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, 2013
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
First Trust
High Income
Long/Short Fund
(FSD)
Annual Report
For the Year Ended
October 31, 2013
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TABLE OF CONTENTS
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2013
Shareholder Letter........................................................... 1
At A Glance.................................................................. 2
Portfolio Commentary ........................................................ 3
Portfolio of Investments .................................................... 6
Statement of Assets and Liabilities ......................................... 18
Statement of Operations ..................................................... 19
Statements of Changes in Net Assets.......................................... 20
Statement of Cash Flows...................................................... 21
Financial Highlights......................................................... 22
Notes to Financial Statements................................................ 23
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 Shields" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust High Income Long/Short Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund's
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
MacKay Shields are just that: informed opinions. They should not be considered
to be promises or advice. The opinions, like the statistics, cover the period
through the date on the cover of this report. The risks of investing in the Fund
are spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2013
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust High Income Long/Short Fund (the "Fund").
As a shareholder, twice a year you receive a detailed report about your
investment, including portfolio commentary from the Fund's management team, a
performance analysis, and a market and Fund outlook. Additionally, First Trust
Advisors L.P. ("First Trust") compiles the Fund's financial statements for you
to review. These reports are intended to keep you up-to-date on your investment,
and I encourage you to read this document and discuss it with your financial
advisor.
As you are probably aware, the twelve months covered by this report saw both
challenging economic and political issues in the U.S. However, the period was
still positive for the markets. In fact, the S&P 500 Index, as measured on a
total return basis, rose 27.18% during the twelve months ended October 31, 2013.
Of course, past performance can never be an indicator of future performance, but
First Trust believes that staying invested in quality products through up and
down markets and having a long-term horizon can help investors as they work
toward their financial goals.
First Trust continues to offer a variety of products that we believe could fit
many financial plans for investors seeking long-term investment success. Your
advisor can tell you about the other investments First Trust offers that might
fit your financial goals. We encourage you to discuss those goals with your
financial advisor regularly so that he or she can help keep you on track and
help you choose investments that match your goals.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
"AT A GLANCE"
OCTOBER 31, 2013 (UNAUDITED)
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FUND STATISTICS
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Symbol on NYSE FSD
Common Share Price $17.62
Common Share Net Asset Value ("NAV") $19.63
Premium (Discount) to NAV (10.24)%
Net Assets Applicable to Common Shares $707,807,095
Current Monthly Distribution per Common Share (1) $0.1155
Current Annualized Distribution per Common Share $1.3860
Current Distribution Rate on Closing Common Share Price (2) 7.87%
Current Distribution Rate on NAV (2) 7.06%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/12 $18.78 $19.05
18.65 18.97
18.27 18.93
17.91 18.79
17.88 18.97
11/12 17.91 19.13
17.81 19.20
17.82 19.35
18.05 19.43
12/12 17.81 19.33
18.69 19.58
18.66 19.78
18.91 19.82
1/13 19.03 19.88
18.70 19.60
18.82 19.54
18.76 19.60
2/13 18.87 19.61
18.93 19.54
18.87 19.71
18.84 19.77
3/13 18.98 19.73
18.98 19.74
18.85 19.65
19.13 19.76
18.80 19.70
4/13 19.09 19.84
19.16 19.95
19.15 20.04
19.00 20.00
18.78 19.96
5/13 18.19 19.79
17.94 19.52
17.63 19.34
17.34 19.04
6/13 17.56 19.04
16.81 18.97
17.28 19.20
17.43 19.42
7/13 17.50 19.35
17.77 19.23
17.40 19.19
16.95 19.10
17.17 19.02
8/13 17.11 19.02
16.96 18.96
17.01 19.07
17.77 19.29
9/13 17.76 19.20
17.44 19.14
17.45 19.20
17.59 19.43
17.69 19.56
10/13 17.62 19.63
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PERFORMANCE
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Average Annual Total Return
1 Year Ended Inception (9/27/2010)
10/31/2013 to 10/31/2013
FUND PERFORMANCE (3)
NAV 11.32% 9.35%
Market Value 1.36% 4.04%
INDEX PERFORMANCE
Bank of America Merrill Lynch U.S. High Yield Master II
Constrained Index 8.82% 9.62%
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% OF LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS
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Services 16.6%
Basic Industry 12.6
Energy 11.7
Banking 11.6
Insurance 8.7
Automotive 7.6
Capital Goods 6.1
Financial Services 5.3
Telecommunications 5.2
Technology & Electronics 3.7
Healthcare 3.4
Consumer Non-Cyclical 2.4
Utility 1.5
Media 1.5
Asset-Backed Securities 1.4
Collateralized Mortgage Obligations 0.6
Real Estate 0.1
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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 57.6%
Foreign Corporate Bonds and Notes 18.2
Capital Preferred Securities 17.6
Senior Floating-Rate Loan Interests 2.0
Common Stocks 1.7
Asset-Backed Securities 1.4
Mortgage-Backed Securities 0.6
Foreign Sovereign Bonds and Notes 0.5
Warrants 0.4
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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 21.3%
BB 30.5
B 42.0
CCC+ and below 5.7
NR 0.5
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Total 100.0%
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% OF TOTAL
COUNTRY EXPOSURE INVESTMENTS
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United States 75.5%
Luxembourg 5.4
United Kingdom 4.5
Netherlands 3.5
Cayman Islands 1.7
Canada 1.6
France 1.4
Jersey 1.0
Ireland 0.8
Liberia 0.7
Germany 0.6
Spain 0.5
Finland 0.5
Georgia 0.5
Venezuela 0.4
Brazil 0.4
Australia 0.4
Bermuda 0.4
Portugal 0.2
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Total 100.0%
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(1) Most recent distribution paid or declared through 10/31/2013. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 10/31/2013. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) The credit quality and ratings information presented above reflect the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings, or a comparably rated NRSRO. For situations in which
a security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the credit
worthiness of the issuers of the underlying securities in the Fund, and
not to the Fund or its shares. Credit ratings are subject to change.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013
SUB-ADVISOR
MacKay Shields LLC ("McKay Shields" or the "Sub-Advisor") is a registered
investment adviser founded in 1938, and is Sub-Advisor to First Trust High
Income Long/Short Fund (the "Fund"). The Fund trades under the ticker symbol FSD
on the New York Stock Exchange. As of October 31, 2013, MacKay Shields had
approximately $79.5 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
COMMENTARY
FIRST TRUST HIGH INCOME LONG/SHORT FUND
The Fund's primary investment objective is to provide current income. As a
secondary objective, the Fund seeks capital appreciation. The Fund is designed
to give investors a portfolio for varying market cycles and economic conditions.
In an expanding economy, the strategy of buying U.S. and foreign (including
emerging markets) high-yield corporate securities that are rated below
investment-grade is designed to generate monthly income and capital appreciation
(total return over the long term). However, if the market takes a downturn, the
"short" strategy of having sold borrowed securities that the Global Fixed Income
Team ("Investment Team") of MacKay Shields believes could decline in price, may
help lessen the impact of a significant net asset value decline.
MARKET RECAP
This report covers the Fund for the twelve-month period ending October 31, 2013.
Risk assets were nicely rewarded during the past year due to the overall
positive tone in the markets and the macroeconomic environment. The S&P 500
Index gained 27.18%, and high yield corporate securities, as measured by the
Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index,
gained 8.82%. Alternatively, the 10-year Treasury fell 4.64%, while its yield
increased 86 basis points.
Reflecting back to the start of the reporting period, market participants were
focused on the impending U.S. "fiscal cliff." These negotiations dominated
headlines in November and December 2012, and markets clearly expected that a
resolution would eventually unfold. As the deadline neared, the markets became
somewhat more volatile, but at the final hour, predictably, a near-term solution
was agreed to and finalized on January 1. Investor risk appetites were
reinvigorated in the first quarter following this eleventh-hour resolution. The
agreement to moderately tighten fiscal policy removed a significant market
overhang whereby investors initially feared that widespread tax hikes would
stifle new investments, consumer spending and growth opportunities.
As the year progressed, attention turned to the Federal Reserve (the "Fed") and
concerns over whether or not the Fed would begin to taper or maintain its
accommodative monetary policy. A sell-off across the capital markets intensified
in May and June following hawkish statements by Fed Chairman Ben Bernanke
regarding the possibility of tapering the size and scope of the central bank's
asset purchase program (quantitative easing). Bernanke was purposeful in his
initial rhetoric to remind the markets that the Fed's "backstop" was not
indefinite, although it would be very much data-dependent before the Fed
considered its next move. During the meeting in June, Bernanke actually left
open the possibility of expanding the Fed's asset program if economic conditions
warranted such a move and clarified that any tapering would exclude
mortgage-backed securities. Moreover, Bernanke reassured the markets that
short-term rates would remain highly accommodative for a considerable time after
the asset purchase program ends. Risky assets and safe haven securities (such as
U.S. Treasuries) sold off indiscriminately in June as the technicals in the
market deteriorated quickly.
In the third quarter, the Fed elected to maintain, rather than taper, the pace
of its asset purchase program. The markets were clearly expecting a pull-back in
stimulus, but Fed Chairman Ben Bernanke cited slow growth and the rapid rise in
U.S. Treasury rates over the previous few months as contributing factors to the
committee's decision. Our belief is that Bernanke never committed to tapering:
rather, he simply tried to convey that tapering was a possibility should
economic conditions
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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warrant such a move. We suspect Bernanke was surprised by the reaction in the
U.S. Treasury market when he first hinted at tapering in May. To his credit,
Bernanke has continued to reiterate, as he has all along, the importance of data
dependency before the Fed's next move. Further, we believe there is no doubt now
that the Fed Chairman appreciates how powerful his rhetoric is as a catalyst for
influencing policy, even if it is impossible to predict, with any degree of
precision, when and how the Fed may act. Supported by recent payroll data that
disappointed expectations, surveys now suggest that consensus is building around
a move next year, most likely in March.
Looking at the three centers of risk that we monitor closely, U.S., Europe and
China, we believe the "left tail" (most extreme) risks in these areas are
greatly reduced from one year ago. The U.S. macro picture maintained its slow
growth posture during the last year. Consumer spending, employment, residential
investment and capital expenditures expanded at a moderate rate. The residential
housing market was a bright spot in the recovery with both new and existing
sales activity fairly robust. Inflation remained in check with core CPI well
below the Fed's stated target of 2.5%.
Although Europe continued to face a number of challenges, we became encouraged
that the pace of contraction on the continent subsided during the reporting
period. In fact, the peripheral countries such as Italy and Spain contributed to
business activity in the region, supporting our belief that the European Union
will remain intact. In Germany, Chancellor Angela Merkel won a third term in the
general election, which we view as an important outcome to the longer-term
stability and preservation of the European Union.
In China, manufacturing activity slipped earlier in the year and the government
looked to enforce property curbs to reign in some of the growth. However,
China's manufacturing sector showed modest improvement during the last couple of
months following a stretch of slower growth and tighter credit conditions. The
underlying trend, as evidenced by solid readings on new orders, remains
positive. We believe the Chinese government is sufficiently alert to issues of
growth and credit creation that economic conditions there are unlikely to
deteriorate much further.
PERFORMANCE SUMMARY
The Fund had a strong year, with strong outperformance versus its benchmark for
the twelve-month period ended October 31, 2013. The Fund returned a net asset
value ("NAV") total return1 of 11.32% compared with the Fund's benchmark, the
Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index2,
which gained 8.82%. For the period, the Fund traded from a discount to NAV of
1.42% to a discount to NAV of 10.24%, resulting in a market value total return
of 1.36%.
Throughout the reporting period, we maintained a portfolio beta above the
market, which benefitted the Fund during the year. The principal industries we
favored from the long side included financials, gaming, homebuilders, building
materials, and coal and steel companies. The top-performing names held in the
Fund included Ford, GM, ABN Amro, Deutsche Post Finance and ING Groep. The
laggards during the period included some of the non-domestic credits such as
Brazil-based energy exploration and production company OGX, and Mexican home
builders Urbi Desarrollos Urbanos, Desarrolladora Homex, and Empresas ICA.
On the short side, i.e. the short positions in the portfolio, the Fund was a net
seller of U.S. Treasury bonds, both in the cash market and futures market. These
positions were used to 1) reduce the portfolio's exposure to interest rate risk,
and 2) provide financing for additional long positions that would otherwise be
unavailable on an unlevered basis. The impact of the Fund's leverage was a
positive contributor to performance over the last year.
As we have seen during the past year, lower-quality CCC rated bonds outperformed
higher-quality BB bonds, while smaller bond issues (less than $300 million)
outperformed larger issues ($1 billion or more), pointing to the continued
impact of liquidity dynamics. According to data compiled by Credit Suisse, new
issue volume was nearly $85 billion during the third quarter, bringing the
year-to-date issuance to $311 billion (the all-time calendar year high was $368
billion in 2012). Nearly 60% of the proceeds this year have been used for
refinancing purposes. Following $10.1 billion in high-yield market fund outflows
during the second quarter, momentum reversed course with $10.6 billion in
inflows during the third quarter. The high-yield asset class is back in positive
territory in this regard, with a net gain of $1.5 billion in fund flows in
20133.
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1 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 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.
2 The Bank of America Merrill Lynch U.S. High Yield Master II Constrained
Index tracks the performance of U.S. dollar denominated below investment
grade corporate debt publicly issued in the U.S. domestic market but caps
issuer exposure at 2%. Indexes are unmanaged and an investor cannot invest
directly in an index.
3 Data in this paragraph is sourced from Credit Suisse.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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OUTLOOK
We believe the U.S. will continue to make progress on the path to sustainable
growth as fiscal conditions ease and monetary policy remains highly
accommodative. We maintain a favorable outlook for high-yield and believe there
is room for further spread tightening. Corporate fundamentals remain solid, as
balance sheets generally remain healthy and companies have refinanced near-term
maturities at favorable rates, although leverage has begun to tick up in recent
quarters. Technicals, which had been a headwind during the early summer months,
have become more supportive.
We continue to focus on companies with strong liquidity profiles, stable to
improving credit profiles and positive free cash flow. The Fund's overweights in
higher beta, more economically-sensitive sectors, such as autos and gaming, are
based on our view of stable, positive economic growth. We also favor certain
exploration and production companies in the oil and gas sector with high asset
coverage ratios. We maintain a long-term strategic view that rates will rise in
the front end of the curve as the Fed normalizes its highly accommodative
monetary policy. While spreads should provide some cushion against rising rates,
we expect to maintain a short position in Treasury bonds and futures to further
protect the portfolio from a potential rise in rates in an efficient manner.
Page 5
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2013
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------------------- --------- ----------- --------------
CORPORATE BONDS AND NOTES - 70.8%
AUTOMOTIVE - 4.3%
$ 334,000 Chrysler Group LLC/Chrysler Group Co-Issuer, Inc. ................. 8.00% 06/15/19 $ 371,575
4,367,000 Chrysler Group LLC/Chrysler Group Co-Issuer, Inc. (a).............. 8.25% 06/15/21 4,962,004
2,376,000 Ford Motor Co. (a)................................................. 9.22% 09/15/21 3,125,747
553,000 Ford Motor Co. (a)................................................. 8.90% 01/15/32 716,513
3,000,000 Ford Motor Co. (a)................................................. 7.75% 06/15/43 3,630,831
2,480,000 Ford Motor Co. (a)................................................. 9.98% 02/15/47 3,474,438
1,400,000 Goodyear Tire & Rubber (The) Co. .................................. 6.50% 03/01/21 1,487,500
5,396,000 Goodyear Tire & Rubber (The) Co. (a)............................... 7.00% 05/15/22 5,827,680
21,432 Motors Liquidation Co. GUC Trust (Transferable) (b)................ N/A N/A 777,981
4,872,000 Navistar International Corp. (a)................................... 8.25% 11/01/21 4,999,890
1,272,000 Tomkins LLC/Tomkins, Inc........................................... 9.00% 10/01/18 1,399,200
--------------
30,773,359
--------------
BANKING - 1.5%
740,000 Ally Financial, Inc. (a)........................................... 8.00% 11/01/31 877,270
2,285,000 Ally Financial, Inc. (a)........................................... 8.00% 11/01/31 2,736,288
5,610,000 Bank of America Corp. (a).......................................... 7.63% 06/01/19 7,001,998
--------------
10,615,556
--------------
BASIC INDUSTRY - 9.3%
4,500,000 AK Steel Corp. (a)................................................. 8.38% 04/01/22 4,061,250
3,095,000 Aleris International, Inc. (a)..................................... 7.63% 02/15/18 3,300,044
2,160,000 Aleris International, Inc. (a)..................................... 7.88% 11/01/20 2,300,400
3,450,000 Alpha Natural Resources, Inc. (a).................................. 6.00% 06/01/19 2,984,250
1,255,000 Arch Coal, Inc. ................................................... 7.00% 06/15/19 985,175
1,428,000 Arch Coal, Inc. ................................................... 7.25% 10/01/20 1,097,775
1,125,000 Arch Coal, Inc. ................................................... 7.25% 06/15/21 866,250
4,405,000 Associated Materials LLC/AMH New Finance, Inc. (a)................. 9.13% 11/01/17 4,718,856
3,635,000 Boise Paper Holdings LLC/Boise Finance Co. ........................ 9.00% 11/01/17 3,812,206
1,700,000 Cloud Peak Energy Resources LLC/Cloud Peak
Energy Finance Corp. (a)........................................ 8.25% 12/15/17 1,789,250
6,500,000 Hexion U.S. Finance Corp./Hexion Nova Scotia Finance ULC (a)....... 8.88% 02/01/18 6,727,500
8,655,000 Huntsman International LLC (a)..................................... 8.63% 03/15/21 9,758,512
1,950,000 Momentive Performance Materials, Inc. ............................. 10.00% 10/15/20 2,057,250
3,245,000 Polypore International, Inc. (a)................................... 7.50% 11/15/17 3,447,813
5,150,000 Texas Industries, Inc. (a)......................................... 9.25% 08/15/20 5,716,500
4,000,000 United States Steel Corp. ......................................... 7.38% 04/01/20 4,250,000
1,500,000 US Coatings Acquisition, Inc. (c).................................. 7.38% 05/01/21 1,601,250
4,000,000 USG Corp. (a)...................................................... 6.30% 11/15/16 4,300,000
1,878,000 USG Corp. (c)...................................................... 8.38% 10/15/18 2,051,715
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65,825,996
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Page 6 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------------------- --------- ----------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
CAPITAL GOODS - 6.1%
$ 2,000,000 Ducommun, Inc. (a)................................................. 9.75% 07/15/18 $ 2,245,000
5,000,000 Manitowoc Co., Inc. (a)............................................ 8.50% 11/01/20 5,700,000
3,625,000 Mcron Finance Sub LLC/ Mcron Finance Corp. (c)..................... 8.38% 05/15/19 4,032,813
2,945,000 Milacron LLC/Mcron Finance Corp. (c)............................... 7.75% 02/15/21 3,092,250
3,760,000 Mueller Water Products, Inc. (a)................................... 7.38% 06/01/17 3,891,600
7,500,000 Reynolds Group Issuer, Inc. (a).................................... 8.50% 05/15/18 7,987,500
2,085,000 Reynolds Group Issuer, Inc. (a).................................... 9.88% 08/15/19 2,316,956
4,050,000 Terex Corp. ....................................................... 6.00% 05/15/21 4,252,500
4,000,000 Transdigm, Inc. (a)................................................ 7.75% 12/15/18 4,320,000
4,650,000 Triumph Group, Inc. (a)............................................ 8.63% 07/15/18 5,068,500
--------------
42,907,119
--------------
CONSUMER NON-CYCLICAL - 1.0%
3,990,000 Post Holdings, Inc. (c)............................................ 7.38% 02/15/22 4,274,288
2,240,000 Smithfield Foods, Inc. (a)......................................... 6.63% 08/15/22 2,368,800
--------------
6,643,088
--------------
ENERGY - 10.8%
1,150,000 Atlas Pipeline Partners L.P./Atlas Pipeline Finance Corp. (c)...... 4.75% 11/15/21 1,086,750
2,535,000 Atlas Pipeline Partners L.P./Atlas Pipeline Finance Corp. (c)...... 5.88% 08/01/23 2,503,312
3,540,000 Basic Energy Services, Inc. (a).................................... 7.75% 10/15/22 3,593,100
3,974,000 Berry Petroleum Co. (a)............................................ 6.75% 11/01/20 4,202,505
600,000 Chesapeake Energy Corp. (a)........................................ 7.25% 12/15/18 693,000
1,970,000 Chesapeake Energy Corp. (a)........................................ 6.63% 08/15/20 2,231,025
6,600,000 Chesapeake Energy Corp. (a)........................................ 5.38% 06/15/21 6,897,000
4,135,000 EP Energy LLC/EP Energy Finance, Inc. (a).......................... 9.38% 05/01/20 4,796,600
3,000,000 Ferrellgas L.P./Ferrellgas Finance Corp. (a)....................... 6.50% 05/01/21 3,052,500
800,000 Frontier Oil Corp. (a)............................................. 6.88% 11/15/18 864,000
3,960,000 Hornbeck Offshore Services, Inc. .................................. 5.00% 03/01/21 3,910,500
4,640,000 Kinder Morgan, Inc. (c)............................................ 5.00% 02/15/21 4,666,471
2,636,000 Linn Energy LLC/Linn Energy Finance Corp. (c)...................... 7.00% 11/01/19 2,642,590
4,240,000 Linn Energy LLC/Linn Energy Finance Corp. ......................... 8.63% 04/15/20 4,536,800
5,500,000 PHI, Inc. (a)...................................................... 8.63% 10/15/18 5,898,750
5,900,000 Plains Exploration & Production Co. (a)............................ 6.50% 11/15/20 6,503,287
3,998,000 Samson Investment Co. (c).......................................... 10.25% 02/15/20 4,337,830
3,695,000 Swift Energy Co. .................................................. 8.88% 01/15/20 3,879,750
3,425,000 Targa Resources Partners L.P./Targa Resources Partners
Finance Corp. (a)............................................... 7.88% 10/15/18 3,733,250
5,800,000 Whiting Petroleum Corp. ........................................... 5.75% 03/15/21 6,148,000
--------------
76,177,020
--------------
See Notes to Financial Statements Page 7
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------------------- --------- ----------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
FINANCIAL SERVICES - 4.0%
$ 8,000,000 CIT Group, Inc. ................................................... 4.25% 08/15/17 $ 8,420,000
3,500,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp. ............ 8.00% 01/15/18 3,679,375
8,000,000 SLM Corp. (a)...................................................... 8.00% 03/25/20 9,170,000
2,395,000 Springleaf Finance Corp. (c)....................................... 6.00% 06/01/20 2,371,050
4,555,000 Springleaf Finance Corp. (c)....................................... 7.75% 10/01/21 4,919,400
--------------
28,559,825
--------------
HEALTHCARE - 3.1%
5,074,000 Alere, Inc. ....................................................... 7.25% 07/01/18 5,594,085
665,000 Alere, Inc. ....................................................... 6.50% 06/15/20 684,950
2,500,000 Davita Healthcare Partners, Inc. .................................. 5.75% 08/15/22 2,578,125
5,600,000 HCA Holdings, Inc. ................................................ 7.75% 05/15/21 6,146,000
3,150,000 Kinetic Concepts, Inc./KCI USA, Inc. .............................. 10.50% 11/01/18 3,567,375
2,975,000 Tenet Healthcare Corp. (c)......................................... 8.13% 04/01/22 3,265,062
--------------
21,835,597
--------------
MEDIA - 1.8%
3,895,000 CCO Holdings LLC/CCO Holdings Capital Corp. (a).................... 5.75% 01/15/24 3,700,250
3,931,000 Clear Channel Communications, Inc. (a)............................. 5.50% 12/15/16 3,390,488
1,800,000 Clear Channel Communications, Inc. (a)............................. 9.00% 03/01/21 1,822,500
456,000 Clear Channel Worldwide Holdings, Inc. ............................ 7.63% 03/15/20 484,500
3,193,000 Clear Channel Worldwide Holdings, Inc. (a)......................... 7.63% 03/15/20 3,424,492
--------------
12,822,230
--------------
SERVICES - 17.6%
1,095,000 Ashtead Capital, Inc. (c).......................................... 6.50% 07/15/22 1,179,863
1,426,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc. .............. 8.25% 01/15/19 1,561,470
4,915,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc. .............. 5.50% 04/01/23 4,841,275
6,500,000 Beazer Homes USA, Inc. (a)......................................... 8.13% 06/15/16 7,231,250
1,749,000 Caesars Entertainment Operating Co., Inc. ......................... 9.00% 02/15/20 1,648,433
11,397,000 Caesars Entertainment Operating Co., Inc. ......................... 9.00% 02/15/20 10,741,672
2,600,000 Caesars Entertainment Resort Properties LLC (c).................... 8.00% 10/01/20 2,613,000
1,110,000 CEVA Group PLC (c)................................................. 8.38% 12/01/17 1,154,400
4,893,148 Continental Airlines 2003-ERJ1 Pass Through Trust ................. 7.88% 07/02/18 5,211,202
2,365,449 Continental Airlines 2005-ERJ1 Pass Through Trust ................. 9.80% 04/01/21 2,637,476
1,587,751 Delta Air Lines 2009-1 Series B Pass Through Trust ................ 9.75% 12/17/16 1,774,312
8,000,000 Hertz (The) Corp. ................................................. 7.50% 10/15/18 8,720,000
5,250,000 Iron Mountain, Inc. (a)............................................ 8.38% 08/15/21 5,696,250
Page 8 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------------------- --------- ----------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
SERVICES (CONTINUED)
$ 3,500,000 Isle of Capri Casinos, Inc. (a).................................... 7.75% 03/15/19 $ 3,771,250
4,160,000 K Hovnanian Enterprises, Inc. (c).................................. 7.25% 10/15/20 4,451,200
3,479,000 KB Home ........................................................... 7.50% 09/15/22 3,661,647
9,175,000 MGM Resorts International ......................................... 6.75% 10/01/20 10,023,687
2,380,000 Mohegan Tribal Gaming Authority (c)................................ 9.75% 09/01/21 2,576,350
2,840,131 Northwest Airlines 2001-1 Class B Pass Through Trust .............. 7.69% 04/01/17 3,081,543
4,127,000 Pinnacle Entertainment, Inc. ...................................... 7.75% 04/01/22 4,534,541
1,780,000 Pulte Group, Inc. (a).............................................. 7.63% 10/15/17 2,060,350
4,570,000 Pulte Group, Inc. (a).............................................. 7.88% 06/15/32 4,684,250
3,319,000 Shea Homes L.P./Shea Homes Funding Corp. .......................... 8.63% 05/15/19 3,692,387
5,500,000 Standard Pacific Corp. (a)......................................... 8.38% 05/15/18 6,407,500
2,597,986 UAL 2009-2B Pass Through Trust (c)................................. 12.00% 01/15/16 2,929,230
375,000 United Rentals North America, Inc. ................................ 7.38% 05/15/20 420,000
7,062,000 United Rentals North America, Inc. (a)............................. 8.38% 09/15/20 7,927,095
367,000 United Rentals North America, Inc. ................................ 7.63% 04/15/22 412,875
6,712,290 US Airways 2000-3C Pass Through Trust ............................. 8.39% 03/01/22 6,913,659
2,000,000 US Airways Group, Inc. ............................................ 6.13% 06/01/18 1,977,500
--------------
124,535,667
--------------
TECHNOLOGY & ELECTRONICS - 4.6%
2,110,000 Alcatel-Lucent USA, Inc. (a)....................................... 6.45% 03/15/29 1,867,350
5,675,000 CommScope, Inc. (c)................................................ 8.25% 01/15/19 6,256,688
9,050,000 First Data Corp. (c)............................................... 8.88% 08/15/20 10,136,000
4,175,000 First Data Corp. (c)............................................... 10.63% 06/15/21 4,503,781
2,950,000 Freescale Semiconductor, Inc. (c).................................. 5.00% 05/15/21 2,876,250
6,460,000 Sungard Data Systems, Inc. ........................................ 6.63% 11/01/19 6,783,000
--------------
32,423,069
--------------
TELECOMMUNICATIONS - 4.9%
2,500,000 Frontier Communications Corp. (a).................................. 9.00% 08/15/31 2,600,000
2,411,000 Hughes Satellite Systems Corp. (a)................................. 7.63% 06/15/21 2,652,100
3,500,000 MetroPCS Wireless, Inc. (a)........................................ 7.88% 09/01/18 3,797,500
7,660,000 Sprint Capital Corp. (a)........................................... 8.75% 03/15/32 8,330,250
1,240,000 Sprint Communications, Inc. ....................................... 6.00% 11/15/22 1,227,600
2,600,000 Sprint Communications, Inc......................................... 9.13% 03/01/17 3,081,000
6,000,000 Sprint Communications, Inc. (a).................................... 9.25% 04/15/22 7,170,000
1,700,000 T-Mobile USA, Inc. ................................................ 6.54% 04/28/20 1,808,375
2,428,000 Viasat, Inc. ...................................................... 6.88% 06/15/20 2,549,400
1,500,000 Windstream Corp. .................................................. 6.38% 08/01/23 1,462,500
--------------
34,678,725
--------------
UTILITY - 1.8%
6,736,000 Calpine Corp. (c).................................................. 7.88% 07/31/20 7,392,760
5,000,000 NRG Energy, Inc. (a)............................................... 8.25% 09/01/20 5,600,000
--------------
12,992,760
--------------
TOTAL CORPORATE BONDS AND NOTES ........................................................... 500,790,011
(Cost $472,601,387) --------------
See Notes to Financial Statements Page 9
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ------------------------------------------------------------------- --------- ----------- --------------
FOREIGN CORPORATE BONDS AND NOTES - 22.3%
AUTOMOTIVE - 1.6%
7,450,000 Banque PSA Finance S.A. (USD) (c).................................. 5.75% 04/04/21 $ 7,575,316
4,120,000 Schaeffler Finance B.V. (USD) (c).................................. 4.75% 05/15/21 4,130,300
--------------
11,705,616
--------------
BANKING - 2.7%
3,500,000 Banco do Brasil S.A. (USD) (c)..................................... 5.88% 01/19/23 3,473,750
2,200,000 Barclays Bank PLC (GBP) ........................................... 10.00% 05/21/21 4,702,730
2,000,000 Belfius Funding N.V. (GBP) (e)..................................... 1.22% 02/09/17 2,722,978
4,350,000 Industrial Senior Trust (USD) (c).................................. 5.50% 11/01/22 4,045,500
3,000,000 Royal Bank of Scotland N.V. (EUR) (e).............................. 4.70% 06/10/19 4,073,265
--------------
19,018,223
--------------
BASIC INDUSTRY - 6.2%
3,868,000 Aperam (USD) (c)................................................... 7.38% 04/01/16 4,003,380
2,648,000 Arcelormittal (USD) (a)............................................ 6.75% 02/25/22 2,892,940
3,592,000 Arcelormittal (USD) (a)............................................ 7.50% 10/15/39 3,565,060
185,000 Arcelormittal (USD) ............................................... 7.25% 03/01/41 178,988
4,000,000 Cemex Espana Luxembourg (USD) (a) (c).............................. 9.25% 05/12/20 4,380,000
3,135,000 FMG Resources Pty, Ltd. (USD) (c).................................. 7.00% 11/01/15 3,258,441
2,694,628 INEOS Group Holdings S.A. (EUR) ................................... 7.88% 02/15/16 3,717,365
6,300,000 Novelis, Inc. (USD) (a)............................................ 8.75% 12/15/20 7,040,250
3,700,000 Severstal OAO Via Steel Capital S.A. (USD) (c)..................... 5.90% 10/17/22 3,621,375
4,200,000 Stora Enso Oyj (USD) (c)........................................... 7.25% 04/15/36 3,948,000
6,785,000 Vedanta Resources PLC (USD) (c).................................... 8.25% 06/07/21 7,018,234
--------------
43,624,033
--------------
CAPITAL GOODS - 1.5%
3,000,000 Albea Beauty Holdings S.A. (USD) (c)............................... 8.38% 11/01/19 3,172,500
3,000,000 Ardagh Packaging Finance (EUR) .................................... 9.25% 10/15/20 4,410,979
2,775,000 Bombardier, Inc. (USD) (c)......................................... 6.13% 01/15/23 2,823,562
--------------
10,407,041
--------------
CONSUMER NON-CYCLICAL - 2.0%
6,000,000 JBS Finance II Ltd. (USD) (c)...................................... 8.25% 01/29/18 6,345,000
5,900,000 Minerva Luxembourg S.A. (USD) (c).................................. 7.75% 01/31/23 5,737,750
3,000,000 Virgolino de Oliveira Finance Ltd. (USD) (c)....................... 11.75% 02/09/22 2,430,000
--------------
14,512,750
--------------
ENERGY - 2.3%
7,840,000 CHC Helicopter S.A. (USD) (a)...................................... 9.25% 10/15/20 8,506,400
3,855,000 Petroleos de Venezuela S.A. (USD) ................................. 12.75% 02/17/22 3,826,088
1,700,000 Precision Drilling Corp. (USD) .................................... 6.63% 11/15/20 1,819,000
1,750,000 Precision Drilling Corp. (USD) .................................... 6.50% 12/15/21 1,872,500
--------------
16,023,988
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ------------------------------------------------------------------- --------- ----------- --------------
FOREIGN CORPORATE BONDS AND NOTES (CONTINUED)
FINANCIAL SERVICES - 0.3%
1,750,000 Portugal Obrigacoes do Tesouro OT (EUR) (c)........................ 4.95% 10/25/23 $ 2,174,152
--------------
HEALTHCARE - 1.0%
6,550,000 Valeant Pharmaceuticals International (USD) (c).................... 7.50% 07/15/21 7,303,250
--------------
INSURANCE - 0.8%
1,650,000 Aviva PLC (EUR) (d)................................................ 6.88% 05/22/38 2,522,752
3,500,000 Oil Insurance Ltd. (USD) (c) (e)................................... 3.23% (f) 3,221,281
--------------
5,744,033
--------------
SERVICES - 2.4%
5,250,000 Hapag-Lloyd AG (USD) (c)........................................... 9.75% 10/15/17 5,551,875
5,755,000 Royal Caribbean Cruises Ltd. (USD) (a)............................. 7.50% 10/15/27 6,186,625
5,930,000 Ukraine Railways Via Shortline PLC (USD) (c)....................... 9.50% 05/21/18 5,099,800
--------------
16,838,300
--------------
TELECOMMUNICATIONS - 1.5%
2,408,000 En Germany Holdings B.V. (EUR) .................................... 10.75% 11/15/15 3,318,843
5,859,000 Intelsat Luxembourg S.A. (USD) (c)................................. 7.75% 06/01/21 6,203,216
1,055,000 Intelsat Luxembourg S.A. (USD) (c)................................. 8.13% 06/01/23 1,119,619
--------------
10,641,678
--------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES ................................................... 157,993,064
(Cost $151,447,283) --------------
PAR
AMOUNT
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (US DOLLARS)
------------- ------------------------------------------------------------------- --------- ----------- --------------
CAPITAL PREFERRED SECURITIES - 21.6%
BANKING - 9.6%
6,500,000 ABN AMRO Bank N.V. (EUR) (d)....................................... 4.31% (f) 8,704,939
2,975,000 Ageas Hybrid Financing S.A. (EUR) (d).............................. 5.13% (f) 4,150,402
1,400,000 Barclays Bank PLC (EUR) (d)........................................ 4.75% (f) 1,577,654
8,264,000 Canada Square Operations PLC (GBP) (d)............................. 7.50% (f) 13,165,263
6,750,000 Deutsche Postbank Funding Trust IV (EUR) (d) ...................... 5.98% (f) 9,179,509
3,250,000 Dresdner Funding Trust I (USD) (c)................................. 8.15% 06/30/31 3,306,875
4,200,000 Fifth Third Capital Trust IV (USD) (a) (d)......................... 6.50% 04/15/37 4,163,250
5,325,000 HBOS Capital Funding L.P. (GBP) (d)................................ 6.46% (f) 8,623,551
3,250,000 Mellon Capital III (GBP) (d)....................................... 6.37% 09/05/66 5,235,842
2,100,000 Mizuho Capital Investment, Ltd. (USD) (a) (c) (d).................. 14.95% (f) 2,289,042
3,000,000 National Westminster Bank PLC (GBP) (d)............................ 5.98% (f) 4,353,264
See Notes to Financial Statements Page 11
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PAR
AMOUNT
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (US DOLLARS)
------------- ------------------------------------------------------------------- --------- ----------- --------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
BANKING (CONTINUED)
2,250,000 UT2 Funding PLC (EUR).............................................. 5.32% 06/30/16 $ 2,993,849
--------------
67,743,440
--------------
FINANCIAL SERVICES - 2.2%
10,500,000 GE Capital Trust IV (EUR) (d) ..................................... 4.63% 09/15/66 14,480,879
410,000 General Electric Capital Corp. (EUR) (d) .......................... 5.50% 09/15/67 587,018
700,000 Textron Financial Corp. (USD) (c) (d).............................. 6.00% 02/15/67 626,500
--------------
15,694,397
--------------
INSURANCE - 9.8%
2,450,000 American International Group, Inc. (EUR) (d) ...................... 8.00% 05/22/38 3,871,629
1,800,000 American International Group, Inc. (EUR) (d) ...................... 4.88% 03/15/67 2,414,020
3,050,000 American International Group, Inc. (GBP) (d) ...................... 8.63% 05/22/38 5,770,680
10,950,000 American International Group, Inc. (GBP) (d) ...................... 5.75% 03/15/67 17,258,886
5,000,000 CHUBB Corp. (USD) (a) (d).......................................... 6.38% 03/29/67 5,475,000
3,500,000 CNP Assurances (EUR) (d)........................................... 5.25% (f) 4,158,124
11,000,000 Glen Meadow Pass Through Trust (USD) (c) (d)....................... 6.51% 02/12/67 10,615,000
5,000,000 ING Groep N.V. (GBP) (d)........................................... 5.14% (f) 7,876,762
6,500,000 Liberty Mutual Group, Inc. (USD) (c) (d)........................... 7.00% 03/15/37 6,792,500
3,500,000 Lincoln National Corp. (USD) (a) (d)............................... 7.00% 05/17/66 3,631,250
1,800,000 Lincoln National Corp. (USD) (a) (d)............................... 6.05% 04/20/67 1,795,500
--------------
69,659,351
--------------
TOTAL CAPITAL PREFERRED SECURITIES ........................................................ 153,097,188
(Cost $135,133,266) --------------
PRINCIPAL STATED
VALUE DESCRIPTION RATE (g) MATURITY (h) VALUE
------------- ------------------------------------------------------------------- --------- ----------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 2.5%
AUTOMOTIVE - 1.2%
$ 6,672,889 Allison Transmission, Inc. ........................................ 3.18% 08/07/17 6,703,451
1,743,750 Navistar, Inc. Term Loan B ........................................ 5.75% 08/17/17 1,776,445
--------------
8,479,896
--------------
ENERGY - 0.8%
5,880,131 Meg Energy Term Loan .............................................. 3.75% 03/31/20 5,911,649
--------------
REAL ESTATE - 0.1%
394,678 Realogy Synthetic Letter of Credit ................................ 4.44% 10/10/16 398,502
--------------
SERVICES - 0.4%
3,000,000 US Airway Group Term Loan ......................................... 4.25% 05/23/19 3,001,260
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS ................................................. 17,791,307
(Cost $17,649,856) --------------
Page 12 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL STATED
VALUE DESCRIPTION RATE (g) MATURITY (h) VALUE
------------- ------------------------------------------------------------------- --------- ----------- --------------
ASSET-BACKED SECURITIES - 1.7%
Ace Securities Corp. Home Equity Loan Trust
$ 3,180,266 Series 2007-HE2, Class A2A (e).................................. 0.29% 12/25/36 $ 1,929,321
Carrington Mortgage Loan Trust
2,037,300 Series 2006-NC4, Class A5 (e)................................... 0.23% 10/25/36 1,723,980
HSI Asset Securitization Corp. Trust
1,450,462 Series 2007-NC1, Class A1 (e)................................... 0.27% 04/25/37 1,307,960
Keycorp Student Loan Trust
2,306,885 Series 2000-A, Class A2 (e)..................................... 0.58% 05/25/29 2,122,041
Morgan Stanley ABS Capital I, Inc. Trust
737,633 Series 2006-HE6, Class A2B (e).................................. 0.27% 09/25/36 436,473
Securitized Asset Backed Receivables LLC Trust
9,606,871 Series 2006-FR4, Class A2A (e).................................. 0.25% 08/25/36 3,860,555
Soundview Home Loan Trust
1,039,325 Series 2006-EQ2, Class A2 (e)................................... 0.28% 01/25/37 647,978
--------------
TOTAL ASSET-BACKED SECURITIES ............................................................. 12,028,308
(Cost $14,446,276) --------------
MORTGAGE-BACKED SECURITIES - 0.8%
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.8%
Morgan Stanley Mortgage Loan Trust
1,315,592 Series 2007-6XS, Class 2A1S (e)................................. 0.28% 02/25/47 1,181,803
Specialty Underwriting & Residential Finance Trust
1,904,580 Series 2006-BC4, Class A2B (e).................................. 0.28% 09/25/37 1,028,852
Wells Fargo Mortgage Backed Securities Trust
3,421,606 Series 2006-AR7 Trust, Class 2A4 (e)............................ 2.62% 05/25/36 3,194,794
--------------
TOTAL MORTGAGE-BACKED SECURITIES .......................................................... 5,405,449
(Cost $5,699,518) --------------
FOREIGN SOVEREIGN BONDS AND NOTES - 0.6%
ENERGY - 0.6%
3,750,000 Georgian Oil and Gas Corp. (c)..................................... 6.88% 05/16/17 3,928,125
--------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES ................................................... 3,928,125
(Cost $3,724,794) --------------
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
COMMON STOCKS - 2.1%
AUTOMOTIVE - 1.6%
448,000 Ford Motor Co.............................................................................. 7,665,280
98,768 General Motors Co. (i)..................................................................... 3,649,478
--------------
11,314,758
--------------
See Notes to Financial Statements Page 13
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------------------------------------- --------------
CCOMMON STOCKS (CONTINUED)
BANKING - 0.5%
75,700 Citigroup, Inc. ........................................................................... $ 3,692,646
--------------
TOTAL COMMON STOCKS ....................................................................... 15,007,404
(Cost $14,700,177) --------------
WARRANTS - 0.5%
AUTOMOTIVE - 0.5%
77,608 General Motors Co., expiring 07/10/16 (i).................................................. 2,157,502
77,608 General Motors Co., expiring 07/10/19 (i).................................................. 1,519,565
--------------
TOTAL WARRANTS............................................................................. 3,677,067
(Cost $4,065,974) --------------
SHORT-TERM INVESTMENTS - 0.3%
2,079,705 Dreyfus Government Cash Management - Institutional Shares ................................. 2,079,705
--------------
TOTAL SHORT-TERM INVESTMENTS .............................................................. 2,079,705
(Cost $2,079,705) --------------
TOTAL INVESTMENTS - 123.2% ................................................................ 871,797,628
(Cost $821,548,236) (j) --------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ------------------------------------------------------------------- --------- ----------- --------------
U.S. GOVERNMENT BONDS SOLD SHORT - (20.7%)
$(119,200,000) United States Treasury Note ....................................... 0.88% 02/28/17 (119,777,405)
(27,500,000) United States Treasury Note ....................................... 2.00% 02/15/22 (26,942,492)
--------------
TOTAL U.S. GOVERNMENT BONDS SOLD SHORT .................................................... (146,719,897)
(Proceeds $147,297,957) --------------
BORROWINGS - (3.4%)........................................................................ (24,041,503)
NET OTHER ASSETS AND LIABILITIES - 0.9%.................................................... 6,770,867
--------------
NET ASSETS - 100.0% ....................................................................... $ 707,807,095
==============
-----------------------------
(a) This security or a portion of this security is segregated as collateral
for investments sold short.
(b) The Fund previously held non-transferable trust units that were originally
issued to facilitate distribution of General Motors common stock and
warrants pursuant to the General Motors Bankruptcy Plan of Reorganization.
The non-transferable trust units existed only for the purpose of receiving
residual cash, if any, from the General Motors Bankruptcy. These units
were received in exchange for the previously owned General Motors 8.375%
Corporate Notes that were scheduled to mature on July 15, 2033. On June
12, 2012, the holders of these units received new transferable Motors
Liquidation Co. GUC Trust, formerly known as General Motors Unsecured
Claim (GUC) Trust Units, which were created to hold and administer the
common stock and warrants of General Motors Company to be contributed to
the GUC Trust under the General Motors Bankruptcy Plan of Reorganization.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by MacKay Shields LLC, the Fund's sub-advisor.
Although market instability can result in periods of increased overall
market illiquidity, liquidity for each security is determined based on
security specific factors and assumptions, which require subjective
judgment. At October 31, 2013, securities noted as such amounted to
$211,108,646, or 29.83% of net assets.
(d) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at October 31, 2013. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
Page 14 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
(e) Floating rate security. The interest rate shown reflects the rate in
effect at October 31, 2013.
(f) Perpetual maturity.
(g) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests pay interest at rates which are periodically predetermined by
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the
prime rate offered by one or more United States banks or (iii) the
certificate of deposit rate. Certain Senior Loans are subject to a LIBOR
floor that establishes a minimum LIBOR rate. The interest rate shown
reflects the rate in effect at October 31, 2013. When a range of rates is
disclosed the Fund holds more than one contract within the same tranche at
varying rates.
(h) 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.
(i) Non-income producing security.
(j) Aggregate cost for federal income tax purposes is $820,955,562. As of
October 31, 2013, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$59,720,405 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$8,878,339.
Currency Abbreviations:
EUR Euro
GBP British Pound Sterling
USD United States Dollar
See Notes to Financial Statements Page 15
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2013 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2013 PRICES INPUTS INPUTS
-------------- --------------- --------------- --------------
Corporate Bonds and Notes:
Automotive............................... $ 30,773,359 $ 777,981 $ 29,995,378 $ --
Other Industry Categories *.............. 470,016,652 -- 470,016,652 --
Foreign Corporate Bonds and Notes*.......... 157,993,064 -- 157,993,064 --
Capital Preferred Securities*............... 153,097,188 -- 153,097,188 --
Senior Floating-Rate Loan Interests*........ 17,791,307 -- 17,791,307 --
Asset-Backed Securities..................... 12,028,308 -- 12,028,308 --
Mortgage-Backed Securities.................. 5,405,449 -- 5,405,449 --
Foreign Sovereign Bonds and Notes*.......... 3,928,125 -- 3,928,125 --
Common Stocks*.............................. 15,007,404 15,007,404 -- --
Warrants*................................... 3,677,067 3,677,067 -- --
Short-Term Investments...................... 2,079,705 2,079,705 -- --
------------- ------------- ------------- ------------
Total Investments........................... $ 871,797,628 $ 21,542,157 $ 850,255,471 $ --
============= ============= ============= ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2013 PRICES INPUTS INPUTS
-------------- --------------- --------------- --------------
U.S. Government Bonds Sold Short............ $(146,719,897) $ -- $(146,719,897) $ --
Forward Foreign Currency Contracts**........ (2,279,912) -- (2,279,912) --
Futures Contracts........................... (192,169) (192,169) -- --
------------- ------------- ------------- ------------
Total....................................... $(149,191,978) $ (192,169) $(148,999,809) $ --
============= ============= ============= ============
* See the Portfolio of Investments for industry breakout.
** See the Schedule of Forward Foreign Currency Contracts for contract and
currency detail.
Page 16 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
BEGINNING BALANCE AT OCTOBER 31, 2012
Corporate Bonds and Notes.......................... $ 2,100
Net Realized Gain (Loss).............................. --
Net Change in Unrealized Appreciation/Depreciation.... --
Purchases ............................................ --
Sales ................................................ --
Corporate Bonds and Notes.......................... (2,100)
Transfers In ......................................... --
Transfers Out ........................................ --
ENDING BALANCE AT OCTOBER 31, 2013
Corporate Bonds and Notes.......................... --
-----------
Total Level 3 holdings................................ $ --
===========
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2013.
OPEN FUTURES CONTRACTS AT OCTOBER 31, 2013 (see Note 2F - Futures Contracts in
the Notes to Financial Statements):
UNREALIZED
NUMBER OF EXPIRATION NOTIONAL APPRECIATION/
SHORT FUTURES CONTRACTS CONTRACTS MONTH VALUE (DEPRECIATION)
---------------------------------------------- -------------- ---------------- ---------------- --------------
U.S. Treasury 2-Year Notes 180 December-2013 $ 39,675,938 $ (192,169)
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS: (see Note 2D - Forward Foreign
Currency Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
--------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED (k) SOLD (k) OCTOBER 31, 2013 OCTOBER 31, 2013 (DEPRECIATION)
---------- ------------ --------------- -------------- ---------------- ---------------- --------------
12/17/13 JPM USD 70,757,265 EUR 53,122,000 $ 70,757,265 $ 72,131,891 $(1,374,626)
12/17/13 JPM USD 67,669,735 GBP 42,784,000 67,669,735 68,575,021 (905,286)
-----------
Net Unrealized Appreciation (Depreciation).................................................................. $(2,279,912)
===========
(k) Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
JPM JPMorgan Chase
See Notes to Financial Statements Page 17
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2013
ASSETS:
Investments, at value
(Cost $821,548,236)........................................................................... $ 871,797,628
Cash............................................................................................... 63
Foreign currency (Cost $321,030)................................................................... 319,892
Restricted cash.................................................................................... 45,000
Receivables:
Interest...................................................................................... 16,104,418
Dividends..................................................................................... 45,557
Prepaid expenses................................................................................... 19,814
--------------
Total Assets.................................................................................. 888,332,372
--------------
LIABILITIES:
Investments sold short, at value (proceeds $147,297,957)........................................... 146,719,897
Borrowings......................................................................................... 24,041,503
Unrealized depreciation on forward foreign currency contracts...................................... 2,279,912
Payables:
Investment securities purchased............................................................... 6,313,702
Investment advisory fees...................................................................... 591,251
Interest on investments sold short............................................................ 295,211
Custodian fees................................................................................ 94,525
Audit and tax fees............................................................................ 57,200
Administrative fees........................................................................... 53,102
Printing fees................................................................................. 38,783
Legal fees.................................................................................... 29,074
Variation margin.............................................................................. 5,625
Trustees' fees and expenses................................................................... 2,862
Transfer agent fees........................................................................... 1,731
Financial reporting fees...................................................................... 771
Other liabilities.................................................................................. 128
--------------
Total Liabilities............................................................................. 180,525,277
--------------
NET ASSETS......................................................................................... $ 707,807,095
==============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $ 684,571,906
Par value.......................................................................................... 360,561
Accumulated net investment income (loss)........................................................... 2,872,586
Accumulated net realized gain (loss) on investments, forward foreign currency contracts,
foreign currency transactions and investments sold short........................................ (28,431,923)
Net unrealized appreciation (depreciation) on investments, forward foreign currency contracts,
foreign currency translation, futures and investments sold short................................ 48,433,965
--------------
NET ASSETS......................................................................................... $ 707,807,095
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... $ 19.63
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)........ 36,056,159
==============
Page 18 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2013
INVESTMENT INCOME:
Interest........................................................................................... $ 60,164,747
Dividends.......................................................................................... 182,985
Other.............................................................................................. 178,461
--------------
Total investment income....................................................................... 60,526,193
--------------
EXPENSES:
Investment advisory fees........................................................................... 6,999,593
Interest expense on investments sold short......................................................... 1,636,384
Margin interest expense............................................................................ 1,506,054
Short sale fees.................................................................................... 788,084
Administrative fees................................................................................ 590,110
Printing fees...................................................................................... 138,596
Custodian fees..................................................................................... 103,357
Legal fees......................................................................................... 67,442
Audit and tax fees................................................................................. 59,064
Trustees' fees and expenses........................................................................ 38,888
Transfer agent fees................................................................................ 28,030
Financial reporting fees........................................................................... 9,250
Other.............................................................................................. 66,492
--------------
Total expenses................................................................................ 12,031,344
--------------
NET INVESTMENT INCOME (LOSS)....................................................................... 48,494,849
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................... (10,726,647)
Forward foreign currency contracts............................................................ (821,694)
Foreign currency transactions................................................................. (539,154)
Short sales................................................................................... (22,832)
--------------
Net realized gain (loss)........................................................................... (12,110,327)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................... 34,822,453
Forward foreign currency contracts............................................................ (1,708,033)
Foreign currency translation.................................................................. 32,670
Futures....................................................................................... (192,169)
Short positions............................................................................... 2,375,769
--------------
Net change in unrealized appreciation (depreciation)............................................... 35,330,690
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ 23,220,363
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 71,715,212
==============
See Notes to Financial Statements Page 19
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2013 10/31/2012
--------------- --------------
OPERATIONS:
Net investment income (loss)..................................................... $ 48,494,849 $ 50,915,230
Net realized gain (loss)......................................................... (12,110,327) (18,647,026)
Net change in unrealized appreciation (depreciation)............................. 35,330,690 69,794,203
--------------- --------------
Net increase (decrease) in net assets resulting from operations.................. 71,715,212 102,062,407
--------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................ (47,827,919) (51,996,786)
Net realized gain................................................................ -- (5,765,181)
Return of capital................................................................ (2,794,928) --
--------------- --------------
Total distributions to shareholders.............................................. (50,622,847) (57,761,967)
--------------- --------------
Total increase (decrease) in net assets.......................................... 21,092,365 44,300,440
NET ASSETS:
Beginning of period.............................................................. 686,714,730 642,414,290
--------------- --------------
End of period.................................................................... $ 707,807,095 $ 686,714,730
=============== ==============
Accumulated net investment income (loss) at end of period........................ $ 2,872,586 $ 3,630,512
=============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................. 36,056,159 36,056,159
--------------- --------------
Common Shares at end of period................................................... 36,056,159 36,056,159
=============== ==============
Page 20 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations............. $ 71,715,212
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used in operating activities:
Purchases of investments................................................ (429,072,465)
Sales, maturities and paydowns of investments........................... 427,733,382
Borrowed investments purchased.......................................... (20,519,219)
Net amortization/accretion of premiums/discounts on investments......... (816,498)
Net realized gain/loss on investments................................... 10,726,647
Net realized gain/loss on investments sold short........................ 22,832
Net change in unrealized appreciation/depreciation on forward
foreign currency contracts........................................... 1,708,033
Net change in unrealized appreciation/depreciation on investments
sold short........................................................... (2,375,769)
Net change in unrealized appreciation/depreciation on investments....... (34,822,453)
CHANGES IN ASSETS AND LIABILITIES:
Increase in restricted cash............................................. (45,000)
Decrease in interest receivable......................................... 672,389
Increase in dividends receivable........................................ (23,157)
Decrease in currency receivable......................................... 1,570,401
Decrease in prepaid expenses............................................ 4,388
Decrease in interest payable on investments sold short.................. (4,506)
Increase in investment advisory fees payable............................ 11,831
Decrease in audit and tax fees payable.................................. (636)
Decrease in legal fees payable.......................................... (16,599)
Decrease in printing fees payable....................................... (17,526)
Increase in administrative fees payable................................. 7,091
Increase in custodian fees payable...................................... 69,323
Decrease in transfer agent fees payable................................. (2,090)
Decrease in Trustees' fees and expenses payable......................... (1,195)
Increase in variation margin fees payable............................... 5,625
Decrease in other liabilities........................................... (10,704)
----------------
CASH PROVIDED BY OPERATING ACTIVITIES....................................... $ 26,519,337
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income......... (47,827,919)
Distributions to Common Shareholders from return of capital............. (2,794,928)
Net proceeds from borrowing............................................. 24,041,503
----------------
CASH USED IN FINANCING ACTIVITIES........................................... (26,581,344)
----------------
Decrease in cash (a)........................................................ (62,007)
Cash at beginning of period................................................. 381,962
----------------
CASH AT END OF PERIOD....................................................... $ 319,955
================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees........................... $ 3,146,944
================
-----------------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $32,670.
See Notes to Financial Statements Page 21
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
10/31/2013 10/31/2012 10/31/2011 10/31/2010 (a)
-------------- -------------- -------------- ----------------
Net asset value, beginning of period ........ $ 19.05 $ 17.82 $ 19.57 $ 19.10 (b)
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................ 1.35 1.41 1.48 0.08
Net realized and unrealized gain (loss) ..... 0.64 1.42 (1.72) 0.42
---------- ---------- ---------- ----------
Total from investment operations ............ 1.99 2.83 (0.24) 0.50
---------- ---------- ---------- ----------
Common Shares offering costs charged to
paid-in capital .......................... -- -- -- (0.03)
---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ....................... (1.33) (1.44) (1.47) --
Net realized gain ........................... -- (0.16) -- --
Return of capital ........................... (0.08) -- -- --
---------- ---------- ---------- ----------
Total from distributions .................... (1.41) (1.60) (1.47) --
---------- ---------- ---------- ----------
Common Shares offering costs charged to
paid-in capital .......................... -- -- -- (0.03)
---------- ---------- ---------- ----------
Capital charge resulting from issuance of
Common Shares related to over allotment... -- -- (0.04) --
---------- ---------- ---------- ----------
Net asset value, end of period .............. $ 19.63 $ 19.05 $ 17.82 $ 19.57
========== ========== ========== ==========
Market value, end of period ................. $ 17.62 $ 18.78 $ 16.63 $ 20.01
========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (c).... 11.32% 17.09% (1.27)% 2.46%
========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (c) ...... 1.36% 23.69% (9.89)% 0.05%
========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........ $ 707,807 $ 686,715 $ 642,414 $ 662,604
Ratio of net expenses to average net assets.. 1.72% 1.88% 2.09% 1.46% (d)
Ratio of net expenses to average net assets
excluding interest expense ............... 1.27% 1.32% 1.29% 1.33% (d)
Ratio of net investment income (loss) to
average net assets ....................... 6.93% 7.83% 7.78% 4.98% (d)
Portfolio turnover rate ..................... 28% 24% 18% 0%
-----------------------------
(a) Initial seed date was August 20, 2010. The Fund commenced operations on
September 27, 2010.
(b) Beginning NAV is net of sales load of $0.90 per share from the initial
offering.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) Annualized.
Page 22 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013
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 ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FSD on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to provide current income. The Fund's
secondary objective is capital appreciation. The Fund seeks to achieve its
investment objectives by investing, under normal market conditions, a majority
of its assets in a diversified portfolio of U.S. and foreign (including emerging
markets) high-yield corporate fixed-income securities of varying maturities that
are rated below-investment grade at the time of purchase. For purposes of this
strategy, "corporate fixed-income securities" include corporate bonds,
debentures, notes, commercial paper and other similar types of corporate debt
instruments, including instruments issued by corporations with direct or
indirect government ownership, as well as asset-backed securities, preferred
shares, senior floating-rate loan participations, commitments and assignments
("Senior Loans")1, payment-in-kind securities, zero-coupon bonds, bank
certificates of deposit, fixed time deposits, bankers' acceptances and
derivative instruments that provide the same or similar economic impact as a
physical investment in the above securities. Below-investment grade fixed-income
securities are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal. As part of its investment strategy, the Fund intends to
maintain both long and short positions in securities under normal market
conditions. The Fund will take long positions in securities that MacKay Shields
LLC ("MacKay" or the "Sub-Advisor") believes offer the potential for attractive
returns and that it considers in the aggregate to have the potential to
outperform the Fund's benchmark, the Bank of America Merrill Lynch U.S. High
Yield Master II Constrained Index (the "Index"). The Fund will take short
positions in securities that the Sub-Advisor believes in the aggregate will
underperform the Index. The Fund's long positions, either directly or through
derivatives, may total up to 130% of the Fund's Managed Assets. The Fund's short
positions, either directly or through derivatives, may total up to 30% of the
Fund's Managed Assets. "Managed Assets" means the average daily gross asset
value of the Fund (which includes the principal amount of any borrowings), minus
the sum of the Fund's liabilities. There can be no assurance that the Fund will
achieve its investment objectives. The Fund may not be appropriate for all
investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees and in accordance with provisions of the
1940 Act. Market quotations and prices used to value the Fund's investments are
primarily obtained from third party pricing services. The Fund's securities will
be valued as follows:
Corporate bonds, notes, U.S. government securities, mortgage-backed
securities, asset-backed securities and other debt securities are valued
on the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Fund's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
-----------------------------
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013
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 valued at the midpoint
between the bid and asked price, if available, and otherwise at the
closing bid price.
The Senior Loans held in the Fund are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while
having grown substantially since its inception, generally has fewer trades
and less liquidity than the secondary market for other types of
securities. Some Senior Loans have few or no trades, or trade
infrequently, and information regarding a specific Senior Loan may not be
widely available or may be incomplete. Accordingly, determinations of the
market value of Senior Loans may be based on infrequent and dated
information. Because there is less reliable, objective data available,
elements of judgment may play a greater role in valuation of Senior Loans
than for other types of securities. Typically, Senior Loans are 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 will be valued at the closing price in
the market where such contracts are principally traded. If no closing
price is available, exchange-traded futures contracts will be valued at
the mean between the last bid and asked price, if available, and otherwise
at the closing bid price.
Forward foreign currency contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by an independent pricing service.
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretion of discounts.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board of Trustees or its delegate
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 price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
"fair value." As a general principle, the current "fair value" of a security
would appear to be the amount which the owner might reasonably expect to receive
for the security upon its current sale. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from current market
quotations or official closing prices on the applicable exchange. A variety of
factors may be considered in determining the fair value of such securities
including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
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, 2013
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates)
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means ..
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2013, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method.
C. UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund did not have unfunded delayed draw loan
commitments as of October 31, 2013.
D. FORWARD FOREIGN CURRENCY CONTRACTS:
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements to
exchange one currency for another at a future date and at a specified price. The
Fund uses forward foreign currency contracts to facilitate transactions in
foreign securities and to manage the Fund's foreign currency exposure. These
contracts are valued daily, and the Fund's net equity therein, representing
unrealized gain or loss on the contracts as measured by the difference between
the forward foreign exchange rates at the dates of entry into the contracts and
the forward rates at the reporting date, is included in "Unrealized
appreciation/(depreciation) on forward foreign currency contracts" on the
Statement of Assets and Liabilities. When the forward contract is closed, the
Fund records a realized gain or loss equal to the difference between the
proceeds from (or the cost of) the closing transaction and the Fund's basis in
the contract. This realized gain or loss is included in "Net realized gain
(loss) on forward foreign currency contracts" on the Statement of Operations.
Risks arise from the possible inability of counterparties to meet the terms of
their contracts and from movement in currency and securities values and interest
rates. Due to the risks, the Fund could incur losses in excess of the net
unrealized value shown on the Schedule of Forward Foreign Currency Contracts.
During the year ended October 31, 2013, the amount of notional values of forward
foreign currency contracts opened and closed were $1,606,914,960 and
$(1,304,513,831), respectively.
E. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received. The portion of foreign
currency gains and losses related to fluctuation in exchange rates between the
initial purchase trade date and subsequent sale trade date is included in "Net
realized gain (loss) on foreign currency transactions" on the Statement of
Operations.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013
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 contract 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.
During the year ended October 31, 2013, the amount of notional values of futures
contracts opened and closed were $39,484,219 and $0, respectively.
G. SHORT SALES:
Short sales are utilized for investment and risk management purposes and are
transactions in which securities or other instruments (such as options,
forwards, futures or other derivative contracts) are sold that are not currently
owned in the Fund's portfolio. When a short sale is engaged in, the security
sold short must be borrowed and delivered to the counterparty. Short selling
allows the Fund to profit from a decline in a market price to the extent such
decline exceeds the transaction costs and the costs of borrowing the securities.
The Fund will pay a fee or premium to borrow the securities and is obligated to
repay the lenders of the securities. Any dividends or interest that accrues on
the securities during the period of the loan are due to the lenders. A gain,
limited to the price at which the security was sold short, or a loss, unlimited
in size, will be recognized upon the termination of the short sale. Any such
gain or loss may be offset, completely or in part, by the change in the value of
the long portion of the Fund's portfolio. The Fund is subject to the risk it may
be unable to reacquire a security to terminate a short position except at a
price substantially in excess of the last quoted price. Also, there is the risk
that the counterparty to a short sale may fail to honor its contractual terms,
causing a loss to the Fund.
The Fund has established an account with Pershing, LLC ("Pershing") for the
purpose of purchasing securities on margin. At October 31, 2013, the Fund owed
Pershing $24,041,503 for securities purchased on margin (reflected as Borrowings
in the Statement of Assets and Liabilities). The Fund pays interest on any
margin balance, which is calculated as the daily margin account balance times
the broker's margin interest rate. Interest is charged on payable debit margin
balances at a rate equal to the Federal Funds rate plus 75 basis points and
charged on payable credit margin balances at a rate equal to the Federal Funds
rate less 40 basis points. At October 31, 2013, the Fund had a debit margin
balance with an interest rate of 0.81%. For the year ended October 31, 2013,
margin interest expense was $1,506,054 as shown on the Statement of Operations.
For the year ended October 31, 2013, the average margin balance and interest
rate were $168,490,935 and 0.88%, respectively.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Level dividend distributions are declared and paid monthly to Common
Shareholders after the payment of interest and/or dividends in connection with
leverage. The level dividend rate may be modified by the Board of Trustees from
time to time. If, for any monthly distribution, net investment company taxable
income, if any (which term includes net short-term capital gain), is less than
the amount of the distribution, the difference will generally be a tax-free
return of capital distributed from the Fund's assets. Distributions of any net
long-term capital gains earned by the Fund are distributed at least annually.
Distributions will automatically be reinvested into additional Common Shares
pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are
elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013
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, 2013, resulting in book and tax accounting
differences, have been reclassified at year end to reflect a decrease in
accumulated net investment income (loss) by $1,424,856 and an increase in
accumulated net realized gain (loss) on investments by $1,424,856. Net assets
were not affected by this reclassification.
The tax character of distributions paid during the fiscal years ended October
31, 2013 and October 31, 2012 was as follows:
Distributions paid from: 2013 2012
Ordinary income.................................. $ 47,827,919 $ 57,752,609
Capital gain..................................... -- 9,358
Return of capital................................ 2,794,928 --
As of October 31, 2013, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income.................... $ --
Undistributed capital gains...................... --
------------
Total undistributed earnings..................... --
Accumulated capital and other losses............. (28,624,092)
Net unrealized appreciation (depreciation)....... 51,498,720
------------
Total accumulated earnings (losses).............. 22,874,628
Other............................................ --
Paid-in capital.................................. 684,932,467
------------
Net assets....................................... $707,807,095
============
I. INCOME AND OTHER TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward
eight years and treated as short-term losses. As a transition rule, the Act
requires that post-enactment net capital losses be used before pre-enactment net
capital losses. At October 31, 2013, the Fund had no pre-enactment net capital
losses for federal income tax purposes. At October 31, 2013 the Fund had
post-enactment net capital losses for federal income tax purposes of $28,624,092
to be carried forward indefinitely.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2010, 2011,
2012 and 2013 remain open to federal and state audit. As of October 31, 2013,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
J. EXPENSES:
The Fund will pay all expenses directly related to its operations.
K. ACCOUNTING PRONOUNCEMENT:
In December 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). This disclosure requirement is intended to help
investors and other financial statement users better assess the effect or
potential effect of offsetting arrangements on a fund's financial position. ASU
2011-11 requires entities to disclose both gross and net information about both
instruments and transactions eligible for offset on the Statement of Assets and
Liabilities, and disclose instruments and transactions subject to master netting
or similar agreements. In addition, in January 2013, FASB issued Accounting
Standards Update No. 2013-1 "Clarifying the Scope of Offsetting Assets and
Liabilities" ("ASU 2013-1"), specifying which transactions are subject to
offsetting disclosures. The scope of the disclosure
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, 2013
requirements is limited to derivative instruments, repurchase agreements and
reverse repurchase agreements, and securities borrowing and securities lending
transactions. ASU 2011-11 and ASU 2013-1 are effective for financial statements
with fiscal years beginning on or after January 1, 2013, and interim periods
within those fiscal years. Management is currently evaluating the impact of the
updated standards on the Fund's financial statements, if any.
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 Shields serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee at an annual rate of 0.50% of Managed Assets that is paid by
First Trust from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
chairman will serve two-year terms until December 31, 2013, before rotating to
serve as chairman of another committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee Chairmen will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended October 31, 2013, were $236,106,791 and
$233,245,412, respectively.
5. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
6. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On November 20, 2013, the Fund declared a dividend of $0.1100 per share to
Common Shareholders of record on December 4, 2013, payable December 10, 2013.
This was a decrease from the prior month's distribution paid on November 15,
2013 of $0.1155 per share.
On December 17, 2013, the Fund declared a dividend of $0.1100 per share to
Common Shareholders of record on December 31, 2013, payable January 15, 2014.
Page 28
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST HIGH INCOME LONG/SHORT
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust High Income Long/Short Fund (the "Fund"), including the portfolio of
investments, as of October 31, 2013, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2013 by correspondence with the Fund's
custodian, brokers, and agent banks; where replies were not received, 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, 2013, and the results
of its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 20, 2013
Page 29
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2013, 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 May 14, 2013, 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 (formerly known as First Trust Active
Dividend Income Fund), First Trust High Income Long/Short Fund and First Trust
Energy Infrastructure Fund was held on April 17, 2013 (the "Annual Meeting"). At
the Annual Meeting, James A. Bowen and Niel B. Nielson were elected by the
Common Shareholders of the First Trust High Income Long/Short Fund as Class III
Trustees for a three-year term expiring at the Fund's annual meeting of
shareholders in 2016. The number of votes cast in favor of Mr. Bowen was
31,666,533, the number of votes against was 518,130 and the number of
abstentions was 3,871,496. The number of votes cast in favor of Mr. Nielson was
31,641,349, the number of votes against was 543,314 and the number of
abstentions was 3,871,496. Richard E. Erickson, Thomas R. Kadlec and Robert F.
Keith are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
securities of companies in similar
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013 (UNAUDITED)
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, 2013 (UNAUDITED)
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND INVESTMENT
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust High Income Long/Short Fund (the "Fund"),
including the Independent Trustees, approved the Investment Management Agreement
(the "Advisory Agreement") between the Fund and First Trust Advisors L.P. (the
"Advisor") and the Investment Sub Advisory Agreement (the "Sub Advisory
Agreement" and together with the Advisory Agreement, the "Agreements") among the
Fund, the Advisor and MacKay Shields LLC (the "Sub-Advisor"), at a meeting held
on June 9-10, 2013. 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. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs.
Following receipt of this information, the Independent Trustees and their
counsel met separately to discuss the information provided by the Advisor and
the Sub-Advisor. The Board applied its business judgment to determine whether
the arrangements between the Fund and the Advisor and among the Fund, the
Advisor and the Sub-Advisor are reasonable business arrangements from the Fund's
perspective as well as from the perspective of shareholders. The Board
considered that shareholders chose to invest or remain invested in the Fund
knowing that the Advisor and the Sub-Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objectives and policies. With respect to the Sub-Advisory Agreement,
the Board 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 with investment objectives and policies similar to the Fund's. The
Board noted that the Advisor charges a lower advisory fee rate to the separately
managed accounts, as well as the Advisor's statement that the nature of the
services provided to the separately managed accounts is not comparable to those
provided to the Fund. The Board considered the sub-advisory fee and how it
relates to the Fund's overall advisory fee structure and noted that the
sub-advisory fee is paid by the Advisor from its advisory fee. The Board also
considered information provided by the Sub-Advisor as to the fees it charges to
other similar clients, noting that the sub-advisory fee rate is generally lower
than the fee rate charged by the Sub-Advisor to other similar clients. In
addition, the Board reviewed data prepared by Lipper Inc. ("Lipper"), an
independent source, showing the advisory fees and expense ratios of the Fund as
compared to the advisory fees and expense ratios of an expense peer group
selected by Lipper and similar data from the Advisor for a separate peer group
selected by the Advisor. The Board noted that the Lipper expense peer group
consisted of only three other funds and that the Lipper and Advisor peer groups
did not include any overlapping peer funds. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer 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 types of leverage which have different costs
associated with them or may use no leverage, noting that the Fund uses
non-traditional leverage by shorting bonds and reinvesting the proceeds; and
(iii) none of the peer funds employ
Page 33
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013 (UNAUDITED)
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 contractual advisory fee was above the median of the
Lipper peer group.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance and portfolio risk on an ongoing basis. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also received
data prepared by Lipper comparing the Fund's performance to a performance peer
universe selected by Lipper and to a benchmark. In reviewing the Fund's
performance as compared to the performance of Lipper performance peer universe,
the Board took into account the limitations described above with respect to
creating a relevant peer group for the Fund. The Board considered the Fund's
dividend yield as of March 28, 2013 and an analysis prepared by the Advisor on
the continued benefits provided by the Fund's leverage. In addition, the Board
compared the Fund's premium/discount over the past eight quarters to the average
and median premium/discount of the Advisor peer group over the same period and
considered the factors that may impact a fund's premium/discount.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board determined that due to the Fund's
closed-end structure, the potential for realization of economies of scale as
Fund assets grow was not a material factor to be considered. The Board also
considered the costs of the services provided and profits realized by the
Advisor from serving as investment advisor to the Fund for the twelve months
ended December 31, 2012, as set forth in the materials provided to the Board.
The Board noted the inherent limitations in the profitability analysis, and
concluded that the Advisor's estimated profitability appeared to be not
excessive in light of the services provided to the Fund. In addition, the Board
considered fall-out benefits described by the Advisor that may be realized from
its relationship with the Fund, including the Advisor's compensation for fund
reporting services pursuant to a separate Fund Reporting Services Agreement.
The Board noted the Sub-Advisor's statement that it will not experience
significant economies of scale based on the current level of assets of the Fund.
The Board considered that the sub advisory fee rate was negotiated at arm's
length between the Advisor and the Sub-Advisor, an unaffiliated third party. The
Board also considered data provided by the Sub-Advisor as to the profitability
of the Sub-Advisory Agreement to the Sub-Advisor. The Board noted the inherent
limitations in the profitability analysis and concluded that the profitability
analysis for the Advisor was more relevant, although the profitability of the
Sub-Advisory Agreement appeared to be not excessive in light of the services
provided to the Fund. The Board considered fall-out benefits realized by the
Sub-Advisor from its relationship with the Fund, noting that the Sub-Advisor did
not identify any material fall-out benefits.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 34
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013 (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; 105 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 105 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. and ADM
Suite 400 Inception ADM Investor Services, Inc. Investor Services,
Wheaton, IL 60187 (Futures Commission Merchant) International
D.O.B.: 11/57
Robert F. Keith, Trustee o Three Year Term President (2003 to Present), Hibs 105 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 President and Chief Executive Officer (June 105 Director of
c/o First Trust Advisors L.P. 2013 to Present), Dew Learning LLC Covenant
120 East Liberty Drive, o Since Fund (Educational Products and Services); President Transport Inc.
Suite 400 Inception (June 2002 to June 2013), Covenant College
Wheaton, IL 60187
D.O.B.: 03/54
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee and o Three Year Term Chief Executive Officer (December 2010 105 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 2014 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2015 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2016 annual meeting of shareholders.
Page 35
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013 (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 WHO ARE NOT TRUSTEES(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 President and L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Chief Executive Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Officer Since Company/Investment Advisor) and Stonebridge
January 2012 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 Treasurer, Chief January 2011), First Trust Advisors L.P.
Wheaton, IL 60187 Financial Officer and First Trust Portfolios L.P.
D.O.B.: 01/66 and Chief Accounting
Officer Since
January 2012
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First
120 East Liberty Drive, Legal Officer Trust Portfolios L.P. and BondWave LLC
Suite 400 o Since Fund Inception (Software Development Company/Investment
Wheaton, IL 60187 Advisor); Secretary of Stonebridge Advisors LLC
D.O.B.: 05/60 (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 East Liberty Drive, Senior Vice President, (September 2005 to
Suite 400 o Since Fund Inception July 2012), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel,
120 East Liberty Drive, and Assistant Secretary First Trust Advisors L.P. and
Suite 400 o Assistant Secretary First Trust Portfolios L.P.
Wheaton, IL 60187 Since Fund Inception
D.O.B.: 12/66
o Chief Compliance
Officer Since
January 2011
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 36
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2013
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, 2012 and $52,000 for the fiscal
year ended October 31, 2013.
(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, 2012 and $0 for the
fiscal year ended October 31, 2013.
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, 2012 and $0 for
the fiscal year ended October 31, 2013.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning were $0 for the fiscal year
ended October 31, 2012 and $5,200 for the fiscal year ended October 31, 2013.
The fees for 2013 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, 2012 and $0 for the fiscal year ended October 31,
2013.
(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, 2012 and
$0 for the fiscal year ended October 31, 2013.
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, 2012 and
$0 for the fiscal year ended October 31, 2013.
(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, 2012 were $0 for the Registrant and $6,600 for the
Registrant's investment adviser and for the Registrant's fiscal year ended
October 31, 2013 were $5,200 for the Registrant and $3,000 for the Registrant's
investment adviser.
(h) The Registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
INFORMATION PROVIDED AS OF DECEMBER 18, 2013
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, 2012, MacKay Shields had approximately $79.5
billion in assets under management.
DAN ROBERTS, PHD, EXECUTIVE MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER AND HEAD
OF GLOBAL FIXED INCOME DIVISION Mr. Roberts has 37 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 36 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 30 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 35 years of investment experience. During his career, Mr.
Wagenseil has served as a specialist in troubled loan workouts and recoveries.
He headed a High Yield Commercial Paper Research department and has been a
managing director of a Financial Restructuring Group. He was a Senior Portfolio
Manager for High Yield and High Yield Arbitrage Portfolios. His public service
and military experience includes the U.S. Navy (Lieutenant) during the Vietnam
War and five years as the Commissioner, Department of Elderly Affairs for the
City of Boston. Mr. Wagenseil received a BA from Dartmouth College and an MBA
(finance) from the Harvard Business School. Mr. Wagenseil joined MacKay Shields
in October 2004 after the firm acquired the fixed income assets of Pareto
Partners.
(a)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
INFORMATION PROVIDED AS OF OCTOBER 31, 2013.
# 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 $5,255,000,000 0 $0
Companies:
Other Pooled Investment 19 $10,194,000,000 3 $835,810,000
Vehicles:
Other Accounts: 164 $29,212,000,000 8 $2,715,000,000
Registered Investment 11 $5,255,000,000 0 $0
2. Louis Cohen Companies:
Other Pooled Investment 19 $10,194,000,000 3 $835,810,000
Vehicles:
Other Accounts: 164 $29,212,000,000 8 $2,715,000,000
Registered Investment 11 $5,255,000,000 0 $0
3. Michael Kimble Companies:
Other Pooled Investment 19 $10,194,000,000 3 $835,810,000
Vehicles:
Other Accounts: 164 $29,212,000,000 8 $2,715,000,000
Registered Investment 11 $5,255,000,000 0 $0
4. Taylor Wagenseil Companies:
Other Pooled Investment 19 $10,194,000,000 3 $835,810,000
Vehicles:
Other Accounts: 164 $29,212,000,000 8 $2,715,000,000
* 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.
POTENTIAL CONFLICTS OF INTERESTS
MacKay's Global Fixed Income team provides portfolio management services for
other MacKay accounts, including: mutual funds, institutional accounts, managed
accounts, private commingled funds, and hedge funds. Except for distinctions
based on investment objectives, investment guidelines and cash flow, all
accounts are treated the same, regardless of fee structure.
To address potential conflicts of interest, MacKay has adopted various policies
and procedures to provide for equitable treatment of trading activity and to
make sure that investment opportunities are allocated in a fair and appropriate
manner. In addition, our Code Ethics and related policies and procedures
reinforce a manager's obligation to treat all clients fairly and equitably.
These policies, procedures, and the Code of Ethics are designed to prevent a
portfolio manager from favoring one client over another.
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, 2013.
MacKay establishes salaries at competitive levels, verified through industry
surveys, to attract and maintain the best professional talent. In addition, an
incentive bonus equal to a significant percentage of the firm's pre-tax profits
is paid annually to the firm's employees based upon an individual's performance
and the profitability of the firm. The bonus generally represents a sizable
amount relative to the base salary, and when considered with the base salary,
results in a highly attractive level of total cash compensation for the firm's
professional employees. There is no difference between the method used in
determining the portfolio managers' compensation with respect to the Fund and
the other accounts they manage. We believe that compensation paid by MacKay is
adequate to attract and retain high-caliber employees.
MacKay Shields has performance-based fee arrangements with certain clients.
Performance-based fees may be calculated as a percentage of returns, or as a
percentage of the increase in net asset value. They may be tied to a benchmark
or loss carry forward or high watermark. Higher fees benefit our company as well
as our employees because asset-based fees and performance-based fees we receive
are included in the pool from which we pay incentive bonuses to our performance
fee.
Effective January 1, 2010, MacKay Shields adopted the MacKay Shields Equity
Plan, which provides phantom equity to senior employees, which vests over a
specified number of months following the grant. Awards from the MacKay Shields
Equity Plan are an integral component of total compensation for senior
employees.
The incentive bonus paid to MacKay Shields' portfolio managers is based on their
overall investment performance, not the performance of any specific portfolios.
The senior portfolio managers involved in managing the Fund's investments have
each entered into Executive Employment Agreements with MacKay Shields, which
include provisions relating to base salary and incentive compensation as
described above. The Executive Employment Agreements are renewable for one year
terms and can be terminated on 60 days' prior written notice. There is also a
provision for termination by MacKay Shields 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 Registrant.
The compensation received by portfolio managers is based on both quantitative
and qualitative factors. The quantitative factors may include (i) the portfolio
managers' overall investment performance, (ii) the assets under their
management, (iii) the overall profitability of their investment team and the
firm, and (iv) industry benchmarks. The qualitative factors include, among
others, leadership and adherence to the firm's policies and procedures. To the
extent that an increase in the size of an account (including a mutual fund)
managed by a portfolio manager results in an increase in the firm's
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 one account and other accounts they manage.
(a)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF OCTOBER 31, 2013.
Dollar Range of Fund Shares
Name Beneficially Owned
-------------------- ---------------------------
Dan Roberts $0
Taylor Wagenseil $0
Louis Cohen $50,001-$100,000
Michael Kimble $0
--------------------------------------------------------------------------------
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required by
this paragraph, based on their evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust High Income Long/Short Fund
---------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2013
---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2013
---------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 20, 2013
---------------------
* Print the name and title of each signing officer under his or her signature.