.1%
4,432,448 American Airlines Pass Through Trust 2001-01 (g)................ 6.98% 05/23/21 4,432,448
1,095,000 Ashtead Capital, Inc. (f)....................................... 6.50% 07/15/22 1,212,712
1,426,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc. (a)........ 8.25% 01/15/19 1,591,772
4,915,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc. (f)........ 5.50% 04/01/23 5,093,169
6,500,000 Beazer Homes USA, Inc. (a)...................................... 8.13% 06/15/16 7,231,250
757,000 Caesars Entertainment Operating Co., Inc. (f)................... 9.00% 02/15/20 749,430
10,397,000 Caesars Operating Escrow LLC/Caesars Escrow Corp. (f)........... 9.00% 02/15/20 10,293,030
992,000 Caesars Operating Escrow LLC/Caesars Escrow Corp. (f)........... 9.00% 02/15/20 982,080
5,228,240 Continental Airlines 2003-ERJ1 Pass Through Trust .............. 7.88% 07/02/18 5,568,075
2,485,662 Continental Airlines 2005-ERJ1 Pass Through Trust .............. 9.80% 04/01/21 2,821,226
1,649,381 Delta Air Lines 2009-1 Series B Pass Through Trust ............. 9.75% 12/17/16 1,830,813
8,000,000 Hertz (The) Corp. .............................................. 7.50% 10/15/18 8,890,000
5,250,000 Iron Mountain, Inc. (a)......................................... 8.38% 08/15/21 5,893,125
3,500,000 Isle of Capri Casinos, Inc. (a)................................. 7.75% 03/15/19 3,867,500
4,160,000 K Hovnanian Enterprises, Inc. (f)............................... 7.25% 10/15/20 4,669,600
9,175,000 MGM Resorts International (f)................................... 6.75% 10/01/20 10,092,500
3,500,000 Mohegan Tribal Gaming Authority (f)............................. 10.50% 12/15/16 3,500,000
3,074,652 Northwest Airlines 2001-1 Class B Pass Through Trust ........... 7.69% 04/01/17 3,228,385
4,127,000 Pinnacle Entertainment, Inc. ................................... 7.75% 04/01/22 4,539,700
1,780,000 Pulte Group, Inc. (a)........................................... 7.63% 10/15/17 2,104,850
4,570,000 Pulte Group, Inc. (a)........................................... 7.88% 06/15/32 5,101,262
3,319,000 Shea Homes L.P./Shea Homes Funding Corp. ....................... 8.63% 05/15/19 3,787,809
Page 8 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ---------------------------------------------------------------- -------- ---------- -------------
CORPORATE BONDS AND NOTES - (Continued)
SERVICES - (Continued)
$ 5,500,000 Standard Pacific Corp. (a)...................................... 8.38% 05/15/18 $ 6,572,500
2,950,267 UAL 2009-2B Pass Through Trust (f).............................. 12.00% 01/15/16 3,333,802
375,000 United Rentals North America, Inc. ............................. 7.38% 05/15/20 426,563
7,062,000 United Rentals North America, Inc. (a).......................... 8.38% 09/15/20 8,015,370
367,000 United Rentals North America, Inc. ............................. 7.63% 04/15/22 422,968
6,712,290 US Airways 2000-3C Pass Through Trust .......................... 8.39% 03/01/22 6,829,755
-------------
123,081,694
-------------
TECHNOLOGY & ELECTRONICS - 5.8%
5,500,000 Alcatel-Lucent USA, Inc. (a).................................... 6.45% 03/15/29 4,317,500
5,675,000 CommScope, Inc. (f)............................................. 8.25% 01/15/19 6,228,312
9,050,000 First Data Corp. (f)............................................ 8.88% 08/15/20 10,362,250
3,525,000 First Data Corp. (f)............................................ 10.63% 06/15/21 3,643,969
8,834,000 Freescale Semiconductor, Inc. (f)............................... 10.13% 03/15/18 9,827,825
6,460,000 Sungard Data Systems, Inc. (f).................................. 6.63% 11/01/19 6,904,125
-------------
41,283,981
-------------
TELECOMMUNICATIONS - 5.0%
2,500,000 Frontier Communications Corp. (a)............................... 9.00% 08/15/31 2,618,750
2,411,000 Hughes Satellite Systems Corp. (a).............................. 7.63% 06/15/21 2,778,678
3,500,000 MetroPCS Wireless, Inc. (a)..................................... 7.88% 09/01/18 3,871,875
10,000,000 Sprint Capital Corp. (a)........................................ 8.75% 03/15/32 11,875,000
2,600,000 Sprint Nextel Corp. ............................................ 9.13% 03/01/17 3,074,500
6,000,000 Sprint Nextel Corp. (a)......................................... 9.25% 04/15/22 7,530,000
2,428,000 Viasat, Inc. ................................................... 6.88% 06/15/20 2,658,660
1,500,000 Windstream Corp. ............................................... 6.38% 08/01/23 1,560,000
-------------
35,967,463
-------------
UTILITY - 2.6%
6,736,000 Calpine Corp. (f)............................................... 7.88% 07/31/20 7,662,200
3,350,000 Energy Future Intermediate Holding Co., LLC/Energy Future
Intermediate Holding Finance, Inc. (a)....................... 10.00% 12/01/20 3,852,500
5,000,000 NRG Energy, Inc. (a)............................................ 8.25% 09/01/20 5,712,500
2,150,000 Texas Competitive Electric Holdings Co. LLC/Texas Competitive
Electric Holdings Finance, Inc. (f).......................... 11.50% 10/01/20 1,703,875
-------------
18,931,075
-------------
TOTAL CORPORATE BONDS AND NOTES ....................................................... 595,660,445
(Cost $547,135,281) -------------
See Notes to Financial Statements Page 9
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ---------------------------------------------------------------- -------- ---------- -------------
FOREIGN CORPORATE BONDS AND NOTES - 28.7%
AUTOMOTIVE - 0.6%
4,120,000 Schaeffler Finance B.V. (EUR) (f)............................... 4.75% 05/15/21 $ 4,192,100
-------------
BANKING - 8.7%
6,500,000 ABN AMRO Bank N.V. (EUR) (d).................................... 4.31% (e) 8,152,286
2,975,000 Ageas Hybrid Financing S.A. (EUR) (d)........................... 5.13% (e) 3,723,011
2,200,000 Barclays Bank PLC (GBP) ........................................ 10.00% 05/21/21 4,687,251
2,000,000 Belfius Funding N.V. (GBP) ..................................... 1.21% 02/09/17 2,554,183
8,264,000 Canada Square Operations PLC (GBP) (d).......................... 7.50% (e) 12,836,884
5,325,000 HBOS Capital Funding L.P. (GBP) (d)............................. 6.46% (e) 8,002,762
3,300,000 IKB Deutsche Industriebank AG (EUR) (h)......................... 1.11% 05/28/13 4,374,185
175,000 IKB Deutsche Industriebank AG (EUR) ............................ 4.50% 07/09/13 230,812
4,350,000 Industrial Senior Trust (USD) (f)............................... 5.50% 11/01/22 4,371,750
2,100,000 Mizuho Capital Investment, Ltd. (USD) (a) (d) (f)............... 14.95% (e) 2,394,000
3,000,000 National Westminster Bank PLC (GBP) (d)......................... 5.98% (e) 3,658,139
3,000,000 Royal Bank of Scotland N.V. (EUR) (h)........................... 4.70% 06/10/19 3,994,311
2,250,000 UT2 Funding PLC (EUR) .......................................... 5.32% 06/30/16 3,606,436
-------------
62,586,010
-------------
BASIC INDUSTRY - 6.0%
3,868,000 Aperam (USD) (f)................................................ 7.38% 04/01/16 3,926,020
2,648,000 Arcelormittal (USD) (a)......................................... 6.75% 02/25/22 2,909,392
3,592,000 Arcelormittal (USD) (a)......................................... 7.50% 10/15/39 3,790,189
185,000 Arcelormittal (USD) ............................................ 7.25% 03/01/41 189,756
3,451,000 Boart Longyear Management Pty., Ltd. (USD) (f).................. 7.00% 04/01/21 3,537,275
3,135,000 FMG Resources Pty, Ltd. (USD) (f)............................... 7.00% 11/01/15 3,299,588
1,000,000 INEOS Finance PLC (EUR) ........................................ 9.25% 05/15/15 1,379,506
4,000,000 INEOS Group Holdings PLC (EUR) ................................. 7.88% 02/15/16 5,366,573
6,300,000 Novelis, Inc. (USD) (a)......................................... 8.75% 12/15/20 7,182,000
4,200,000 Stora Enso Oyj (USD) (f)........................................ 7.25% 04/15/36 4,032,000
6,785,000 Vedanta Resources PLC (USD) (f)................................. 8.25% 06/07/21 7,425,334
-------------
43,037,633
-------------
CAPITAL GOODS - 1.0%
3,000,000 Ardagh Packaging Finance (EUR) ................................. 9.25% 10/15/20 4,405,199
2,775,000 Bombardier, Inc. (USD) (f)...................................... 6.13% 01/15/23 3,014,344
-------------
7,419,543
-------------
CONSUMER NON-CYCLICAL - 2.2%
6,000,000 JBS Finance II Ltd. (USD) (f)................................... 8.25% 01/29/18 6,540,000
5,900,000 Minerva Luxembourg S.A. (USD) (f)............................... 7.75% 01/31/23 6,314,180
3,000,000 Virgolino de Oliveira Finance Ltd. (USD) (f).................... 11.75% 02/09/22 3,105,000
-------------
15,959,180
-------------
ENERGY - 3.1%
7,840,000 CHC Helicopter S.A. (USD) (a)................................... 9.25% 10/15/20 8,398,600
3,750,000 Georgian Oil and Gas Corp. (USD) (f)............................ 6.88% 05/16/17 3,993,750
Page 10 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ---------------------------------------------------------------- -------- ---------- -------------
FOREIGN CORPORATE BONDS AND NOTES - (Continued)
ENERGY - (Continued)
5,600,000 OGX Petroleo e Gas Participacoes S.A. (USD) (f)................. 8.50% 06/01/18 $ 3,542,000
3,855,000 Petroleos de Venezuela S.A. (USD) .............................. 12.75% 02/17/22 4,307,962
1,700,000 Precision Drilling Corp. (USD) ................................. 6.63% 11/15/20 1,840,250
-------------
22,082,562
-------------
FINANCIAL SERVICES - 1.0%
7,450,000 Banque PSA Finance S.A. (USD) (f)............................... 5.75% 04/04/21 7,384,321
-------------
INSURANCE - 2.3%
1,650,000 Aviva PLC (EUR) (d)............................................. 6.88% 05/22/38 2,434,702
3,500,000 CNP Assurances (EUR) (d)........................................ 5.25% (e) 3,618,321
5,000,000 ING Groep N.V. (GBP) (d)........................................ 5.14% (e) 7,067,743
3,500,000 Oil Insurance Ltd. (USD) (f).................................... 3.27% (e) 3,210,207
-------------
16,330,973
-------------
SERVICES - 2.5%
4,600,000 Desarrolladora Homex Sab de CV (USD) (f)........................ 9.75% 03/25/20 2,829,000
1,800,000 Empresas ICA Sab de CV (USD) (f)................................ 8.38% 07/24/17 1,759,500
5,250,000 Hapag-Lloyd AG (USD) (f)........................................ 9.75% 10/15/17 5,565,000
5,755,000 Royal Caribbean Cruises Ltd. (USD) (a).......................... 7.50% 10/15/27 6,589,475
3,250,000 Urbi Desarrollos Urbanos Sab de CV (USD) (f).................... 9.75% 02/03/22 1,023,750
-------------
17,766,725
-------------
TELECOMMUNICATIONS - 1.3%
2,628,000 En Germany Holdings B.V. (EUR) ................................. 10.75% 11/15/15 3,184,070
3,522,000 Intelsat Luxembourg S.A. (USD) (a).............................. 11.25% 02/04/17 3,755,332
1,495,000 Intelsat Luxembourg S.A. (USD) (f).............................. 7.75% 06/01/21 1,580,963
1,055,000 Intelsat Luxembourg S.A. (USD) (f).............................. 8.13% 06/01/23 1,127,531
-------------
9,647,896
-------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES................................................ 206,406,943
(Cost $200,015,375) -------------
PRINCIPAL RATINGS (i) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (j) MATURITY (k) VALUE
------------- ------------------------------------------ -------------------- --------- ----------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - 2.8%
AUTOMOTIVE - 1.2%
$ 7,136,237 Allison Transmission, Inc................. Ba3 BB- 3.21% 08/07/17 7,207,600
1,743,750 Navistar, Inc. Term Loan B ............... NR B+ 5.75% 08/17/17 1,775,364
-------------
8,982,964
-------------
ENERGY - 0.8%
5,910,044 Meg Energy Term Loan ..................... Ba1 BBB- 3.75% 03/31/20 5,970,976
-------------
REAL ESTATE - 0.1%
396,666 Realogy Synthetic Letter of Credit ....... B1 BB- 4.45% 10/10/16 401,252
-------------
See Notes to Financial Statements Page 11
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (i) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (j) MATURITY (k) VALUE
------------- ------------------------------------------ -------------------- --------- ----------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (Continued)
SERVICES - 0.7%
$ 4,791,667 US Airways Term Loan ..................... B2 B+ 2.70% 03/23/14 $ 4,791,044
-------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS ............................................. 20,146,236
(Cost $19,832,669) -------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ---------------------------------------------------------------- -------- ---------- -------------
ASSET-BACKED SECURITIES - 1.8%
Ace Securities Corp.
3,270,586 Series 2007-HE2, Class A2A (h)............................. 0.32% 12/25/36 1,700,389
Carrington Mortgage Loan Trust
2,289,009 Series 2006-NC4, Class A5 (h).............................. 0.26% 10/25/36 1,913,755
HSI Asset Securitization Corp. Trust
1,764,557 Series 2007-NC1, Class A1 (h).............................. 0.30% 04/25/37 1,569,241
Keycorp Student Loan Trust
2,593,930 Series 2000-A, Class A2 (h)................................ 0.61% 05/25/29 2,401,520
Morgan Stanley ABS Capital I
942,154 Series 2006-HE6, Class A2B (h)............................. 0.30% 09/25/36 657,125
Securitized Asset Backed Receivables LLC Trust
9,846,120 Series 2006-FR4, Class A2A (h)............................. 0.28% 08/25/36 4,217,758
Soundview Home Equity Loan Trust
1,079,714 Series 2006-EQ2, Class A2 (h).............................. 0.31% 01/25/37 708,704
-------------
TOTAL ASSET-BACKED SECURITIES ......................................................... 13,168,492
(Cost $15,481,785) -------------
MORTGAGE-BACKED SECURITIES - 1.0%
COLLATERALIZED MORTGAGE OBLIGATIONS - 1.0%
Morgan Stanley Mortgage Loan Trust
1,585,162 Series 2007-6XS, Class 2A1S (h)............................ 0.31% 02/25/47 1,463,502
Specialty Underwriting & Residential Finance
2,011,519 Series 2006-BC4, Class A2B (h)............................. 0.31% 09/25/37 1,752,437
Wells Fargo Mortgage Backed Securities Trust
3,775,219 Series 2006-AR7, Class 2A4 (h)............................. 2.62% 05/25/36 3,531,881
-------------
TOTAL MORTGAGE-BACKED SECURITIES ...................................................... 6,747,820
(Cost $6,317,803) -------------
SHARES DESCRIPTION VALUE
------------- --------------------------------------------------------------------------------------- -------------
COMMON STOCKS - 1.8%
AUTOMOTIVE - 1.3%
448,000 Ford Motor Co.......................................................................... 6,142,080
98,768 General Motors Co. (l)................................................................. 3,046,005
-------------
9,188,085
-------------
BANKING - 0.5%
75,700 Citigroup, Inc......................................................................... 3,532,162
-------------
TOTAL COMMON STOCKS ................................................................... 12,720,247
(Cost $14,700,177) -------------
Page 12 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- --------------------------------------------------------------------------------------- -------------
WARRANTS - 0.4%
AUTOMOTIVE - 0.4%
77,608 General Motors Co. (l)................................................................. $ 1,663,915
77,608 General Motors Co. (l)................................................................. 1,093,497
-------------
TOTAL WARRANTS ........................................................................ 2,757,412
(Cost $4,065,974) -------------
SHORT-TERM INVESTMENTS - 1.4%
10,010,197 Dreyfus Government Cash Management .................................................... 10,010,197
-------------
TOTAL SHORT-TERM INVESTMENTS .......................................................... 10,010,197
(Cost $10,010,197) -------------
TOTAL INVESTMENTS - 120.8% ............................................................ 867,617,792
(Cost $817,559,261) (m) -------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ---------------------------------------------------------------- -------- ---------- -------------
U.S. GOVERNMENT BONDS SOLD SHORT - (23.7%)
$(20,500,000)United States Treasury Note ...................................... 0.25% 03/31/14 (20,524,026)
(119,200,000)United States Treasury Note ...................................... 0.88% 02/28/17 (121,099,810)
(27,500,000)United States Treasury Note ...................................... 2.00% 02/15/22 (28,668,750)
-------------
TOTAL U.S. GOVERNMENT BONDS SOLD SHORT ................................................ (170,292,586)
(Proceeds $167,794,344) -------------
NET OTHER ASSETS AND LIABILITIES - 2.9% ............................................... 20,971,469
-------------
NET ASSETS - 100.0% ................................................................... $ 718,296,675
=============
(a) This security or a portion of this security is segregated as collateral
for investments sold short.
(b) 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.
(c) Security issued by a U.S. incorporated entity, that has its principal
value denominated in the listed foreign currency.
(d) Fixed-to-floating rate security. The interest rate shown reflects the
fixed rate in effect at April 30, 2013. At a predetermined date, the fixed
rate will change to a floating rate.
(e) Perpetual maturity.
(f) 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.
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 April 30, 2013, securities noted as such amounted to
$219,426,367, or 30.55% of net assets.
(g) The issuer is in default. Income is not being accrued.
(h) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2013.
(i) Ratings below Baa3 by Moody's Investors Service, Inc. or BBB- by Standard
& Poor's Ratings Group are considered to be below investment grade.
See Notes to Financial Statements Page 13
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
(j) 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 April 30, 2013.
(k) 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. (l) Non-income
producing security.
(m) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2013, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $64,633,745 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $14,575,214.
Currency Abbreviations:
EUR Euro
GBP British Pound Sterling
USD United States Dollar
---------------------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2013 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
4/30/2013 PRICES INPUTS INPUTS
---------------- -------------- ---------------- --------------
Corporate Bonds and Notes*.................. $ 595,660,445 $ -- $ 595,660,445 $ --
Foreign Corporate Bonds and Notes*.......... 206,406,943 -- 206,406,943 --
Senior Floating-Rate Loan Interests*........ 20,146,236 -- 20,146,236 --
Asset-Backed Securities..................... 13,168,492 -- 13,168,492 --
Mortgage-Backed Securities.................. 6,747,820 -- 6,747,820 --
Common Stocks* ............................. 12,720,247 12,720,247 -- --
Warrants* .................................. 2,757,412 2,757,412 -- --
Short-Term Investments...................... 10,010,197 10,010,197 -- --
---------------- -------------- ---------------- --------------
Total Investments........................... 867,617,792 25,487,856 842,129,936 --
---------------- -------------- ---------------- --------------
Other Financial Instruments:
Forward Foreign Currency Contracts**........ 1,100,118 -- 1,100,118 --
---------------- -------------- ---------------- --------------
Total $ 868,717,910 $ 25,487,856 $ 843,230,054 $ --
================ ============== ================ ==============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2013 PRICES INPUTS INPUTS
---------------- -------------- ---------------- --------------
U.S. Government Bonds Sold Short............ $ (170,292,586) $ -- $ (170,292,586) $ --
Forward Foreign Currency Contracts**........ (2,808,926) -- (2,808,926) --
---------------- -------------- ---------------- --------------
Total $ (173,101,512) $ -- $ (173,101,512) $ --
================ ============== ================ ==============
* See the Portfolio of Investments for industry breakout. ** See the Schedule of
Forward Foreign Currency Contracts for contract and currency detail.
Page 14 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
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, 2012
Corporate Bonds and Notes $ 2,100
Net Realized Gain (Loss) --
Net Change in Unrealized Appreciation/Depreciation --
Purchases --
Sales --
Corporate Bonds and Notes (2,100)
Transfers In --
Transfers Out --
ENDING BALANCE AT APRIL 30, 2013
Corporate Bonds and Notes --
------------
Total Level 3 holdings $ --
============
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 April 30, 2013.
There was no net change in unrealized appreciation (depreciation) from Level 3
investments held as of April 30, 2013.
See Notes to Financial Statements Page 15
FIRST TRUST HIGH INCOME LONG/SHORT FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
APRIL 30, 2013 (UNAUDITED)
FORWARD FOREIGN CURRENCY CONTRACTS
------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED (a) SOLD (a) APRIL 30, 2013 APRIL 30, 2013 (DEPRECIATION)
---------- ------------ --------------- --------------- -------------- -------------- -------------
05/23/13 JPM EUR 58,209,000 USD 75,793,936 $ 76,669,982 $ 75,793,936 $ 876,046
05/23/13 JPM GBP 39,313,000 USD 60,832,936 61,057,008 60,832,936 224,072
06/27/13 JPM USD 77,643,388 EUR 59,617,000 77,643,388 78,543,502 (900,114)
05/23/13 JPM USD 75,795,110 EUR 58,209,000 75,795,110 76,669,981 (874,871)
05/23/13 JPM USD 60,251,104 GBP 39,313,000 60,251,104 61,057,008 (805,904)
06/27/13 JPM USD 61,570,963 GBP 39,799,000 61,570,963 61,799,000 (228,037)
-------------
Net Unrealized Appreciation (Depreciation)................................................ $ (1,708,808)
=============
(a) 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
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2013 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $817,559,261)........................................................................... $ 867,617,792
Cash............................................................................................... 136,556
Foreign currency (Cost $3,644,416)................................................................. 3,683,895
Unrealized appreciation on forward foreign currency contracts...................................... 1,100,118
Prepaid expenses................................................................................... 36,529
Receivables:
Interest...................................................................................... 15,401,584
Investment securities sold.................................................................... 8,378,308
--------------
Total Assets............................................................................... 896,354,782
--------------
LIABILITIES:
Investments sold short, at value (proceeds $167,794,344)........................................... 170,292,586
Unrealized depreciation on forward foreign currency contracts...................................... 2,808,926
Payables:
Investment securities purchased............................................................... 3,896,075
Investment advisory fees...................................................................... 584,457
Interest on investments sold short............................................................ 294,014
Custodian fees................................................................................ 59,844
Administrative fees........................................................................... 51,903
Audit and tax fees............................................................................ 32,781
Legal fees.................................................................................... 19,588
Printing fees................................................................................. 9,037
Transfer agent fees........................................................................... 6,010
Financial reporting fees...................................................................... 771
Other liabilities.................................................................................. 2,115
--------------
Total Liabilities.......................................................................... 178,058,107
--------------
NET ASSETS......................................................................................... $ 718,296,675
==============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $ 687,366,834
Par value.......................................................................................... 360,561
Accumulated net investment income (loss)........................................................... 2,643,613
Accumulated net realized gain (loss) on investments, forward foreign currency contracts,
foreign currency transactions, investments sold short, futures and swap contracts.............. (17,998,843)
Net unrealized appreciation (depreciation) on investments, forward foreign currency contracts,
foreign currency translation and investment sold short......................................... 45,924,510
--------------
NET ASSETS......................................................................................... $ 718,296,675
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... $ 19.92
==============
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
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2013 (UNAUDITED)
INVESTMENT INCOME:
Interest........................................................................................... $ 30,442,604
Dividends.......................................................................................... 46,314
Other.............................................................................................. 131,773
--------------
Total investment income.................................................................... 30,620,691
--------------
EXPENSES:
Investment advisory fees........................................................................... 3,485,678
Interest expense on investments sold short......................................................... 1,594,112
Short sale fees.................................................................................... 361,833
Administrative fees................................................................................ 292,854
Printing fees...................................................................................... 63,399
Custodian fees..................................................................................... 50,629
Audit and tax fees................................................................................. 29,445
Legal fees......................................................................................... 27,466
Trustees' fees and expenses........................................................................ 17,692
Transfer agent fees................................................................................ 14,692
Financial reporting fees........................................................................... 4,625
Other.............................................................................................. 29,236
--------------
Total expenses............................................................................. 5,971,661
--------------
NET INVESTMENT INCOME (LOSS)....................................................................... 24,649,030
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................... (2,552,400)
Forward foreign currency contracts............................................................ 2,320,692
Foreign currency transactions................................................................. (20,683)
--------------
Net realized gain (loss)........................................................................... (252,391)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................... 34,631,592
Forward foreign currency contracts............................................................ (1,136,929)
Foreign currency translation.................................................................. 27,107
Short positions............................................................................... (700,535)
--------------
Net change in unrealized appreciation (depreciation)............................................... 32,821,235
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ 32,568,844
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 57,217,874
==============
Page 18 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2013 ENDED
(UNAUDITED) 10/31/2012
-------------- --------------
OPERATIONS:
Net investment income (loss)..................................................... $ 24,649,030 $ 50,915,230
Net realized gain (loss)......................................................... (252,391) (18,647,026)
Net change in unrealized appreciation (depreciation)............................. 32,821,235 69,794,203
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................. 57,217,874 102,062,407
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................ (25,635,929) (51,996,786)
Net realized gain................................................................ -- (5,765,181)
-------------- --------------
Total distributions to shareholders.............................................. (25,635,929) (57,761,967)
-------------- --------------
Total increase (decrease) in net assets.......................................... 31,581,945 44,300,440
-------------- --------------
NET ASSETS:
Beginning of period.............................................................. 686,714,730 642,414,290
-------------- --------------
End of period.................................................................... $ 718,296,675 $ 686,714,730
============== ==============
Accumulated net investment income (loss) at end of period........................ $ 2,643,613 $ 3,630,512
============== ==============
See Notes to Financial Statements Page 19
FIRST TRUST HIGH INCOME LONG/SHORT FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2013 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.................. $ 57,217,874
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................... (246,831,812)
Sales, maturities and paydowns of investments............................... 246,747,558
Net amortization/accretion of premiums/discounts on investments............. (704,042)
Net realized gain/loss on investments....................................... 2,552,400
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts....................................................... 1,136,929
Net change in unrealized appreciation/depreciation on investments
sold short............................................................... 700,535
Net change in unrealized appreciation/depreciation on investments........... (34,631,592)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable............................................. 1,375,223
Decrease in dividends receivable............................................ 22,400
Decrease in currency receivable............................................. 1,570,401
Increase in prepaid expenses................................................ (12,327)
Decrease in interest payable on investments sold short...................... (5,703)
Increase in investment advisory fees payable................................ 5,037
Decrease in audit and tax fees payable...................................... (25,055)
Decrease in legal fees payable.............................................. (26,085)
Decrease in printing fees payable........................................... (47,272)
Increase in administrative fees payable..................................... 5,892
Increase in custodian fees payable.......................................... 34,642
Increase in transfer agent fees payable..................................... 2,189
Decrease in Trustees' fees and expenses payable............................. (4,057)
Decrease in other liabilities............................................... (8,717)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................ $ 29,074,418
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............. (25,635,929)
--------------
CASH USED BY FINANCING ACTIVITIES................................................ (25,635,929)
--------------
Increase in cash (a)............................................................. 3,438,489
Cash at beginning of period...................................................... 381,962
--------------
CASH AT END OF PERIOD............................................................ $ 3,820,451
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................ $ 1,599,815
==============
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $27,107.
Page 20 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR
4/30/2013 ENDED ENDED ENDED
(UNAUDITED) 10/31/2012 10/31/2011 10/31/2010 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period ........... $ 19.05 $ 17.82 $ 19.57 $ 19.10 (b)
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.68 1.41 1.48 0.08
Net realized and unrealized gain (loss) ........ 0.90 1.42 (1.72) 0.42
---------- ---------- ---------- ----------
Total from investment operations ............... 1.58 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 .......................... (0.71) (1.44) (1.47) --
Net realized gain .............................. -- (0.16) -- --
---------- ---------- ---------- ----------
Total from distributions to Common
Shareholders ................................ (0.71) (1.60) (1.47) --
---------- ---------- ---------- ----------
Capital charge resulting from issuance of
Common Shares related to over allotment...... -- -- (0.04) --
---------- ---------- ---------- ----------
Net asset value, end of period ................. $ 19.92 $ 19.05 $ 17.82 $ 19.57
========== ========== ========== ==========
Market value, end of period .................... $ 19.10 $ 18.78 $ 16.63 $ 20.01
========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (c)....... 8.63% 17.09% (1.27)% 2.46%
========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (c).......... 5.65% 23.69% (9.89)% 0.05%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 718,297 $ 686,715 $ 642,414 $ 662,604
Ratio of total expenses to average net assets .. 1.71% (d) 1.88% 2.09% 1.46% (d)
Ratio of total expenses to average net assets
excluding interest expense .................. 1.26% (d) 1.32% 1.29% 1.33% (d)
Ratio of net investment income (loss) to
average net assets .......................... 7.07% (d) 7.83% 7.78% 4.98% (d)
Portfolio turnover rate ........................ 15% 24% 18% 0%
(a) Initial seed date was August 20, 2010. The Fund commenced operations on
September 27, 2010.
(b) Beginning NAV 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)
APRIL 30, 2013 (UNAUDITED)
1. FUND DESCRIPTION
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 ("SEC") 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 in accordance with valuation procedures
adopted by the Fund's Board of Trustees and in accordance with provisions of the
1940 Act. The Fund's securities will be 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;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 22
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2013 (UNAUDITED)
A ready market does not exist for some of these investments. As such,
these values may differ from the values that would have been used had a
ready market for these investments existed, and the differences could be
material.
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 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 valued at their
closing bid prices.
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 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.
Forward foreign currency contracts are 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.
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretion of discounts.
In the event that the pricing service or dealer does not provide a valuation, or
the valuations received are deemed unreliable, the Fund's Board of Trustees has
designated First Trust Advisors L.P. ("First Trust") to use a fair value method
to value the Fund's securities. Additionally, if events occur after the close of
the principal markets for certain securities (e.g., domestic debt and foreign
securities) that could materially affect the Fund's NAV, First Trust may use a
fair value method to value the Fund's securities. The use of fair value pricing
is governed by valuation procedures adopted by the Fund's Board of Trustees, and
in accordance with the provisions of the 1940 Act. As a general principle, the
fair value of a security is the amount which the Fund might reasonably expect to
receive for the security upon its current sale. In light of the judgment
involved in fair valuations, there can be no assurance that a fair value
assigned to a particular security will be the amount which the Fund might be
able to receive upon its current sale. Fair valuation of a security is based on
the consideration of all available information, 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;
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.
Page 23
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2013 (UNAUDITED)
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 April 30, 2013, 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 unfunded delayed draw loan
commitments as of April 30, 2013.
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 six months ended April 30, 2013, the open and close notional values
of forward foreign currency contracts were $1,063,918,647 and $(763,505,591),
respectively.
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 trade date and subsequent sale trade date is included in "Net
realized gain (loss) on foreign currency transactions" on the Statement of
Operations.
Page 24
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2013 (UNAUDITED)
F. 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.
G. 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. The character of
distributions for tax reporting purposes will depend on the Fund's investment
experience during the remainder of its fiscal year.
The tax character of distributions paid during the fiscal year ended October 31,
2012 was as follows:
Distributions paid from:
Ordinary income....................................... $ 57,752,609
Capital gain ......................................... 9,358
Return of capital .................................... --
As of October 31, 2012, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income ........................ $ 3,058,633
Undistributed capital gains .......................... --
------------
Total undistributed earnings ......................... 3,058,633
Accumulated capital and other losses ................. (17,746,452)
Net unrealized appreciation (depreciation) ........... 13,675,154
------------
Total accumulated earnings (losses) .................. (1,012,665)
Other ................................................ --
Paid-in capital ...................................... 687,727,395
------------
Net assets ........................................... $686,714,730
============
H. INCOME 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
Page 25
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2013 (UNAUDITED)
net capital losses be used before pre-enactment net capital losses. At October
31, 2012, the Fund had no pre-enactment net capital losses for federal income
tax purposes. At October 31, 2012, the Fund had post-enactment net capital
losses for federal income tax purposes of $17,746,452 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.
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 2010, 2011
and 2012 remain open to federal and state audit. As of April 30, 2013,
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.
I. 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 of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually 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 each Committee
chairman will serve two-year terms until December 31, 2013, before rotating to
serve as chairman of another committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee Chairmen will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds 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 six months ended April 30, 2013, were $127,041,167 and
$144,524,060, respectively.
5. 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.
Page 26
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2013 (UNAUDITED)
6. 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
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
Page 27
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2013 (UNAUDITED)
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.
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 were the following subsequent events:
On May 20, 2013, the Fund declared a dividend of $0.1155 per share to Common
Shareholders of record on June 5, 2013, payable June 17, 2013.
On June 20, 2013, the Fund declared a dividend of $0.1155 per share to Common
Shareholders of record on July 3, 2013, payable July 15, 2013.
Page 28
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2013 (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 29
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ADDITIONAL INFORMATION - (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2013 (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.
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 Active Dividend Income Fund, First Trust High Income
Long/Short Fund and First Trust Energy Infrastructure Fund was held on April 17,
2013 (the "Annual Meeting"). At the Annual Meeting, James A. Bowen and Niel B.
Nielson were elected by the Common Shareholders of the First Trust High Income
Long/Short Fund as Class III Trustees for a three-year term expiring at the
Fund's annual meeting of shareholders in 2016. The number of votes cast in favor
of Mr. Bowen was 31,666,533, and the number of votes against was 518,130 and the
number of abstentions was 3,871,496. The number of votes cast in favor of Mr.
Nielson was 31,641,349, and the number of votes against was 543,314 and the
number of abstentions was 3,871,496. Richard E. Erickson, Thomas R. Kadlec and
Robert F. Keith are the other current and continuing Trustees.
Page 30
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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.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
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.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the
portfolios managers identified in response to paragraph (a)(1) of this Item in
the Registrant's most recently filed annual report on Form N-CSR.
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) Not applicable.
(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: June 18, 2013
-------------------------
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: June 18, 2013
-------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 18, 2013
-------------------------
* Print the name and title of each signing officer under his or her signature.