UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-22442
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First Trust High Income Long/Short Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2015
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
First Trust
High Income
Long/Short Fund
(FSD)
ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2015
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TABLE OF CONTENTS
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2015
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 16
Statement of Operations..................................................... 17
Statements of Changes in Net Assets......................................... 18
Statement of Cash Flows..................................................... 19
Financial Highlights........................................................ 20
Notes to Financial Statements............................................... 21
Report of Independent Registered Public Accounting Firm..................... 29
Additional Information...................................................... 30
Board of Trustees and Officers.............................................. 35
Privacy Policy.............................................................. 37
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or MacKay Shields LLC ("MacKay" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust High Income Long/Short Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. 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 material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2015
Dear Shareholders:
Thank you for your investment in First Trust High Income Long/Short Fund (the
"Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2015, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, most of 2015 has been
volatile. Economic and global factors, such as the continued conflict in the
Middle East, a sharp decline in oil prices and terrorism around the world, have
impacted U.S. and global markets. Another factor that has weighed upon U.S.
markets for most of the year is the fact that many economists had predicted that
the Federal Reserve would begin to raise interest rates in 2015, which has still
not happened.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
"AT A GLANCE"
OCTOBER 31, 2015 (UNAUDITED)
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FUND STATISTICS
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Symbol on NYSE FSD
Common Share Price $14.96
Common Share Net Asset Value ("NAV") $17.28
Premium (Discount) to NAV (13.43)%
Net Assets Applicable to Common Shares $620,308,654
Current Monthly Distribution per Common Share (1) $0.1000
Current Annualized Distribution per Common Share $1.2000
Current Distribution Rate on Closing Common Share Price (2) 8.02%
Current Distribution Rate on NAV (2) 6.94%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/14 $17.19 $19.47
17.01 19.30
16.86 19.26
16.66 19.18
11/14 16.79 19.15
16.39 18.88
15.65 18.35
16.13 18.61
12/14 16.19 18.72
16.03 18.64
16.18 18.62
16.09 18.43
16.22 18.50
1/15 16.14 18.51
16.14 18.64
16.37 18.72
16.35 18.79
2/15 16.60 18.90
16.28 18.73
16.26 18.61
16.39 18.60
3/15 16.35 18.65
16.34 18.59
16.46 18.73
16.53 18.72
4/15 16.66 18.76
16.44 18.63
16.44 18.64
16.40 18.63
16.42 18.64
5/15 16.37 18.67
16.00 18.44
15.69 18.40
15.87 18.41
6/15 15.64 18.35
15.62 18.19
15.51 18.12
15.58 18.12
14.94 17.94
7/15 15.10 18.05
14.85 17.80
14.76 17.69
14.46 17.53
8/15 14.46 17.58
14.48 17.50
14.45 17.55
14.47 17.44
9/15 14.46 17.19
13.75 16.78
14.74 17.23
14.84 17.23
14.72 17.31
10/15 14.96 17.28
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PERFORMANCE
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Average Annual Total Return
-----------------------------------
1 Year Ended 5 Years Ended Inception (9/27/10)
10/31/15 10/31/15 to 10/31/15
FUND PERFORMANCE (3)
NAV -3.89% 5.74% 6.13%
Market Value -5.76% 2.28% 2.24%
INDEX PERFORMANCE
BofA Merrill Lynch US High
Yield Constrained Index -2.03% 6.00% 6.50%
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% OF LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS
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Basic Industry 11.5%
Healthcare 10.4
Capital Goods 9.1
Banking 7.5
Telecommunications 7.3
Automotive 7.3
Energy 6.6
Media 5.6
Transportation 5.5
Leisure 5.3
Insurance 5.1
Technology & Electronics 4.4
Financial Services 4.2
Services 3.2
Consumer Goods 3.2
Commercial Mortgage-Backed Securities 1.2
Utility 1.2
Retail 0.6
Collateralized Mortgage Obligations 0.6
Asset-Backed Securities 0.2
Real Estate 0.0*
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Total 100.0%
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% OF TOTAL
COUNTRY EXPOSURE INVESTMENTS
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United States 82.1%
Luxembourg 4.5
Canada 2.7
Netherlands 2.3
Jersey 1.5
Cayman Islands 1.2
Ireland 1.0
Liberia 1.0
Germany 0.8
United Kingdom 0.8
Finland 0.7
France 0.6
Bermuda 0.5
Sweden 0.3
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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 69.3%
Foreign Corporate Bonds and Notes 14.3
Capital Preferred Securities 11.0
Senior Floating-Rate Loan Interests 3.2
Mortgage-Backed Securities 1.7
Asset-Backed Securities 0.2
Common Stocks 0.2
Warrants 0.1
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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 14.9%
BB 46.7
B 28.3
CCC+ and below 9.6
NR 0.5
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Total 100.0%
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* Amount is less than 0.1%.
(1) Most recent distribution paid or declared through 10/31/2015. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 10/31/2015. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) The credit quality and ratings information presented above reflect the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings, or a comparably rated NRSRO. For situations in which
a security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2015
SUB-ADVISOR
MacKay Shields LLC is a registered investment adviser founded in 1938, and is
Sub-Advisor to First Trust High Income Long/Short Fund. The Fund trades under
the ticker symbol FSD on the New York Stock Exchange. As of October 31, 2015,
MacKay had approximately $91.8 billion in assets under management.
PORTFOLIO MANAGEMENT TEAM
DAN ROBERTS, PHD - EXECUTIVE MANAGING DIRECTOR, HEAD OF GLOBAL FIXED INCOME
DIVISION AND ITS CHIEF INVESTMENT OFFICER
LOUIS N. COHEN, CFA - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
MICHAEL KIMBLE, CFA - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
TAYLOR WAGENSEIL - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
MARKET RECAP
This report covers the Fund for the 12-month period ended October 31, 2015.
Risk-based assets faced a number of strong headwinds over the period covered by
this report. Uncertainty over the rapid decline of energy and commodities
prices, the prospects for slower global growth particularly in China, the
renewed debt crisis in Greece, as well as the timing of a U.S. Federal Reserve
(the "Fed") rate hike all dominated market sentiment throughout the last year.
This had a negative impact on risk-based assets. During this period, the S&P
500(R) Index, which tracks large-capitalization U.S. equities, was the
best-performing risk sector, returning 5.20%. U.S. Treasuries benefitted from
nervous investors trying to avert risk; the BofA Merrill Lynch 10 Year U.S.
Treasury Index returned 3.57%. International equities, as measured by the MSCI
EAFE Index, returned a modest 0.37%. However, U.S. high-yield bonds delivered
negative returns. The BofA Merrill Lynch US High Yield Constrained Index
declined 2.03%.
Global markets were highly focused on the direction of oil prices during the
course of the reporting period, as West Texas Intermediate crude oil ("WTI")
fell sharply from $80.54 per barrel as of October 31, 2014, to $46.59 as of
October 31, 2015. Energy and related other sectors have been under severe
pressure due to the unexpected drop in oil and commodity prices. WTI has
deteriorated on an overabundance of supply both domestically and abroad coupled
with surprising resilience in shale oil production in North America in the face
of lower oil prices, when compared to the peaks seen in 2014. It is worth noting
that the decline in oil prices since 2014 is expected to benefit global
consumers by approximately $2 trillion annually.
Concerns about China also added pressure to global markets. Economic weakness in
China prompted officials to devalue its currency; this surprise move fueled a
panic-like sell-off in risk assets globally during the liquidity-starved month
of August. We can say with some confidence, however, that the negative impact of
a decline in China's rate of growth is likely to be most acute for countries and
companies with deeper economic ties to that country. The U.S. economy, on the
other hand, is relatively independent of economic developments in China, other
than via the transmission mechanism of (lower) commodity prices, which should
have a largely positive impact on the broader U.S. economy. We do not believe
that the China slowdown story and imbalances in the emerging markets will be
sufficient to derail the U.S. or core European economies. With regard to Europe,
we have seen, and continue to see, positive signs of modest improvements. Also,
the threat of a "Grexit" scenario was diminished during the summer following a
last hour emergency funding deal for Greece from the European Central Bank
("ECB").
Anxieties around the timing of a U.S. interest rate hike added to market
anxiety, which did not abate when the Fed passed on a rate hike on September 17,
2015. Although Fed inaction was largely reflected in the pricing of Fed funds
futures, queasy markets reacted poorly to the Fed's inaction. The Fed cited
global financial conditions yet hinted at a hike before year-end. As far as U.S.
economic data, the labor market has improved, the housing market is gaining
momentum, and consumer spending behavior remains healthy.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2015
PERFORMANCE ANALYSIS
The Fund underperformed its benchmark, the BofA Merrill Lynch US High Yield
Constrained Index1, on a total gross return2 and net asset value ("NAV") basis
for the 12-month period ended October 31, 2015. The Fund declined 3.89% on an
NAV basis, compared with the benchmark, which lost 2.03% during the period. The
underperformance of the Fund largely resulted from natural resource bonds
including those of energy, coal, and steel producers. At an issuer level, energy
names, Linn Energy LLC, Basic Energy Services, Inc., CHC Helicopter S.A., as
well as Intelsat Luxembourg S.A. and AK Steel Corp., were among the laggards (as
measured by contribution to nominal returns). The top performers included HCA,
Inc., Reynolds Group Issuer, Inc., First Data Corp., General Motors Co. and US
Airways Group, Inc. During the period, riskier higher-yielding positions within
the energy and emerging markets sectors were reduced.
The Fund's short position in U.S. Treasury futures was closed during the recent
year. However, the Fund continued to short the two-year U.S. Treasury in the
cash markets to reduce the 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. During the recent year, two-year US
Treasury rates increased 23 basis points. However, the combination of a weak
period for high-yield investments, as well as carry costs associated with the
Treasury short, offset the contribution from the rise in interest rates.
We still believe that the overall high-yield market is fairly priced on a
spread, or yield basis, and reflects the anticipated rise in defaults in the
energy and metals/mining arena. In fact, we believe investor angst, as reflected
in declining prices and widening spreads of the summer months, may be
overcompensating for fundamentals. It is important to note that the U.S.
high-yield market is highly bifurcated, with the two troubled sectors
representing approximately 77% of total defaults year-to-date, according to JP
Morgan. It is worth noting that even with the heightened risk in these sectors,
the overall default rate remains at an impressively low 2.3% for the trailing 12
months, according to Moody's.
Given this bifurcation, we believe that the high-yield market, in general,
remains a good value, both in the context of future defaults and the relative
stability of industries not afflicted by the volatility in energy and
commodities prices. The nearly 80% of the market that does not derive earnings
from the commodities complexes actually stands to benefit from the drop in
energy prices as does the consuming public, and a majority of the U.S.
high-yield market is not directly affected by economic news emanating from
Beijing. We continue to closely monitor and assess the likely impact of the
problems in the energy and metals/mining sectors, and we expect the default
impact on the overall market to remain below the historical long-term average
default rate.
At this time, we remain comfortable with our positioning in the Fund.
OUTLOOK
We believe that the U.S. economy is growing at a moderate pace and is likely to
continue to improve. Certainly, the pace of the current expansion has been
modest and longer than normal, resulting in an extended period of low inflation
and low interest rates. We believe that the current domestic economic
environment remains favorable for credit. We expect credit spreads to tighten
over the remainder of the economic expansion given our macro-economic view.
While recent developments in the energy and metals/mining sectors are important,
we believe these developments are now largely priced into the market. We are
also comfortable with the potentially limited impact of the China slowdown
directly on the U.S. economy and the U.S. issuer base. While the U.S. does,
indeed, import significantly from China, exports to China are a small fraction
of our economic activity. Most companies in the U.S. high-yield universe have
little or no direct exposure to China.
Outside of the U.S. market, we see developing Asia - especially Taiwan and Korea
- as having deep manufacturing ties with Beijing, and therefore we believe that
region will remain under pressure for the near-term. The rise in idiosyncratic
risk in Russia, Turkey, South Africa, and Brazil also compounds the near-term
problems although a number of Eastern European names are not impacted. Developed
Europe, however, we believe will benefit from the drop in the euro (improving
exports) and energy prices, although the China slowdown will present some drag
to companies and countries that export to China.
-------------------
1 The BofA Merrill Lynch US High Yield Constrained Index tracks the
performance of U.S. dollar denominated below investment grade corporate
debt publicly issued in the U.S. domestic market but caps issuer exposure
at 2%. Indexes are unmanaged and an investor cannot invest directly in an
index.
2 Total return is based on the combination of reinvested dividends, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per Common 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.
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 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.
Page 4
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES - 74.0%
Automotive - 5.6%
$ 4,725,000 Dana Holding Corp............................................. 5.50% 12/15/24 $ 4,736,813
1,376,000 Ford Motor Co................................................. 9.22% 09/15/21 1,742,687
553,000 Ford Motor Co................................................. 8.90% 01/15/32 710,955
2,000,000 Ford Motor Co. (a)............................................ 7.75% 06/15/43 2,430,566
2,480,000 Ford Motor Co................................................. 9.98% 02/15/47 3,657,792
3,960,000 Gates Global LLC/Gates Global Co. (b)......................... 6.00% 07/15/22 3,197,700
1,400,000 Goodyear Tire & Rubber (The) Co............................... 6.50% 03/01/21 1,492,750
4,396,000 Goodyear Tire & Rubber (The) Co. (a).......................... 7.00% 05/15/22 4,797,135
21,432 Motors Liquidation Co. GUC Trust (Transferable) (c)........... N/A N/A 347,198
4,720,000 MPG Holdco I, Inc. (a)........................................ 7.38% 10/15/22 5,038,600
3,472,000 Navistar International Corp. (a).............................. 8.25% 11/01/21 2,725,520
3,705,000 ZF North America Capital, Inc. (b)............................ 4.75% 04/29/25 3,649,425
--------------
34,527,141
--------------
Banking - 1.2%
5,335,000 Ally Financial, Inc. (a)...................................... 8.00% 11/01/31 6,488,694
612,000 Ally Financial, Inc........................................... 8.00% 11/01/31 749,700
--------------
7,238,394
--------------
Basic Industry - 9.0%
850,000 AK Steel Corp................................................. 7.63% 05/15/20 446,250
650,000 AK Steel Corp................................................. 7.63% 10/01/21 312,000
4,500,000 AK Steel Corp. (a)............................................ 8.38% 04/01/22 2,137,500
2,584,000 Aleris International, Inc..................................... 7.63% 02/15/18 2,428,960
1,804,000 Aleris International, Inc..................................... 7.88% 11/01/20 1,704,780
3,405,000 Associated Materials LLC/AMH New Finance, Inc................. 9.13% 11/01/17 2,732,512
1,500,000 Axalta Coating Systems US Holdings, Inc./
Axalta Coating Systems Dutch Holding B B.V. (b)............ 7.38% 05/01/21 1,590,000
4,000,000 Beazer Homes USA, Inc. (a).................................... 8.13% 06/15/16 4,140,000
5,500,000 CalAtlantic Group, Inc........................................ 8.38% 05/15/18 6,352,500
2,470,000 Hexion, Inc................................................... 8.88% 02/01/18 1,901,900
1,873,000 K Hovnanian Enterprises, Inc. (b)............................. 7.00% 01/15/19 1,498,400
4,160,000 K Hovnanian Enterprises, Inc. (b)............................. 7.25% 10/15/20 3,931,200
3,479,000 KB Home (a)................................................... 7.50% 09/15/22 3,583,370
2,565,000 Meritage Homes Corp........................................... 6.00% 06/01/25 2,641,950
1,840,000 Momentive Performance Escrow Claim (d) (e) (f) (g)............ N/A N/A 2
1,840,000 Momentive Performance Materials, Inc. (d)..................... 4.69% 04/24/22 1,278,800
1,780,000 PulteGroup, Inc. (a).......................................... 7.63% 10/15/17 1,949,100
4,570,000 PulteGroup, Inc............................................... 7.88% 06/15/32 5,312,625
4,465,000 TRI Pointe Holdings, Inc. (a)................................. 5.88% 06/15/24 4,487,325
4,000,000 United States Steel Corp...................................... 7.38% 04/01/20 3,000,000
4,000,000 USG Corp. (b)................................................. 5.88% 11/01/21 4,235,000
--------------
55,664,174
--------------
Capital Goods - 7.6%
3,595,000 Ball Corp..................................................... 4.00% 11/15/23 3,523,100
4,000,000 Crown Americas LLC/Crown Americas Capital Corp IV (a)......... 4.50% 01/15/23 4,030,000
5,445,000 KLX, Inc. (b)................................................. 5.88% 12/01/22 5,584,528
See Notes to Financial Statements Page 5
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (Continued)
Capital Goods (Continued)
$ 2,595,000 Milacron LLC/Mcron Finance Corp. (b).......................... 7.75% 02/15/21 $ 2,672,850
1,575,000 Orbital ATK, Inc. (b)......................................... 5.50% 10/01/23 1,647,844
7,500,000 Reynolds Group Issuer, Inc.................................... 8.50% 05/15/18 7,575,000
2,085,000 Reynolds Group Issuer, Inc. (a)............................... 9.88% 08/15/19 2,197,069
1,775,000 Reynolds Group Issuer, Inc.................................... 8.25% 02/15/21 1,852,656
4,375,000 Sealed Air Corp. (b).......................................... 5.50% 09/15/25 4,626,562
4,050,000 Terex Corp. (a)............................................... 6.00% 05/15/21 4,030,560
4,540,000 TransDigm, Inc................................................ 6.00% 07/15/22 4,608,100
1,000,000 TransDigm, Inc................................................ 6.50% 07/15/24 1,022,500
4,000,000 Triumph Group, Inc............................................ 4.88% 04/01/21 3,590,000
--------------
46,960,769
--------------
Consumer Goods - 2.0%
2,567,000 Kraft Heinz Foods Co. (b)..................................... 4.88% 02/15/25 2,762,482
2,325,000 Pilgrim's Pride Corp. (b)..................................... 5.75% 03/15/25 2,383,125
2,240,000 Smithfield Foods, Inc......................................... 6.63% 08/15/22 2,405,200
4,585,000 Spectrum Brands, Inc. (b)..................................... 5.75% 07/15/25 4,911,681
--------------
12,462,488
--------------
Energy - 5.6%
455,000 Basic Energy Services, Inc.................................... 7.75% 02/15/19 185,413
4,540,000 Basic Energy Services, Inc. (a)............................... 7.75% 10/15/22 1,702,500
3,460,000 Berry Petroleum Co., LLC...................................... 6.75% 11/01/20 1,366,700
2,315,000 California Resources Corp..................................... 6.00% 11/15/24 1,582,881
3,735,000 Chesapeake Energy Corp........................................ 5.38% 06/15/21 2,437,087
2,940,000 CITGO Petroleum Corp. (b)..................................... 6.25% 08/15/22 2,895,900
3,170,000 Crestwood Midstream Partners L.P./
Crestwood Midstream Finance Corp. (b)...................... 6.25% 04/01/23 2,710,350
1,290,000 EP Energy LLC/Everest Acquisition Finance, Inc................ 9.38% 05/01/20 1,128,750
3,000,000 Ferrellgas L.P./Ferrellgas Finance Corp....................... 6.50% 05/01/21 2,797,500
1,000,000 Hornbeck Offshore Services, Inc............................... 5.88% 04/01/20 810,000
3,960,000 Hornbeck Offshore Services, Inc. (a).......................... 5.00% 03/01/21 3,049,200
3,660,000 Linn Energy LLC/Linn Energy Finance Corp...................... 8.63% 04/15/20 969,900
3,715,000 Linn Energy LLC/Linn Energy Finance Corp...................... 6.50% 09/15/21 835,875
3,535,000 PHI, Inc. (a)................................................. 5.25% 03/15/19 3,146,150
1,235,000 Suburban Propane Partners L.P./
Suburban Energy Finance Corp............................... 5.75% 03/01/25 1,194,863
1,900,000 Sunoco L.P./Sunoco Finance Corp. (b).......................... 5.50% 08/01/20 1,957,000
1,855,000 Sunoco L.P./Sunoco Finance Corp. (b).......................... 6.38% 04/01/23 1,878,187
4,325,000 Whiting Petroleum Corp. (a)................................... 5.75% 03/15/21 4,038,469
--------------
34,686,725
--------------
Financial Services - 4.4%
6,155,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp......... 6.00% 08/01/20 6,447,362
1,190,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp......... 5.88% 02/01/22 1,230,163
8,000,000 Navient Corp.................................................. 8.00% 03/25/20 8,500,000
3,850,000 OneMain Financial Holdings, Inc. (b).......................... 7.25% 12/15/21 4,032,875
2,395,000 Springleaf Finance Corp....................................... 6.00% 06/01/20 2,433,919
4,555,000 Springleaf Finance Corp....................................... 7.75% 10/01/21 4,919,400
--------------
27,563,719
--------------
Page 6 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (Continued)
Healthcare - 8.6%
$ 5,074,000 Alere, Inc. (a)............................................... 7.25% 07/01/18 $ 5,308,673
665,000 Alere, Inc.................................................... 6.50% 06/15/20 689,938
8,005,000 CHS/Community Health Systems, Inc. (a)........................ 6.88% 02/01/22 8,105,062
2,500,000 DaVita HealthCare Partners, Inc............................... 5.75% 08/15/22 2,634,375
3,775,000 DaVita HealthCare Partners, Inc............................... 5.00% 05/01/25 3,756,872
1,500,000 HCA, Inc...................................................... 5.88% 05/01/23 1,597,500
10,850,000 HCA, Inc. (a)................................................. 5.00% 03/15/24 11,202,625
4,585,000 Hologic, Inc. (b)............................................. 5.25% 07/15/22 4,802,788
2,115,000 Kinetic Concepts, Inc./KCI USA, Inc. (a)...................... 10.50% 11/01/18 2,238,516
6,814,000 MPH Acquisition Holdings LLC (b).............................. 6.63% 04/01/22 6,967,315
5,485,000 Tenet Healthcare Corp......................................... 8.13% 04/01/22 5,827,812
--------------
53,131,476
--------------
Leisure - 4.5%
1,475,000 Isle of Capri Casinos, Inc.................................... 5.88% 03/15/21 1,559,813
9,175,000 MGM Resorts International (a)................................. 6.75% 10/01/20 9,817,250
2,760,000 Mohegan Tribal Gaming Authority............................... 9.75% 09/01/21 2,856,600
4,127,000 Pinnacle Entertainment, Inc................................... 7.75% 04/01/22 4,591,288
2,765,000 Scientific Games International, Inc. (b)...................... 7.00% 01/01/22 2,792,650
2,175,000 Scientific Games International, Inc........................... 10.00% 12/01/22 1,935,750
4,975,000 Wynn Las Vegas LLC/Wynn Las Vegas Capital Corp. (b)........... 5.50% 03/01/25 4,687,942
--------------
28,241,293
--------------
Media - 4.3%
7,245,000 CCO Holdings LLC/CCO Holdings Capital Corp.................... 5.75% 01/15/24 7,371,788
456,000 Clear Channel Worldwide Holdings, Inc., Series A.............. 7.63% 03/15/20 464,550
4,160,000 Clear Channel Worldwide Holdings, Inc., Series B (a).......... 7.63% 03/15/20 4,331,600
541,000 Clear Channel Worldwide Holdings, Inc., Series B.............. 6.50% 11/15/22 566,021
6,430,000 Dish DBS Corp................................................. 6.75% 06/01/21 6,655,050
559,000 iHeartCommunications, Inc..................................... 5.50% 12/15/16 511,485
8,405,000 iHeartCommunications, Inc..................................... 9.00% 03/01/21 6,944,631
--------------
26,845,125
--------------
Retail - 0.6%
3,845,000 Dollar Tree, Inc. (b)......................................... 5.75% 03/01/23 4,070,894
--------------
Services - 3.4%
1,095,000 Ashtead Capital, Inc. (b)..................................... 6.50% 07/15/22 1,179,863
900,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc. (b)...... 5.13% 06/01/22 922,041
4,415,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc........... 5.50% 04/01/23 4,591,600
4,607,000 Iron Mountain, Inc. (b)....................................... 6.00% 10/01/20 4,894,937
4,250,000 Iron Mountain, Inc............................................ 5.75% 08/15/24 4,287,187
375,000 United Rentals North America, Inc............................. 7.38% 05/15/20 399,844
367,000 United Rentals North America, Inc............................. 7.63% 04/15/22 400,070
3,097,000 United Rentals North America, Inc............................. 6.13% 06/15/23 3,247,205
1,400,000 United Rentals North America, Inc............................. 5.50% 07/15/25 1,401,750
--------------
21,324,497
--------------
See Notes to Financial Statements Page 7
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (Continued)
Technology & Electronics - 4.7%
$ 3,780,000 CommScope, Inc. (b)........................................... 5.00% 06/15/21 $ 3,817,800
3,896,000 First Data Corp. (a).......................................... 10.63% 06/15/21 4,358,650
4,808,000 First Data Corp. (b).......................................... 7.00% 12/01/23 4,904,160
2,950,000 Freescale Semiconductor, Inc. (b)............................. 5.00% 05/15/21 3,060,625
3,385,000 MSCI, Inc. (b)................................................ 5.75% 08/15/25 3,577,945
3,900,000 NCR Corp...................................................... 6.38% 12/15/23 4,031,625
5,160,000 Zebra Technologies Corp....................................... 7.25% 10/15/22 5,643,750
--------------
29,394,555
--------------
Telecommunications - 6.9%
1,550,000 Frontier Communications Corp.................................. 6.25% 09/15/21 1,391,900
5,700,000 Frontier Communications Corp. (b)............................. 11.00% 09/15/25 5,988,534
2,500,000 Frontier Communications Corp. (a)............................. 9.00% 08/15/31 2,273,750
2,411,000 Hughes Satellite Systems Corp. (a)............................ 7.63% 06/15/21 2,637,031
3,805,000 Level 3 Financing, Inc. (b)................................... 5.38% 01/15/24 3,862,075
3,850,000 Sprint Capital Corp........................................... 6.88% 11/15/28 3,205,125
7,660,000 Sprint Capital Corp........................................... 8.75% 03/15/32 6,913,150
3,070,000 Sprint Communications, Inc.................................... 9.25% 04/15/22 3,177,450
1,700,000 T-Mobile USA, Inc. (a)........................................ 6.54% 04/28/20 1,746,750
7,900,000 T-Mobile USA, Inc. (a)........................................ 6.00% 03/01/23 7,895,063
2,428,000 ViaSat, Inc................................................... 6.88% 06/15/20 2,546,365
1,500,000 Windstream Services LLC....................................... 6.38% 08/01/23 1,194,375
--------------
42,831,568
--------------
Transportation - 4.3%
3,400,000 American Airlines Group, Inc. (b)............................. 4.63% 03/01/20 3,378,750
3,000,421 Continental Airlines 2003-ERJ1 Pass Through Trust............. 7.88% 07/02/18 3,126,888
1,820,517 Continental Airlines 2005-ERJ1 Pass Through Trust............. 9.80% 04/01/21 2,013,947
1,333,382 Delta Air Lines 2009-1 Series B Pass Through Trust............ 9.75% 12/17/16 1,441,053
2,073,592 Northwest Airlines 2001-1 Class B Pass Through Trust.......... 7.69% 04/01/17 2,200,600
1,222,219 UAL 2009-2B Pass Through Trust (b)............................ 12.00% 01/15/16 1,249,719
6,194,667 US Airways 2000-3C Pass Through Trust......................... 8.39% 03/01/22 6,759,930
2,000,000 US Airways Group, Inc......................................... 6.13% 06/01/18 2,082,500
4,675,000 XPO Logistics, Inc. (b)....................................... 6.50% 06/15/22 4,189,969
--------------
26,443,356
--------------
Utility - 1.3%
5,660,000 Calpine Corp.................................................. 5.75% 01/15/25 5,384,075
2,455,000 NRG Energy, Inc............................................... 8.25% 09/01/20 2,528,650
--------------
7,912,725
--------------
TOTAL CORPORATE BONDS AND NOTES...................................................... 459,298,899
(Cost $475,435,642) --------------
Page 8 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
------------- -------------------------------------------------------------- -------- -------- --------------
FOREIGN CORPORATE BONDS AND NOTES - 15.3%
Automotive - 0.9%
5,545,000 Schaeffler Finance B.V. (USD) (b)............................. 4.75% 05/15/21 $ 5,669,763
--------------
Banking - 0.6%
3,950,000 Industrial Senior Trust (USD) (b)............................. 5.50% 11/01/22 3,619,681
--------------
Basic Industry - 3.3%
2,648,000 ArcelorMittal (USD) (a)....................................... 7.00% 02/25/22 2,522,220
8,362,000 ArcelorMittal (USD)........................................... 7.75% 10/15/39 7,170,415
6,450,000 Novelis, Inc. (USD) (a)....................................... 8.75% 12/15/20 6,498,375
4,200,000 Stora Enso OYJ (USD) (b)...................................... 7.25% 04/15/36 4,515,000
--------------
20,706,010
--------------
Capital Goods - 1.7%
3,000,000 Albea Beauty Holdings S.A. (USD) (b).......................... 8.38% 11/01/19 3,168,750
3,000,000 Ardagh Packaging Finance PLC (EUR)............................ 9.25% 10/15/20 3,471,733
900,000 Ardagh Packaging Finance PLC/
Ardagh Holdings USA, Inc. (USD) (b)........................ 6.00% 06/30/21 886,500
2,480,000 Bombardier, Inc. (USD) (b).................................... 6.00% 10/15/22 1,922,000
1,290,000 Bombardier, Inc. (USD) (b).................................... 6.13% 01/15/23 1,006,200
--------------
10,455,183
--------------
Consumer Goods - 0.3%
1,900,000 Minerva Luxembourg S.A. (USD) (b)............................. 7.75% 01/31/23 1,885,750
--------------
Energy - 1.5%
1,500,000 CGG S.A. (USD)................................................ 6.50% 06/01/21 870,000
5,256,000 CHC Helicopter S.A. (USD)..................................... 9.25% 10/15/20 3,022,200
970,000 Petrobras Global Finance BV (USD)............................. 6.25% 03/17/24 779,347
2,120,000 Petrobras Global Finance BV (USD)............................. 7.25% 03/17/44 1,587,880
1,700,000 Precision Drilling Corp. (USD)................................ 6.63% 11/15/20 1,523,625
1,735,000 Precision Drilling Corp. (USD)................................ 6.50% 12/15/21 1,518,125
--------------
9,301,177
--------------
Healthcare - 1.6%
2,625,000 Endo Ltd./Endo Finance LLC/Endo Finco, Inc. (USD) (b)......... 6.00% 02/01/25 2,618,437
1,315,000 Mallinckrodt International Finance S.A./
Mallinckrodt CB LLC (USD) (b).............................. 5.75% 08/01/22 1,256,640
5,650,000 Valeant Pharmaceuticals International, Inc. (USD) (b)......... 7.50% 07/15/21 5,183,875
715,000 Valeant Pharmaceuticals International, Inc. (USD) (b)......... 5.88% 05/15/23 605,516
--------------
9,664,468
--------------
Insurance - 0.5%
3,500,000 Oil Insurance Ltd. (USD) (b) (h).............................. 3.31% (i) 3,115,000
--------------
Leisure - 1.1%
5,755,000 Royal Caribbean Cruises Ltd. (USD)............................ 7.50% 10/15/27 6,733,350
--------------
See Notes to Financial Statements Page 9
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
------------- -------------------------------------------------------------- -------- -------- --------------
FOREIGN CORPORATE BONDS AND NOTES (Continued)
Media - 1.7%
6,280,000 Altice S.A. (USD) (b)......................................... 7.75% 05/15/22 $ 6,060,200
4,345,000 UPCB Finance IV Ltd. (USD) (b)................................ 5.38% 01/15/25 4,372,156
--------------
10,432,356
--------------
Telecommunications - 0.9%
5,859,000 Intelsat Luxembourg S.A. (USD)................................ 7.75% 06/01/21 3,486,105
2,160,000 Intelsat Luxembourg S.A. (USD)................................ 8.13% 06/01/23 1,290,600
880,000 Telecom Italia Capital S.A. (USD)............................. 7.20% 07/18/36 910,800
--------------
5,687,505
--------------
Transportation - 1.2%
5,250,000 Hapag-Lloyd AG (USD) (b)...................................... 9.75% 10/15/17 5,407,500
2,300,000 Stena AB (USD) (b)............................................ 7.00% 02/01/24 2,110,250
--------------
7,517,750
--------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.............................................. 94,787,993
(Cost $105,537,730) --------------
PAR
AMOUNT
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
------------- -------------------------------------------------------------- -------- -------- --------------
CAPITAL PREFERRED SECURITIES - 11.8%
Banking - 6.3%
1,400,000 Barclays PLC (EUR) (j)........................................ 6.50% (i) 1,555,390
4,525,000 Capital One Financial Corp., Series E (USD) (j)............... 5.55% (i) 4,544,797
6,700,000 Citigroup, Inc., Series M (USD) (j)........................... 6.30% (i) 6,635,010
3,250,000 Dresdner Funding Trust I (USD) (b)............................ 8.15% 06/30/31 4,013,750
5,325,000 HBOS Capital Funding L.P. (GBP) (j)........................... 6.46% (i) 8,725,118
700,000 HSBC Bank Capital Funding Sterling 1 L.P. (GBP) (j)........... 5.84% (i) 1,170,839
3,600,000 HSBC Holdings PLC (USD) (a) (j)............................... 6.38% (i) 3,570,336
3,000,000 Mellon Capital III (GBP) (j).................................. 6.37% 09/05/66 4,703,398
4,095,000 Wells Fargo & Co., Series S (USD) (j)......................... 5.90% (i) 4,207,612
--------------
39,126,250
--------------
Capital Goods - 0.5%
3,760,000 Textron Financial Corp. (USD) (b) (j)......................... 6.00% 02/15/67 2,791,800
--------------
Insurance - 5.0%
2,100,000 American International Group, Inc. (USD) (a) (j).............. 8.18% 05/15/58 2,777,250
3,175,000 Chubb (The) Corp. (USD) (j)................................... 6.38% 04/15/37 3,055,938
3,500,000 CNP Assurances (EUR) (j)...................................... 5.25% (i) 3,348,435
11,000,000 Glen Meadow Pass-Through Trust (USD) (b) (j).................. 6.51% 02/12/67 9,542,500
5,000,000 ING Groep N.V. (GBP) (j)...................................... 5.14% (i) 7,770,310
3,500,000 Lincoln National Corp. (USD) (a) (j).......................... 7.00% 05/17/66 2,937,813
1,800,000 Lincoln National Corp. (USD) (j).............................. 6.05% 04/20/67 1,498,500
--------------
30,930,746
--------------
TOTAL CAPITAL PREFERRED SECURITIES................................................... 72,848,796
(Cost $71,095,272) --------------
Page 10 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED
VALUE DESCRIPTION RATE (k) MATURITY (l) VALUE
------------- -------------------------------------------------------------- -------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 3.4%
Automotive - 0.9%
$ 4,383,343 Allison Transmission, Inc. Term Loan B3....................... 3.50% 08/23/19 $ 4,384,702
1,743,750 Navistar, Inc. Term Loan B.................................... 6.50% 08/06/20 1,639,125
--------------
6,023,827
--------------
Consumer Goods - 1.1%
6,698,000 Aramark Corp. F Term Loan..................................... 3.25% 02/24/21 6,679,848
--------------
Healthcare - 1.0%
6,231,125 Ortho-Clinical Diagnostics S.A., Initial Term Loan............ 4.75% 06/30/21 6,132,486
--------------
Real Estate - 0.0%
181,432 Realogy Group LLC, Extended Synthetic Commitment.............. 4.44% 10/10/16 179,618
--------------
Transportation - 0.4%
2,315,000 US Airways Group Term Loan B1................................. 3.50% 05/23/19 2,303,425
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS............................................ 21,319,204
(Cost $21,439,200) --------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- ------ -------- --------------
MORTGAGE-BACKED SECURITIES - 1.8%
Collateralized Mortgage Obligations - 0.6%
645,484 Morgan Stanley Mortgage Loan Trust
Series 2007-6XS, Class 2A1S (h)............................ 0.31% 02/25/47 620,694
1,522,192 Specialty Underwriting & Residential Finance Trust
Series 2006-BC4, Class A2B (h)............................. 0.31% 09/25/37 723,680
2,537,659 Wells Fargo Mortgage Backed Securities
Series 2006-AR7 Trust, Class 2A4 (h)....................... 2.73% 05/25/36 2,425,262
--------------
3,769,636
--------------
Commercial Mortgage-Backed Securities - 1.2%
2,737,207 Ace Securities Corp. Home Equity Loan Trust
Series 2007-HE2, Class A2A (h)............................. 0.32% 12/25/36 1,687,558
1,183,311 Carrington Mortgage Loan Trust
Series 2006-NC4, Class A5 (h).............................. 0.26% 10/25/36 1,129,281
200,875 HSI Asset Securitization Corp. Trust
Series 2007-NC1, Class A1 (h).............................. 0.30% 04/25/37 199,375
679,875 Morgan Stanley ABS Capital I, Inc. Trust
Series 2006-HE6, Class A2B (h)............................. 0.30% 09/25/36 347,395
8,812,781 Securitized Asset Backed Receivables LLC Trust
Series 2006-FR4, Class A2A (h)............................. 0.28% 08/25/36 3,704,499
868,186 Soundview Home Loan Trust
Series 2006-EQ2, Class A2 (h).............................. 0.31% 01/25/37 589,410
--------------
7,657,518
--------------
TOTAL MORTGAGE-BACKED SECURITIES..................................................... 11,427,154
(Cost $14,099,361) --------------
See Notes to Financial Statements Page 11
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- ------ -------- --------------
ASSET-BACKED SECURITIES - 0.2%
$ 1,389,499 Keycorp Student Loan Trust
Series 2000-A, Class A2 (h)................................ 0.65% 05/25/29 $ 1,345,424
--------------
TOTAL ASSET-BACKED SECURITIES........................................................ 1,345,424
(Cost $1,274,594) --------------
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------- --------------
COMMON STOCKS - 0.2%
Automotive - 0.2%
34,350 General Motors Co.................................................................... 1,199,159
--------------
TOTAL COMMON STOCKS.................................................................. 1,199,159
(Cost $1,031,183) --------------
WARRANTS - 0.1%
Automotive - 0.1%
48,926 General Motors Co., expiring 07/10/19 (g)............................................ 835,656
--------------
TOTAL WARRANTS....................................................................... 835,656
(Cost $1,008,501) --------------
SHORT-TERM INVESTMENTS - 1.9%
11,462,544 Dreyfus Government Cash Management - Institutional Shares............................ 11,462,544
--------------
TOTAL SHORT-TERM INVESTMENTS......................................................... 11,462,544
--------------
(Cost $11,462,544)
TOTAL INVESTMENTS - 108.7%........................................................... 674,524,829
(Cost $702,384,027) (m) --------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- -------------------------------------------------------------- ------ -------- --------------
U.S. GOVERNMENT BONDS SOLD SHORT - (6.9%)
$ (42,700,000) United States Treasury Note................................... 0.88% 02/28/17 (42,887,923)
--------------
TOTAL U.S. GOVERNMENT BONDS SOLD SHORT............................................... (42,887,923)
(Proceeds $43,070,300) --------------
CORPORATE BONDS SOLD SHORT - (2.6%)
Consumer Goods - (0.9%)
(5,350,000) ACCO Brands Corp.............................................. 6.75% 04/30/20 (5,724,500)
--------------
Energy - (1.7%)
(5,360,000) Rice Energy, Inc.............................................. 6.25% 05/01/22 (4,877,600)
(6,550,000) Southwestern Energy Co........................................ 4.95% 01/23/25 (5,724,457)
--------------
(10,602,057)
--------------
TOTAL CORPORATE BONDS SOLD SHORT..................................................... (16,326,557)
(Proceeds $16,926,942) --------------
TOTAL INVESTMENTS SOLD SHORT - (9.5%)................................................ (59,214,480)
(Proceeds $59,997,242)
OUTSTANDING LOAN - (0.1%)............................................................ (578,615)
NET OTHER ASSETS AND LIABILITIES - 0.9%.............................................. 5,576,920
--------------
NET ASSETS - 100.0%.................................................................. $ 620,308,654
==============
Page 12 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
(a) This security or a portion of this security is segregated as collateral
for investments sold short.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. Pursuant to procedures adopted
by the Fund's Board of Trustees, this security has been determined to be
liquid by MacKay Shields LLC, the Fund's sub-advisor (the "Sub-Advisor").
Although market instability can result in periods of increased overall
market illiquidity, liquidity for each security is determined based on
security-specific factors and assumptions, which require subjective
judgment. At October 31, 2015, securities noted as such amounted to
$190,264,384 of total investments or 30.67% of net assets.
(c) The Fund previously held non-transferable trust units that were originally
issued to facilitate distribution of General Motors common stock and
warrants pursuant to the General Motors Bankruptcy Plan of Reorganization.
The non-transferable trust units existed only for the purpose of receiving
residual cash, if any, from the General Motors Bankruptcy. These units
were received in exchange for the previously owned General Motors 8.375%
Corporate Notes that were scheduled to mature on July 15, 2033. On June
12, 2012, the holders of these units received new transferable General
Motors Unsecured Claim (GUC) Trust Units, which were created to hold and
administer the common stock and warrants of General Motors Company to be
contributed to the GUC Trust under the General Motors Bankruptcy Plan of
Reorganization.
(d) On October 24, 2014, Momentive Performance Materials, Inc. completed a
Bankruptcy Plan of Reorganization. As part of the Bankruptcy Plan of
Reorganization, the holders of Momentive Performance Materials, Inc.
Senior Secured Lien Notes ("Senior Secured Lien Notes") scheduled to
mature on October 15, 2020, received new Momentive Performance Materials,
Inc. Second Priority Senior Secured Notes maturing on April 24, 2022, in
an exchange for the existing Senior Secured Lien Notes, and received an
escrow claim, Momentive Performance Escrow Claim. The escrow claim
represents a claim on any cash that remains in a Fee Reserve account. It
is unknown if any remaining cash held in the Fee Reserve account will be
available after future legal and financial costs are paid.
(e) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the Investment Company Act of 1940, as
amended. At October 31, 2015, securities noted as such are valued at $2 or
0.00% of net assets.
(f) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by the Fund's Sub-Advisor.
(g) Non-income producing security.
(h) Floating rate security. The interest rate shown reflects the rate in
effect at October 31, 2015.
(i) Perpetual maturity.
(j) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at October 31, 2015. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(k) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests pay interat rates which are periodically predetermined by
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the
prime rate offered by one or more United States banks or (iii) the
certificate of deposit rate. Certain Senior Loans are subject to a LIBOR
floor that establishes a minimum LIBOR rate. The interest rate shown
reflects the rate in effect at October 31, 2015. When a range of rates is
disclosed, the Fund holds more than one contract within the same tranche
at varying rates.
(l) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(m) Aggregate cost for federal income tax purposes is $701,311,419. As of
October 31, 2015,the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$21,298,935 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$48,085,525.
Currency Abbreviations:
EUR Euro
GBP British Pound Sterling
USD United States Dollar
See Notes to Financial Statements Page 13
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2015 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
10/31/2015 PRICES INPUTS INPUTS
---------------- ---------------- ---------------- ----------------
Corporate Bonds and Notes:
Automotive............................... $ 34,527,141 $ 347,198 $ 34,179,943 $ --
Basic Industry........................... 55,664,174 -- 55,664,172 2
Other Industry Categories*............... 369,107,584 -- 369,107,584 --
Foreign Corporate Bonds and Notes*.......... 94,787,993 -- 94,787,993 --
Capital Preferred Securities*............... 72,848,796 -- 72,848,796 --
Senior Floating-Rate Loan Interests*........ 21,319,204 -- 21,319,204 --
Mortgage-Backed Securities:
Collateralized Mortgage Obligations...... 3,769,636 -- 3,769,636 --
Commercial Mortgage-Backed Securities.... 7,657,518 -- 7,657,518 --
Asset-Backed Securities..................... 1,345,424 -- 1,345,424 --
Common Stocks*.............................. 1,199,159 1,199,159 -- --
Warrants*................................... 835,656 835,656 -- --
Short-Term Investments...................... 11,462,544 11,462,544 -- --
---------------- ---------------- ---------------- ----------------
Total Investments........................... 674,524,829 13,844,557 660,680,270 2
Forward Foreign Currency Contracts**........ 208,222 -- 208,222 --
---------------- ---------------- ---------------- ----------------
Total....................................... 674,733,051 13,844,557 660,888,492 2
================ ================ ================ ================
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2014 PRICES INPUTS INPUTS
---------------- ---------------- ---------------- ----------------
U.S. Government Bonds Sold Short............ $ (42,887,923) $ -- $ (42,887,923) $ --
Corporate Bonds Sold Short.................. (16,326,557) -- (16,326,557) --
Credit Default Swap***...................... (1,832,976) -- (1,832,976) --
---------------- ---------------- ---------------- ----------------
Total....................................... (61,047,456) -- (61,047,456) --
================ ================ ================ ================
* See the Portfolio of Investments for industry breakout.
** See the Forward Foreign Currency Contracts table for contract and currency
detail.
*** See the Credit Default Swap Contracts Outstanding for contract detail.
Page 14 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2015
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, 2014
Corporate Bonds and Notes.............. $ 2
Net Realized Gain (Loss).................... --
Net Change in Unrealized Appreciation/
Depreciation........................... --
Purchases................................... --
Sales....................................... --
Transfers In................................ --
Transfers Out............................... --
ENDING BALANCE AT OCTOBER 31, 2015
Corporate Bonds and Notes.............. 2
----------------
Total Level 3 holdings...................... $ 2
================
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2015.
There was no net change in unrealized appreciation (depreciation) from Level 3
investments held as of October 31, 2015.
FORWARD FOREIGN CURRENCY CONTRACTS: (see Note 2D - Forward Foreign Currency
Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
--------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED + SOLD + OCTOBER 31, 2015 OCTOBER 31, 2015 (DEPRECIATION)
---------- ------------ -------------- -------------- ---------------- ---------------- --------------
11/24/15 JPM USD 8,568,629 EUR 7,621,000 $ 8,568,629 $ 8,382,962 $ 185,667
11/24/15 JPM USD 22,961,393 GBP 14,882,000 22,961,393 22,938,838 22,555
-------------
Net Unrealized Appreciation (Depreciation)....................................................... $ 208,222
=============
+ Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
JPM JPMorgan Chase
CREDIT DEFAULT SWAP CONTRACTS OUTSTANDING
BUY/SELL NOTIONAL PAY/RECEIVE EXPIRATION
REFERENCE ENTITY PROTECTION COUNTERPARTY AMOUNT FIXED RATE DATE VALUE
-------------------- ---------- -------------- ----------- ----------- ---------- ------------
Markit iTRAXX Europe Buy Morgan Stanley $18,000,000 5.00% 12/20/20 $(1,832,976)
Crossover Index & Co., Inc.
See Notes to Financial Statements Page 15
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2015
ASSETS:
Investments, at value
(Cost $702,384,027)........................................................................... $ 674,524,829
Foreign currency (Cost $415,947)................................................................... 418,447
Unrealized appreciation on forward foreign currency contracts...................................... 208,222
Restricted cash.................................................................................... 658,466
Receivables:
Interest...................................................................................... 11,079,766
Investment securities sold.................................................................... 3,271,888
Prepaid expenses................................................................................... 14,444
--------------
Total Assets.................................................................................. 690,176,062
--------------
LIABILITIES:
Borrowings......................................................................................... 578,615
Investments sold short, at value (proceeds $59,997,242)............................................ 59,214,480
Payables:
Investment securities purchased............................................................... 8,621,600
Investment advisory fees...................................................................... 524,464
Common Shares repurchased..................................................................... 333,950
Interest on investments sold short............................................................ 321,801
Administrative fees........................................................................... 132,977
Audit and tax fees............................................................................ 57,200
Printing fees................................................................................. 34,710
Custodian fees................................................................................ 21,530
Variation margin on swaps..................................................................... 16,169
Legal fees.................................................................................... 3,536
Transfer agent fees........................................................................... 2,290
Trustees' fees and expenses................................................................... 1,997
Financial reporting fees...................................................................... 771
Other liabilities.................................................................................. 1,318
--------------
Total Liabilities............................................................................. 69,867,408
--------------
NET ASSETS......................................................................................... $ 620,308,654
==============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $ 682,159,519
Par value.......................................................................................... 359,022
Accumulated net investment income (loss)........................................................... 3,499,351
Accumulated net realized gain (loss) on investments, forward foreign currency contracts,
swap contracts, foreign currency transactions, futures and investments sold short................ (38,159,582)
Net unrealized appreciation (depreciation) on investments, forward foreign currency
contracts, swap contracts, foreign currency translation, futures and investments sold short...... (27,549,656)
--------------
NET ASSETS......................................................................................... 620,308,654
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... 17.28
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)........ 35,902,223
==============
Page 16 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2015
INVESTMENT INCOME:
Interest........................................................................................... $ 50,383,161
Dividends.......................................................................................... 203,177
Other.............................................................................................. 332,207
--------------
Total investment income....................................................................... 50,918,545
--------------
EXPENSES:
Investment advisory fees........................................................................... 6,605,772
Interest expense on investments sold short......................................................... 1,767,137
Margin interest expense............................................................................ 1,171,483
Short sale fees.................................................................................... 557,543
Administrative fees................................................................................ 306,962
Printing fees...................................................................................... 131,455
Custodian fees..................................................................................... 87,301
Audit and tax fees................................................................................. 58,791
Transfer agent fees................................................................................ 23,523
Trustees' fees and expenses........................................................................ 23,501
Legal fees......................................................................................... 15,572
Financial reporting fees........................................................................... 9,250
Other.............................................................................................. 204,344
--------------
Total expenses................................................................................ 10,962,634
--------------
NET INVESTMENT INCOME (LOSS)....................................................................... 39,955,911
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................... (19,755,702)
Forward foreign currency contracts............................................................ 7,621,724
Swap contracts................................................................................ (120,123)
Foreign currency transactions................................................................. (5,487,912)
Futures....................................................................................... (312,488)
Shorts........................................................................................ (1,193,010)
--------------
Net realized gain (loss)........................................................................... (19,247,511)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................... (53,197,459)
Forward foreign currency contracts............................................................ (1,707,705)
Swap contracts................................................................................ (681,792)
Foreign currency translation.................................................................. 66,526
Futures....................................................................................... 110,038
Short positions............................................................................... 705,568
--------------
Net change in unrealized appreciation (depreciation)............................................... (54,704,824)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ (73,952,335)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ (33,996,424)
==============
See Notes to Financial Statements Page 17
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2015 10/31/2014
-------------- --------------
OPERATIONS:
Net investment income (loss)..................................................... $ 39,955,911 $ 46,988,275
Net realized gain (loss)......................................................... (19,247,511) 15,851,890
Net change in unrealized appreciation (depreciation)............................. (54,704,824) (21,278,797)
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................. (33,996,424) 41,561,368
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................ (45,376,676) (47,413,849)
-------------- --------------
Total distributions to shareholders.............................................. (45,376,676) (47,413,849)
-------------- --------------
CAPITAL TRANSACTIONS:
Repurchase of Common Shares*..................................................... (2,272,860) --
-------------- --------------
Net increase (decrease) in net assets resulting from capital transactions........ (2,272,860) --
-------------- --------------
Total increase (decrease) in net assets.......................................... (81,645,960) (5,852,481)
NET ASSETS:
Beginning of period.............................................................. 701,954,614 707,807,095
-------------- --------------
End of period.................................................................... $ 620,308,654 701,954,614
============== ==============
Accumulated net investment income (loss) at end of period........................ $ 3,499,351 3,764,378
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................. 36,056,159 36,056,159
Common Shares repurchased*....................................................... (153,936) --
-------------- --------------
Common Shares at end of period................................................... 35,902,223 36,056,159
============== ==============
-----------------------------
* On September 15, 2015, the Fund commenced a Share Repurchase Program. The
program will continue until the earlier of (i) the repurchase of 1,802,808
common shares, or (ii) six months from implementation of the Fund's Share
Repurchase Program. Since September 15, 2015, the Fund repurchased 153,936
of its shares at a weighted-average discount of 14.45% from net asset
value per share. The Fund expects to continue to repurchase its
outstanding shares until the earlier of (i) the repurchase of an
additional 1,648,872 common shares (for an aggregate of 1,802,808), or
(ii) March 15, 2016.
Page 18 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations $ (33,996,424)
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by operating activities:
Purchases of investments.................................................... (474,810,860)
Borrowed investments sold short............................................. 24,619,479
Sales, maturities and paydowns of investments............................... 587,283,456
Borrowed investments purchased.............................................. (123,984,904)
Net amortization/accretion of premiums/discounts on investments............. 217,120
Net realized gain/loss on investments....................................... 19,755,702
Net realized gain/loss on investments sold short............................ 1,193,010
Net change in unrealized appreciation/depreciation on forward
foreign currency contracts............................................... 1,707,705
Net change in unrealized appreciation/depreciation on investments sold
short.................................................................... (705,568)
Net change in unrealized appreciation/depreciation on investments........... 53,197,459
Net increase in restricted cash............................................. (602,666)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in due from broker................................................. 366,805
Decrease in interest receivable............................................. 3,395,020
Decrease in dividends receivable............................................ 56,757
Decrease in variation margin on futures receivable.......................... 11,250
Decrease in prepaid expenses................................................ 1,351
Decrease in interest payable on investments sold short...................... (148,478)
Decrease in investment advisory fees payable................................ (66,355)
Decrease in legal fees payable.............................................. (10,957)
Decrease in printing fees payable........................................... (298)
Increase in administrative fees payable..................................... 70,124
Decrease in custodian fees payable.......................................... (6,211)
Decrease in transfer agent fees payable..................................... (2,571)
Decrease in Trustees' fees and expenses payable............................. (633)
Increase in variation margin on swaps payable............................... 16,169
Increase in other liabilities payable....................................... 433
--------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................ $ 57,555,915
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares................................................. (1,938,910)
Distributions to Common Shareholders from net investment income............. (45,376,676)
Net proceeds from borrowing................................................. (10,040,544)
--------------
CASH USED IN FINANCING ACTIVITIES................................................ (57,356,130)
--------------
Increase in cash and foreign currency (a)........................................ 199,785
Cash and foreign currency at beginning of period................................. 218,662
--------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD....................................... $ 418,447
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................ $ 3,087,098
==============
-------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $66,526.
See Notes to Financial Statements Page 19
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
2015 2014 2013 2012 2011
-------- -------- -------- -------- --------
Net asset value, beginning of period......... $ 19.47 $ 19.63 $ 19.05 $ 17.82 $ 19.57
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................. 1.11 1.31 1.35 1.41 1.48
Net realized and unrealized gain (loss)...... (2.05) (0.15) 0.64 1.42 (1.72)
-------- -------- -------- -------- --------
Total from investment operations............. (0.94) 1.16 1.99 2.83 (0.24)
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................ (1.26) (1.32) (1.33) (1.44) (1.47)
Net realized gain............................ -- -- -- (0.16) --
Return of capital............................ -- -- (0.08) -- --
-------- -------- -------- -------- --------
Total from distributions to
Common Shareholders....................... (1.26) (1.32) (1.41) (1.60) (1.47)
-------- -------- -------- -------- --------
Capital share repurchases................... 0.01 -- -- -- --
-------- -------- -------- -------- --------
Capital charge resulting from issuance of
Common Shares related to over allotment... -- -- -- -- (0.04)
-------- -------- -------- -------- --------
Net asset value, end of period............... $ 17.28 $ 19.47 $ 19.63 $ 19.05 $ 17.82
======== ======== ======== ======== ========
Market value, end of period.................. $ 14.96 $ 17.19 $ 17.62 $ 18.78 $ 16.63
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (a).... (3.89)% 6.86% 11.32% 17.09% (1.27)%
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (a)....... (5.76)% 5.12% 1.36% 23.69% (9.89)%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)......... $620,309 $701,955 $707,807 $686,715 $642,414
Ratio of total expenses to average net 1.66% 1.75% 1.72% 1.88% 2.09%
assets....................................
Ratio of total expenses to average net
assets excluding interest expense......... 1.21% 1.26% 1.27% 1.32% 1.29%
Ratio of net investment income (loss) to
average net assets........................ 6.05% 6.59% 6.93% 7.83% 7.78%
Portfolio turnover rate...................... 26% 28% 28% 24% 18%
-------------------
(a) 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.
Page 20 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015
1. ORGANIZATION
First Trust High Income Long/Short Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on June 18, 2010, and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund trades under the ticker symbol FSD on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to provide current income. The Fund's
secondary objective is capital appreciation. The Fund seeks to achieve its
investment objectives by investing, under normal market conditions, a majority
of its assets in a diversified portfolio of U.S. and foreign (including emerging
markets) high-yield corporate fixed-income securities of varying maturities that
are rated below-investment grade at the time of purchase. For purposes of this
strategy, "corporate fixed-income securities" include corporate bonds,
debentures, notes, commercial paper and other similar types of corporate debt
instruments, including instruments issued by corporations with direct or
indirect government ownership, as well as asset-backed securities, preferred
shares, senior floating-rate loan participations, commitments and assignments
("Senior Loans")1, payment-in-kind securities, zero-coupon bonds, bank
certificates of deposit, fixed time deposits, bankers' acceptances and
derivative instruments that provide the same or similar economic impact as a
physical investment in the above securities. Below-investment grade fixed-income
securities are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal. As part of its investment strategy, the Fund intends to
maintain both long and short positions in securities under normal market
conditions. The Fund will take long positions in securities that MacKay Shields
LLC ("MacKay" or the "Sub-Advisor") believes offer the potential for attractive
returns and that it considers in the aggregate to have the potential to
outperform the Fund's benchmark, the BofA Merrill Lynch US High Yield
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 Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." 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 Fund's NAV per Common
Share is calculated by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service, or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Corporate bonds, notes, U.S. government securities, mortgage-backed
securities, asset-backed securities and other debt securities are valued
on the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Fund's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
-----------------------------
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and
the London Stock Exchange Alternative Investment Market ("AIM")) are
valued at the last sale price on the exchange on which they are
principally traded or, for NASDAQ and AIM securities, the official closing
price. Securities traded on more than one securities exchange are valued
at the last sale price or official closing price, as applicable, at the
close of the securities exchange representing the principal market for
such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Credit default swaps are fair valued using a pricing service or, if the
pricing service does not provide a value, by quotes provided by the
selling dealer or financial institution.
The Senior Loans held in the Fund are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while
having grown substantially since its inception, generally has fewer trades
and less liquidity than the secondary market for other types of
securities. Some Senior Loans have few or no trades, or trade
infrequently, and information regarding a specific Senior Loan may not be
widely available or may be incomplete. Accordingly, determinations of the
market value of Senior Loans may be based on infrequent and dated
information. Because there is less reliable, objective data available,
elements of judgment may play a greater role in valuation of Senior Loans
than for other types of securities. Typically, Senior Loans are fair
valued using information provided by a third-party pricing service. The
third-party pricing service primarily uses over-the-counter pricing from
dealer runs and broker quotes from indicative sheets to value the Senior
Loans.
Exchange-traded futures contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded futures contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
Forward foreign currency contracts are fair valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by an independent pricing service.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes
thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
3) the interest rate conditions in the relevant market and
changes thereto (such as significant changes in interest
rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing
Committee may use last-obtained market-based data to assist it
when valuing portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015
reasonably expect to receive for the security upon its current sale. When fair
value prices are used, generally they will differ from market quotations or
official closing prices on the applicable exchanges. A variety of factors may be
considered in determining the fair value of such securities, including, but not
limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/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 borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) the borrower's/issuer's competitive position within the industry;
13) the borrower's/issuer's ability to access additional liquidity
through public and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets. o
Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates)
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2015, 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.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded using the effective interest method.
Securities purchased on a when-issued, delayed-delivery or forward purchase
commitment basis may have extended settlement periods. The value of the security
so purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At October 31, 2015, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
C. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund did not have any unfunded delayed draw loan
commitments as of October 31, 2015.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015
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
between two parties ("Counterparties") 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 Forward
Foreign Currency Contracts table in the Portfolio of Investments. In the event
of default by the Counterparty, the Fund will provide notice to the Counterparty
of the Fund's intent to convert the currency held by the Fund into the currency
that the Counterparty agreed to exchange with the Fund. If a Counterparty
becomes bankrupt or otherwise fails to perform its obligations due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain
only limited recovery or may obtain no recovery in such circumstances.
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 and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statement of Operations.
F. FUTURES CONTRACTS
The Fund purchases or sells (i.e., is long or short) futures contracts to hedge
against changes in interest rates (interest rate risk). Futures contracts are
agreements between the Fund and a counterparty to buy or sell a specific
quantity of an underlying instrument at a specified price and at a specified
date. Depending on the terms of the contract, futures contracts are settled
either through physical delivery of the underlying instrument on the settlement
date or by payment of a cash settlement amount on the settlement date. Open
futures contracts can also be closed out prior to settlement by entering into an
offsetting transaction in a matching futures contract. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue to be required
to maintain margin deposits on the futures contract. When the contract is closed
or expires, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed or expired. This gain or loss is included in "Net realized
gain (loss) on futures" on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures contacts
are marked to market daily with the change in value recognized as a component of
"Net change in unrealized appreciation (depreciation) on futures" on the
Statement of Operations. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin
and are included in "Variation margin payable or receivable" on the Statement of
Assets and Liabilities.
If market conditions change unexpectedly, the Fund may not achieve the
anticipated benefits of the futures contracts and may realize a loss. The use of
futures contracts involves the risk of imperfect correlation in movements in the
price of the futures contracts, interest rates and the underlying instruments.
The Fund did not hold any futures contracts as of October 31, 2015.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015
G. SHORT SALES
Short sales are utilized for investment and risk management purposes and are
transactions in which securities or other instruments (such as options,
forwards, futures or other derivative contracts) are sold that are not currently
owned in the Fund's portfolio. When the Fund engages in a short sale, the Fund
must borrow the security sold short and deliver the security 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 sold short 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; which is effected by the Fund purchasing the
security sold short and delivering the security to the lender. 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 that it
may be unable to reacquire a security to terminate a short position except at a
price substantially in excess of the last quoted price. Also, there is the risk
that the counterparty to a short sale may fail to honor its contractual terms,
causing a loss to the Fund.
The Fund has established an account with Pershing, LLC ("Pershing") for the
purpose of purchasing or borrowing securities on margin. At October 31, 2015,
the Fund had $578,615 in borrowings associated with investments sold short and
are shown in "Borrowings" on the Statement of Assets and Liabilities and
$59,214,480 of investments sold short and are shown in "Investments sold short,
at value" on the Statement of Assets and Liabilities. Interest is charged on
these balances at a rate equal to the Federal Funds rate plus 75 basis points
and is charged on payable credit margin balances at a rate equal to the Federal
Funds rate less 40 basis points. At October 31, 2015, the Fund had a debit
margin balance with an interest rate of 0.80%. For the year ended October 31,
2015, margin interest expense was $1,171,483, as shown on the Statement of
Operations. For the year ended October 31, 2015, the average margin balance and
interest rate were $132,614,048 and 0.87%, respectively.
H. CREDIT DEFAULT SWAPS
The Fund may enter into credit default swap contracts ("CDS") for investment
purposes or to manage credit risk. A CDS is an agreement between two parties
("Counterparties") to exchange the credit risk of an issuer. Swap agreements may
be privately negotiated in the OTC market as a bilateral contract or centrally
cleared.
A buyer of a CDS is said to buy protection by paying a fixed payment over the
life of the agreement and in some situations an upfront payment to the seller of
the CDS. If a defined credit event occurs (such as payment default or
bankruptcy), the Fund as a protection buyer would cease paying its fixed
payment, the Fund would deliver eligible bonds issued by the reference entity to
the seller, and the seller would pay the full notional value, or the "par
value," of the referenced obligation to the Fund. A seller of a CDS is said to
sell protection and thus would receive a fixed payment over the life of the
agreement and an upfront payment, if applicable. If a credit event occurs, the
Fund as a protection seller would cease to receive the fixed payment stream, the
Fund would pay the buyer "par value" or the full notional value of the
referenced obligation, and the Fund would receive the eligible bonds issued by
the reference entity. In turn, these bonds may be sold in order to realize a
recovery value. Alternatively, the seller of the CDS and its Counterparty may
agree to net the notional amount and the market value of the bonds and make a
cash payment equal to the difference to the buyer of protection. If no credit
event occurs, the Fund receives the fixed payment over the life of the
agreement. As the seller, the Fund would effectively add leverage to its
portfolio because, in addition to its total net assets, the Fund would be
subject to investment exposure on the notional amount of the CDS. In connection
with these agreements, cash and securities may be identified as collateral in
accordance with the terms of the respective swap agreements to provide assets of
value and recourse in the event of default under the swap agreement or
bankruptcy/insolvency of a party to the swap agreement. In the event of a
default by the Counterparty, the Fund will seek withdrawal of this collateral
and may incur certain costs exercising its right with respect to the collateral.
If a Counterparty becomes bankrupt or otherwise fails to perform its obligations
due to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization proceeding. The
Fund may obtain only limited recovery or may obtain no recovery in such
circumstances.
Upon entering into a centrally cleared swap, the Fund is required to deposit
initial margin with the broker in the form of cash or securities in an amount
that varies depending on the size and risk profile of the particular swap. Cash
deposited is segregated and included in "restricted cash" on the Statement of
Assets and Liabilities. The daily change in valuation of centrally cleared swaps
is included in "variation margin on swaps payable" in the Statement of Assets
and Liabilities. Payments received from (paid to) the Counterparty, including at
termination, are recorded as "net realized gain (loss) on swap contracts" on the
Statement of Operations.
Credit default swap contracts are marked to market daily based upon quotations
from brokers, market makers or an independent pricing service and the change in
value, if any, is recorded as unrealized appreciation (depreciation). For a
credit default swap contract sold by the Fund, payment of the agreed upon amount
made by the Fund in the event of default of the referenced debt obligation is
recorded as the cost of the reference debt obligation purchased/received.
Restricted cash in the amount of $658,466, as shown on the Statement of Assets
and Liabilities, is associated with collateral at the broker as of October 31,
2015.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015
I. 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
U.S. income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future. Permanent differences
incurred during the fiscal year ended October 31, 2015, resulting in book and
tax accounting differences, have been reclassified at year end to reflect an
increase in accumulated net investment income (loss) by $5,155,738, a decrease
in accumulated net realized gain (loss) on investments by $5,014,672 and a
decrease to paid-in capital of $141,066. Net assets were not affected by this
reclassification.
The tax character of distributions paid during the fiscal years ended 2015 and
October 31, 2014 was as follows:
Distributions paid from: 2015 2014
Ordinary income..................................... $ 45,376,676 $ 47,413,849
Capital gains....................................... -- --
Return of capital................................... -- --
As of October 31, 2015, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income....................... $ 2,881,549
Undistributed capital gains......................... --
------------
Total undistributed earnings........................ 2,881,549
Accumulated capital and other losses................ (38,074,082)
Net unrealized appreciation (depreciation).......... (26,685,270)
------------
Total accumulated earnings (losses)................. (61,877,803)
Other............................................... (332,084)
Paid-in capital..................................... 682,518,541
------------
Net assets.......................................... $620,308,654
============
J. INCOME AND OTHER TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward
eight years and treated as short-term losses. As a transition rule, the Act
requires that post-enactment net capital losses be used before pre-enactment net
capital losses. At October 31, 2015, the Fund had no pre-enactment net capital
losses for federal income tax purposes. At October 31, 2015 the Fund had
post-enactment net capital losses for federal income tax purposes of $38,074,082
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 2012, 2013,
2014 and 2015 remain open to federal and state audit. As of October 31, 2015,
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.
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015
K. EXPENSES
The Fund will pay all expenses directly related to its operations.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
MacKay serves as the Fund's sub-advisor and manages the Fund's portfolio subject
to First Trust's supervision. The Sub-Advisor receives a portfolio management
fee at an annual rate of 0.50% of Managed Assets that is paid by First Trust
from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, The Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended October 31, 2015, were $197,272,412 and
$310,353,870, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the types of derivatives held by the Fund at
October 31, 2015, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
---------------------------------------- ----------------------------------------
DERIVATIVE RISK STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT EXPOSURE LIABILITIES LOCATION FAIR VALUE LIABILITIES LOCATION FAIR VALUE
------------------ ------------------ --------------------------- ---------- --------------------------- ----------
Forward foreign Currency Risk Unrealized appreciation Unrealized depreciation
currency contracts on forward foreign on forward foreign
currency contracts $ 208,222 currency contracts $ --
Credit default Credit Risk Variation margin on -- Variation margin on 16,169
swaps swaps receivable swaps payable
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
October 31, 2015, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
INTEREST RATE RISK
Net realized gain (loss) on futures $ (312,488)
Net change in unrealized appreciation (depreciation) on futures 110,038
CURRENCY RISK
Net realized gain (loss) on forward foreign currency contracts 7,621,724
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts (1,707,705)
CREDIT RISK
Net unrealized gain (loss) on swap contracts (120,123)
Net change in unrealized appreciation (depreciation) on swap
contracts (681,792)
During the year ended October 31, 2015, the notional values of forward foreign
currency contracts opened and closed were $487,895,688 and $616,599,530,
respectively.
During the year ended October 31, 2015, the notional values of futures contracts
opened and closed were $101,028,985 and $140,440,197, respectively.
The average volume of credit default swap contracts was $7,903,846 for the year
ended October 31, 2015.
The Fund does not have the right to offset financial assets and financial
liabilities related to forward foreign currency contracts, futures contracts and
swap contracts on the Statement of Assets and Liabilities.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. SUBSEQUENT EVENT
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 November 19, 2015, the Fund declared a distribution of $0.1000 per share to
Common Shareholders of record on December 3, 2015, payable December 10, 2015.
At a meeting on December 7, 2015, the Board accepted Mr. Bradley's resignation
from his position as the President and Chief Executive Officer of the Fund,
effective December 31, 2015. At the same meeting, the Board elected Mr. Dykas to
serve as the President and Chief Executive Officer and Mr. Donald Swade,
formerly an Assistant Treasurer of the Fund, to serve as the Treasurer, Chief
Financial Officer and Chief Accounting Officer of the Fund.
Page 28
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST HIGH INCOME LONG/SHORT
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust High Income Long/Short Fund (the "Fund"), including the portfolio of
investments, as of October 31, 2015, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2015 by correspondence with the Fund's
custodian, brokers, and agent banks; when replies were not received from brokers
and agent banks, we performed other auditing procedures. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
First Trust High Income Long/Short Fund as of October 31, 2015, the results of
its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 22, 2015
Page 29
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015 (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 Form N-Qs
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com;
(3) on the SEC's website at http://www.sec.gov; and (4) for review and copying
at the SEC's Public Reference Room ("PRR") in Washington, DC. Information
regarding the operation of the PRR may be obtained by calling (800) SEC-0330.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2015, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 29, 2015, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund, First Trust High Income Long/Short
Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income
Fund, First Trust Intermediate Duration Preferred & Income Fund and First Trust
New Opportunities MLP & Energy Fund was held on April 20, 2015 (the "Annual
Meeting"). At the Annual Meeting, Richard E. Erickson and Thomas R. Kadlec were
elected by the Common Shareholders of the First Trust High Income Long/Short
Fund as Class II Trustees for a three-year term expiring at the Fund's annual
meeting of shareholders in 2018. The number of votes cast in favor of Mr.
Erickson was 31,308,535, the number of votes against was 1,142,882 and the
number of broker non-votes was 3,604,742. The number of votes cast in favor of
Mr. Kadlec was 31,322,678, the number of votes against was 1,128,739 and the
number of broker non-votes was 3,604,742. James A. Bowen, Robert F. Keith and
Niel B. Nielson are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015 (UNAUDITED)
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 positions in the Fund's portfolio in
an attempt to improve performance or reduce overall portfolio risk may not be
successful and may result in greater losses or lower positive returns than if
the Fund held only long positions. It is possible that the Fund's long
securities positions will decline in value at the same time that the value of
its short securities positions increase, thereby increasing potential losses to
the Fund.
By investing the proceeds received from selling securities short, the Fund could
be deemed to be employing a form of leverage, which creates special risks. The
use of leverage may increase the Fund's exposure to long securities positions
and make any change in the Fund's NAV greater than it would be without the use
of leverage. This could result in increased volatility of returns. There is no
guarantee that any leveraging strategy the Fund employs will be successful
during any period in which it is employed.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
Page 32
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015 (UNAUDITED)
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT AND SUB-ADVISORY AGREEMENT
The Board of Trustees of First Trust High Income Long/Short Fund (the "Fund"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub Advisory
Agreement (the "Sub Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and MacKay Shields LLC
(the "Sub-Advisor"), at a meeting held on June 16, 2015. The Board determined
that the continuation of the Agreements is in the best interests of the Fund in
light of the extent and quality of the services provided and such other matters
as the Board considered to be relevant in the exercise of its reasonable
business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 20, 2015 and June 16, 2015, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor (including the relevant personnel
responsible for these services and their experience); the advisory and
sub-advisory fees for the Fund as compared to fees charged to other clients of
the Advisor and the Sub-Advisor and as compared to fees charged to a peer group
of funds selected by Management Practice, Inc. ("MPI"), an independent source
(the "MPI Peer Group"); expenses of the Fund as compared to expense ratios of
the funds in the MPI Peer Group; performance information for the Fund; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. The
Board reviewed initial materials with the Advisor at a special meeting held on
April 20, 2015, at which the Independent Trustees and their counsel met
separately to discuss the information provided by the Advisor and the
Sub-Advisor. Following the April meeting, independent legal counsel on behalf of
the Independent Trustees requested certain clarifications and supplements to the
materials provided, and those were considered at an executive session of the
Independent Trustees and independent legal counsel held prior to the June 16,
2015 meeting, as well as at the meeting. The Board applied its business judgment
to determine whether the arrangements between the Fund and the Advisor and among
the Fund, the Advisor and the Sub-Advisor are reasonable business arrangements
from the Fund's perspective as well as from the perspective of shareholders. The
Board considered that shareholders chose to invest or remain invested in the
Fund knowing that the Advisor and the Sub-Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
With respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objectives and policies. The Board considered the significant asset
growth of the First Trust Fund Complex and the Advisor's concomitant investment
in infrastructure and personnel dedicated to the First Trust funds. With respect
to the Sub-Advisory Agreement, the Board noted the background and experience of
the Sub-Advisor's portfolio management team. The Board reviewed the materials
provided by the Sub-Advisor and considered the services that the Sub-Advisor
provides to the Fund, including the Sub-Advisor's day-to-day management of the
Fund's investments. In light of the information presented and the considerations
made, the Board concluded that the nature, extent and quality of services
provided to the Fund by the Advisor and the Sub-Advisor under the Agreements
have been and are expected to remain satisfactory and that the Sub-Advisor,
under the oversight of the Advisor, has managed the Fund consistent with its
investment objectives and policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, noting that the Advisor does not
provide advisory services to other funds with investment objectives and policies
similar to the Fund's, but does provide services to certain separately managed
accounts that may have investment objectives and policies similar to the Fund's.
The Board noted that the Advisor charges a lower advisory fee rate to the
separately managed accounts, as well as the Advisor's statement that the nature
of the services provided to the separately managed accounts is not comparable to
those provided to the Fund. The Board considered the sub-advisory fee and how it
relates to the Fund's overall advisory fee structure and noted that the
sub-advisory fee is paid by the Advisor from its advisory fee. The Board also
considered information provided by the Sub-Advisor as to the fees it charges to
other similar clients, noting that the sub-advisory fee rate is generally lower
than the fee rate charged by the Sub-Advisor to other similar clients. In
addition, the Board reviewed data prepared by MPI showing the advisory fee and
expense ratio of the Fund as compared to the advisory fees and expense ratios of
the MPI Peer Group. The Board
Page 33
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015 (UNAUDITED)
discussed with representatives of the Advisor the limitations in creating a
relevant peer group for the Fund, including that (i) the Fund is unique in its
composition, which makes assembling peers with similar strategies and asset mix
difficult; (ii) peer funds may use different amounts and types of leverage with
different costs associated with them or may use no leverage, noting that the
Fund uses non-traditional leverage by shorting bonds and reinvesting the
proceeds; and (iii) most of the peer funds do not employ an advisor/sub-advisor
management structure. The Board took these limitations into account in
considering the peer data. In reviewing the peer data, the Board noted that the
Fund's advisory fee, based on average net assets, was slightly above the median
of the MPI Peer Group.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance and portfolio risk on an ongoing basis. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also reviewed
data prepared by MPI comparing the Fund's performance for periods ended December
31, 2014 to the performance of the MPI Peer Group and to a benchmark index. In
reviewing the Fund's performance as compared to the performance of the MPI Peer
Group, the Board took into account the limitations described above with respect
to creating a relevant peer group for the Fund. The Board also considered data
from MPI on the Fund's annual distribution rate as of December 31, 2014 as
compared to the MPI Peer Group and the Fund's leverage costs versus the leverage
costs of applicable funds in the MPI Peer Group. The Board considered
information provided by the Advisor on the Fund's leverage as well, including
that leverage was accretive to the Fund's total return in 2014. In addition, the
Board compared the Fund's premium/discount over the past eight quarters to the
average and median premium/discount over the same period of a peer group
selected by the Advisor, as well as data on the average premium/discount for
2014 for the funds in the MPI Peer Group, and considered factors that may impact
a fund's premium/discount.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board noted that the Advisor has made and continues to make significant
investments in personnel and infrastructure and considered whether fee levels
reflect any economies of scale for the benefit of shareholders. The Board
determined that due to the Fund's closed-end structure, the potential for
realization of economies of scale as Fund assets grow was not a material factor
to be considered. The Board also considered the costs of the services provided
and profits realized by the Advisor from serving as investment advisor to the
Fund for the twelve months ended December 31, 2014, as well as product-line
profitability data for the same period, as set forth in the materials provided
to the Board. The Board noted the inherent limitations in the profitability
analysis, and concluded that the pre-tax profits estimated to have been realized
by the Advisor in connection with the management of the Fund were not
unreasonable. In addition, the Board considered fall-out benefits described by
the Advisor that may be realized from its relationship with the Fund, including
the Advisor's compensation for fund reporting services pursuant to a separate
Fund Reporting Services Agreement.
The Board noted the Sub-Advisor's expenses in providing investment services to
the Fund and considered the Sub-Advisor's statement that it will not experience
significant economies of scale based on the current level of assets of the Fund
and the level of other assets under the management of the portfolio management
team. The Board considered that the sub advisory fee rate was negotiated at
arm's length between the Advisor and the Sub-Advisor, an unaffiliated third
party. The Board also considered data provided by the Sub-Advisor as to the
profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board noted
the inherent limitations in the profitability analysis and concluded that the
profitability analysis for the Advisor was more relevant, although the estimated
profitability of the Sub-Advisory Agreement appeared to be not unreasonable in
light of the services provided to the Fund. The Board considered fall-out
benefits that may be realized by the Sub-Advisor from its relationship with the
Fund, noting that the Sub-Advisor did not identify any material fall-out
benefits.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 34
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE (2) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three Year Term Physician; President, Wheaton Orthopedics; 117 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real
120 East Liberty Drive, o Since Fund Estate Limited Partnership; Member,
Suite 400 Inception Sportsmed LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three Year Term President (March 2010 to Present), Senior 117 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund (May 2007 to March 2010), Inc., ADM
Suite 400 Inception ADM Investor Services, Inc. Investor Services
Wheaton, IL 60187 (Futures Commission Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three Year Term President (2003 to Present), Hibs 117 Director of
c/o First Trust Advisors L.P. Enterprises (Financial and Management Trust Company
120 East Liberty Drive, o Since Fund Consulting) of Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three Year Term Managing Director and Chief Operating 117 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June
2012),
Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee and o Three Year Term Chief Executive Officer (December 2010 117 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund 2010), First Trust Advisors L.P. and First
Suite 400 Inception Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as CEO of First Trust Advisors L.P., investment advisor of the Fund.
(2) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2017 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2018 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2016 annual meeting of shareholders.
Page 35
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 East Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief
Wheaton, IL 60187 Financial Officer, BondWave LLC (Software
D.O.B.: 11/57 Development Company/Investment Advisor) and
Stonebridge Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present),
120 East Liberty Drive, Officer and Chief Senior Vice President (April 2007 to
Suite 400 Accounting Officer o Since January 2012 Present), First Trust Advisors L.P.
Wheaton, IL 60187 and First Trust Portfolios L.P.
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., and
120 East Liberty Drive, Legal Officer First Trust Portfolios L.P. and Secretary and
Suite 400 o Since Fund Inception General Counsel BondWave LLC (Software
Wheaton, IL 60187 Development Company/Investment Advisor); Secretary
D.O.B.: 05/60 of Stonebridge Advisors LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 East Liberty Drive, Senior Vice President, (September 2005 to
Suite 400 o Since Fund Inception July 2012), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors
120 East Liberty Drive, and Assistant Secretary L.P. and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer Since
D.O.B.: 12/66 January 2011
o Assistant Secretary
since Fund Inception
-------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 36
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PRIVACY POLICY
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2015 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship.
We are committed to protecting the security and confidentiality of your personal
information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 37
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
MacKay Shields LLC
1345 Avenue of the Americas
43rd floor
New York, NY 10105
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless
of whether these individuals are employed by the registrant or a third
party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, that relates to one or more of the items set forth in
paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years were
$52,000 for the fiscal year ended October 31, 2014 and $52,000 for the fiscal
year ended October 31, 2015.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years for assurance and related services by the principal
accountant that are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph (a) of
this Item were $0 for the fiscal year ended October 31, 2014 and $0 for the
fiscal year ended October 31, 2015.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0 for the fiscal year ended October 31, 2014 and $0 for
the fiscal year ended October 31, 2015.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning were $5,200 for the fiscal year
ended October 31, 2014 and $5,200 for the fiscal year ended October 31, 2015.
The fees for 2014 and 2015 were for tax return preparation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $0 for the
fiscal year ended October 31, 2014 and $0 for the fiscal year ended October 31,
2015.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the Registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for the fiscal year ended October 31, 2014 and
$0 for the fiscal year ended October 31, 2015.
All Other Fees (Investment Adviser) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal
accountant to the Registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for the fiscal year ended October 31, 2014 and
$0 for the fiscal year ended October 31, 2015.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the Registrant by its
independent auditors. The Chairman of the Committee authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the Registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the Registrant, if the engagement relates
directly to the operations and financial reporting of the Registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the Registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
Registrant that were not pre-approved pursuant to the de minimis exception, the
Committee will consider whether the provision of such non-audit services is
compatible with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the Registrant and the Registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the pre-approval
exceptions included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for the Registrant's
fiscal year ended October 31, 2014 were $5,200 for the Registrant and $43,500
for the Registrant's investment adviser and for the Registrant's fiscal year
ended October 31, 2015 were $5,200 for the Registrant and $12,500 for the
Registrant's investment adviser.
(h) The Registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) (1) Arcelor Mittal
(2) None
(3) Cusip (03938LAS3)
(4) 3,655,000
(5) 5/14/15;5/18/15; 6/24/15;8/25/15; 8/26/15
(6) Arcelor Mittal-Cusip (03938LAX2) 2,648,000; and
Cusip (03938LAP9) 8,362,000
(7) The Sudan Accountability and Divestment Act of
2007 (50 U.S.C. 1701)
(1) Arcelor Mittal
(2) None
(3) Cusip (03938LAP9)
(4) 2,000,000
(5) 7/16/15
(6) Arcelor Mittal-Cusip (03938LAX2) 2,648,000; and
Cusip (03938LAP9) 8,362,000
(7) The Sudan Accountability and Divestment Act of
2007 (50 U.S.C. 1701)
(1) Gazprom (GAZ Capital SA)
(2) None
(3) ISIN (XS1038646078)
(4) 1,650,000
(5) 8/25/15
(6) None
(7) The Sudan Accountability and Divestment Act of
2007 (50 U.S.C. 1701)
(1) Gazprom (GAZ Capital SA)
(2) None
(3) Cusip (368266AA0)
(4) 1,500,000
(5) 8/26/15
(6) None
(7) The Sudan Accountability and Divestment Act of
2007 (50 U.S.C. 1701)
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
INFORMATION PROVIDED AS OF DECEMBER 15, 2015
MacKay Shields LLC ("MacKay Shields" or the "Sub-Advisor") is a registered
investment adviser founded in 1938, and serves as the sub-advisor to the
Registrant. As of October 31, 2015, MacKay Shields had approximately $91.8
billion in assets under management.
DAN ROBERTS, PHD, EXECUTIVE MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER AND HEAD
AND CHIEF INVESTMENT OFFICER OF GLOBAL FIXED INCOME DIVISION
Mr. Roberts has 39 years of investment experience. During Mr. Roberts' career,
he has served as a Chief Investment Officer/Managing Director and head of
several fixed-income groups. His regulatory and government experience includes
two years at the U.S. Securities and Exchange Commission, serving at The White
House with the President's Council of Economic Advisors and as Executive
Director (Chief of Staff) of the U.S. Congress Joint Economic Committee. Mr.
Roberts holds a BBA and a PhD from University of Iowa. In October 2004, Mr.
Roberts joined MacKay Shields when the firm acquired the fixed income assets of
Pareto Partners.
LOUIS N. COHEN, CFA, SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
Mr. Cohen has 38 years of investment experience. During his career, Mr. Cohen
has served as a Core/Core Plus Portfolio Manager and was Co-Chairman of a Credit
Committee. He has extensive credit experience, beginning in a Commercial Banking
Department. He began to specialize in fixed-income in 1981, and became a
fixed-income credit manager at several major firms. With experience in the
fixed-income markets since 1978, Mr. Cohen is a past President of the Capital
Markets Credit Analyst Society and a member of the New York Society of Security
Analysts. Mr. Cohen received his BA and MBA from New York University. He also
holds the Chartered Financial Analyst designation. Mr. Cohen joined MacKay
Shields in October 2004 when the firm acquired the fixed income assets of Pareto
Partners.
MICHAEL KIMBLE, CFA, SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
Mr. Kimble has 32 years of investment experience. During Mr. Kimble's career, he
has served as a fixed-income credit analyst, a high-yield bond analyst and a
portfolio manager. He has also been Co-Chairman of a Credit Committee. With
fixed-income experience since 1984, Mr. Kimble is a member of the Capital
Markets Credit Analyst Society, the New York Society of Security Analysts and
the New York and Louisiana State Bar Associations. Mr. Kimble received a BA from
Columbia University, an MBA from New York University and a JD from Fordham
School of Law. He also holds the Chartered Financial Analyst designation. Mr.
Kimble joined MacKay Shields in October 2004 when the firm acquired the fixed
income assets of Pareto Partners.
TAYLOR WAGENSEIL, SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
Mr. Wagenseil has 37 years of investment experience. During his career, Mr.
Wagenseil has served as a specialist in troubled loan workouts and recoveries.
He headed a High Yield Commercial Paper Research department and has been a
managing director of a Financial Restructuring Group. He was a Senior Portfolio
Manager for High Yield and High Yield Arbitrage Portfolios. His public service
and military experience includes the U.S. Navy (Lieutenant) during the Vietnam
War and five years as the Commissioner, Department of Elderly Affairs for the
City of Boston. Mr. Wagenseil received a BA from Dartmouth College and an MBA
(finance) from the Harvard Business School. Mr. Wagenseil joined MacKay Shields
in October 2004 after the firm acquired the fixed income assets of Pareto
Partners.
MacKay Shields utilizes a team approach in all aspects of investment management
and decision-making. No one portfolio manager is singularly responsible for any
particular account. Investment decisions are carried across all portfolios with
similar guidelines. While portfolio managers conduct their own industry-specific
research, all information is continually shared with the other members of the
investment team. Additionally, portfolio managers will cross-train to gain
familiarity with other industries.
The portfolio managers within the Global Fixed Income Team generally come to a
consensus on the appropriateness of a security for inclusion or removal from the
portfolio. On the rare occasions this is not possible, Dan Roberts, as Head of
the Team, is ultimately responsible and has final decision-making power.
(a)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
INFORMATION PROVIDED AS OF OCTOBER 31, 2015.
# of Accounts
Managed for Total Assets for
Total # of which Advisory which Advisory
Name of Portfolio Accounts Fee is Based Fee is Based on
Manager or Team Member* Type of Accounts* Managed Total Assets on Performance Performance
----------------------- ----------------- ------- ------------ -------------- -----------
1. Dan Roberts Registered Investment 11 $7,004,000,000 0 $0
Companies:
Other Pooled Investment 38 $17,797,000,000 7 $1,700,000,000
Vehicles:
Other Accounts: 138 $25,600,000,000 4 $1,700,000,000
2. Louis Cohen Registered Investment 10 $6,817,000,000 0 $0
Companies:
Other Pooled Investment 38 $17,797,000,000 7 $1,700,000,000
Vehicles:
Other Accounts: 138 $25,600,000,000 4 $1,700,000,000
3. Michael Kimble Registered Investment 7 $4,998,000,000 0 $0
Companies:
Other Pooled Investment 38 $17,797,000,000 7 $1,700,000,000
Vehicles:
Other Accounts: 138 $25,600,000,000 4 $1,700,000,000
4. Taylor Wagenseil Registered Investment 7 $4,818,000,000 0 $0
Companies:
Other Pooled Investment 38 $17,797,000,000 7 $1,700,000,000
Vehicles:
Other Accounts: 138 $25,600,000,000 4 $1,700,000,000
* The Global Fixed Income Team utilizes a team approach in all aspects of
investment management and decision-making. No one portfolio manager is
singularly responsible for any particular account. Information provided
are assets and number of accounts managed by the team.
POTENTIAL CONFLICTS OF INTERESTS
Most of our clients pay us an investment advisory or management fee that is
based on the amount of assets in the clients' accounts. These are commonly
referred to as "asset-based fees". Some of our clients pay us fees calculated as
a percentage of returns, or as a percentage of the increase in net asset value.
These fees may be tied to a client-directed benchmark and may be subject to a
loss carry forward. They are commonly referred to as "performance-based fees".
The Global Fixed Income team that manages the Fund provides portfolio management
services for other MacKay Shields accounts, including: mutual funds;
institutional managed accounts; private commingled funds; and hedge funds.
Managing accounts that have a performance-based fee at the same time that we
manage accounts that only have an asset-based fee is commonly referred to as
"side-by-side management." Except for distinctions based on investment
objectives, investment guidelines and cash flow, all accounts are treated the
same, regardless of fee structure. This creates a conflict of interest by giving
us an incentive to favor those accounts for which we receive a performance-based
fee because we will receive a higher fee if their performance exceeds the
applicable benchmark. Consistent with its policy not to favor any one client
over another, MacKay Shields has the following procedures, among others: (1)
trade allocation procedures that provide for the pro rata allocation of
investment opportunities among clients in a particular strategy, with certain
exceptions; (2) a general prohibition against same day opposite direction
transactions; and (3) short sale trade procedures requiring pre-approval of
short sales and restricting certain short sales.
The Trade Allocation Policy provides that: (1) no client will be favored over
any other client; (2) trades should be pre-allocated, subject to certain
exceptions, and allocations should be in writing; and (3) MacKay Shields'
Legal/Compliance Department conducts periodic reviews of client account
performance as a function of allocation to assure that no account or group of
accounts is being preferred systematically in the allocation process. The policy
contains a procedure for limited offerings, which provides that in a limited
offering, the allocations may be pro-rata based on size of the order or account
size and within a strategy pro-rata based on account size. Under this policy,
when determining which accounts will participate in a trade, the portfolio
managers will consider various objective criteria which may include but are not
limited to: client cash limitations, actual and anticipated account inflows and
outflows, duration and/or average maturity, account size, deal size, trade lots,
existing exposure to an issuer or industry type, other concentration limits,
specific investment objectives, borrowing capacity, and other practical
limitations. If the aggregated order is filled in its entirety, it will be
allocated among clients in accordance with the target allocation. If the order
is partially filled, it will be allocated pro rata based on the allocation
methodology recorded in the trade order management system.
Our Valuation Procedures provide, among other requirements, that any fair
valuation of a security recommended by a portfolio manager be approved by at
least two disinterested portfolio managers from one or more other distinct
portfolio management areas. In addition, on a monthly basis, a Fair Valuation
Committee meeting convenes to review all securities that are being fair valued.
The Firm's cross trading policy provides that all cross trades must be
pre-cleared by the Legal/Compliance Department and requires, among other things,
that the transaction (i) be a purchase or sale for no consideration other than
cash payments against prompt delivery of the security, (ii) be effected at the
independent market price of the security determined in accordance with
applicable methodology; and (iii) be effected with no brokerage transaction.
Special considerations pertain to situations where one investment strategy may
conflict with another. It is the policy of MacKay that no one client be favored
over another. For example, one strategy may focus on selling certain securities
short, with the expectation of profit in the event that the prices for such
securities decrease, while another strategy may involve acquiring securities
"long". As stated above, it is the policy of MacKay that no one client be
favored over another. To effect that policy in cases where investment strategies
compete or conflict with each other, MacKay has adopted the following
procedures:
a) Each portfolio manager will determine, separately from any other managers the
securities to purchase and sell on any given day with respect to the clients and
strategies for which they are responsible.
b) In the event that the same strategy purchases or sells the same security on
the same trading day, all accounts participating in the transaction for that
security shall be average-priced (same-day trades executed on behalf of
different strategies may not be average-priced), provided, however, that short
sales for a particular security shall not be average-priced with purchases of
the same security.
c) If a portfolio manager enters a buy or sell order for the same security for
more than one client or strategy, and the orders are worked concurrently and not
completely filled, each applicable client or strategy will be allotted
securities pro-rata, in proportion to the amounts specified in the portfolio
manager's orders as described above.
(a)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF OCTOBER 31, 2015.
Fixed compensation is primarily paid through a portfolio manager's annual
salary, which is paid in monthly installments in arrears. Salaries are set by
reference to a range of factors, taking account of seniority and
responsibilities and the market rate of pay for the relevant position. Annual
salaries are set at competitive levels to attract and maintain the best
professional talent. Variable or incentive compensation, both cash bonus and
deferred awards, are a significant component of total compensation for portfolio
managers at MacKay Shields. Incentive compensation received by portfolio
managers is based on both quantitative and qualitative factors. This approach
instills a strong sense of commitment towards the overall success of the firm.
Deferred awards are provided to attract, retain, motivate and reward key
personnel. As such, MacKay Shields maintains a phantom equity plan and awards
vest and pay out after several years. Thus, portfolio managers share in the
results and success of the firm.
MacKay Shields has performance-based fee arrangements with "eligible clients"
(as that term is defined under Rule 205-3 of the Advisers Act). In these cases a
portion of these performance-based fees may be included in the incentive program
described above.
MacKay Shields does not align the portfolio managers' compensation to the
investment performance of specific Funds or of other accounts they manage. The
compensation received by portfolio managers is based on both quantitative and
qualitative factors. The quantitative factors may include: (i) investment
performance; (ii) assets under their management; (iii) revenue and
profitability; and (iv) industry benchmarks. The qualitative factors include,
among others, leadership, adherence to the firm's policies and procedures, and
contribution to the firm's goals and objectives. To the extent that an increase
in the size of a Fund or another account managed by a portfolio manager results
in an increase in profitability, the portfolio manager's compensation may also
increase. There is no difference between the method used in determining
portfolio managers' compensation with respect to a Fund and other accounts they
manage. We do not believe the compensation structure provides an incentive for
an employee who provides services to a Fund to take undue risks in managing the
assets of the Fund.
Variable or incentive compensation, both cash bonus and deferred awards, are a
significant component of total compensation for portfolio managers at MacKay
Shields. Deferred awards are provided to attract, retain, motivate and reward
key personnel. As such, MacKay Shields maintains a phantom equity plan. For
those portfolio managers whose total compensation exceeds a pre-determined
threshold, a portion of their total compensation is paid in plan awards which
vest and pay out after several years. Thus, portfolio managers share in the
business results and success of the firm. The portfolio managers involved in
managing the Fund's investments participate in the phantom equity plan.
Receipt of an award from the phantom equity plan is conditioned upon execution
of an Executive Employment Agreements with MacKay, which include provisions
relating to fixed and variable compensation. The Executive Employment Agreements
are renewable for one year terms and can be terminated on 60 days' prior written
notice. There is also a provision for termination by MacKay for cause, as
defined in the Agreements. The Agreements contain restrictions regarding
non-solicitation of clients and non-hiring of employees following termination of
the portfolio managers' employment. None of the portfolio managers is subject to
a non-compete agreement that could potentially affect the portfolio manager's
ability to manage the Fund.
(a)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF OCTOBER 31, 2015.
Dollar Range of Fund Shares
Name Beneficially Owned
Dan Roberts $0
Taylor Wagenseil $0
Louis Cohen $100,001-$500,000
Michael Kimble $0
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
REGISTRANT PURCHASES OF EQUITY SECURITIES
-----------------------------------------------------------------------------------------------
(a) TOTAL (c) TOTAL NUMBER OF (d) MAXIMUM NUMBER (OR
NUMBER OF (b) AVERAGE SHARES (OR UNITS) APPROXIMATE DOLLAR VALUE
SHARES PRICE PAID PURCHASED AS PART OF OF SHARES (OR UNITS) THAT
(OR UNITS) PER SHARE PUBLICLY ANNOUNCED MAY YET BE PURCHASED UNDER
PERIOD PURCHASED (OR UNIT) PLANS OR PROGRAMS THE PLANS OR PROGRAMS
-----------------------------------------------------------------------------------------------
Month #1
(10/01/2015 -
10/31/2015) 153,936 $14.765 153,936 1,802,808
-----------------------------------------------------------------------------------------------
Total 153,936 $14.765 153,936 1,802,808
-----------------------------------------------------------------------------------------------
On September 15, 2015, the Registrant commenced a share repurchase program. The
program will continue until the earlier of (i) the repurchase of 1,802,808
common shares, or (ii) six months from implementation of the registrant's share
repurchase program. For the reporting period, the Registrant repurchased 153,936
of its shares at a weighted average discount of 14.45% from net asset value per
share. The Registrant expects to continue to repurchase its outstanding shares
until the earlier of (the repurchase of an additional 1,648,872 common shares
(for an aggregate of 1,802,808), or (ii) March 15, 2016.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust High Income Long/Short Fund
----------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 22, 2015
---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 22, 2015
---------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 22, 2015
---------------------
* Print the name and title of each signing officer under his or her signature.