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, 2017
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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
HIGH INCOME LONG/SHORT FUND (FSD)
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ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2017
FIRST TRUST
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TABLE OF CONTENTS
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First Trust High Income Long/Short Fund (FSD)
Annual Report
October 31, 2017
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...................... 31
Additional Information....................................................... 32
Board of Trustees and Officers............................................... 37
Privacy Policy............................................................... 39
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or MacKay Shields LLC ("MacKay" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust High Income Long/Short Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of a relevant market
benchmark.
It is important to keep in mind that the opinions expressed by personnel of
MacKay are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2017
Dear Shareholders:
Thank you for your investment in First Trust High Income Long/Short Fund.
First Trust is pleased to provide you with the annual report which contains
detailed information about your investment for the 12 months ended October 31,
2017, including a market overview and a performance analysis for the period. We
encourage you to read this report carefully and discuss it with your financial
advisor.
The U.S. bull market continued through the November 2016 election and the first
nine months of the Trump presidency. During that period, November 8, 2016
(Election Day 2016) through October 31, 2017, the S&P 500(R) Index (the "Index")
posted a total return of 22.73%, according to Bloomberg. Ten of the eleven Index
sectors were up on a total return basis as well. Since the beginning of 2017
through October 31, 2017, the Index has closed its trading sessions at all-time
highs on 50 occasions. Finally, as of October 31, 2017, the Index has spent the
entire year in positive territory. This has only happened in 10 different years
over the past seven decades.
The current bull market, as measured from March 9, 2009 through October 31, 2017
is the second longest in history. While we are optimistic about the U.S.
economy, we are aware that no one can know how markets will perform in different
economic environments. We are also upbeat about the potential for world economic
growth turning higher. While no one can predict the future, the International
Monetary Fund sees world real gross domestic product rising by an estimated 0.5
percentage points from the 3.2% posted in 2016 to the 3.7% it is projecting for
2018.
We believe that one should invest for the long term and be prepared for market
volatility by keeping current on your portfolio and investing goals by speaking
regularly with your investment professional. It is also important to keep in
mind that past performance can never guarantee future results.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on bringing
the types of investments that we believe can help you reach 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, 2017 (Unaudited)
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FUND STATISTICS
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Symbol on NYSE FSD
Common Share Price $16.91
Common Share Net Asset Value ("NAV") $18.23
Premium (Discount) to NAV (7.24)%
Net Assets Applicable to Common Shares $546,047,096
Current Monthly Distribution per Common Share (1) $0.1272
Current Annualized Distribution per Common Share $1.5264
Current Distribution Rate on Common Share Price (2) 9.03%
Current Distribution Rate on NAV (2) 8.37%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/16 15.52 17.71
15.12 17.45
15.02 17.45
15.47 17.37
11/16 15.59 17.48
15.44 17.42
15.89 17.71
15.98 17.69
15.92 17.78
12/16 16.08 17.71
16.42 17.92
16.46 17.97
16.41 17.94
1/17 16.60 18.06
16.64 18.03
16.55 18.05
16.85 18.08
2/17 16.90 18.20
16.95 18.16
16.53 17.86
16.60 17.88
16.47 17.82
3/17 16.66 18.03
16.75 17.97
16.90 17.93
16.92 17.99
4/17 17.30 18.14
17.04 18.01
17.12 18.10
17.12 18.13
5/17 17.25 18.22
17.14 18.16
17.15 18.16
17.21 18.17
17.20 18.11
6/17 17.24 18.17
17.07 18.00
17.09 18.09
17.15 18.27
7/17 17.14 18.33
17.15 18.21
16.85 18.03
16.78 18.05
8/17 16.93 18.14
16.87 18.09
16.79 18.08
16.95 18.13
17.01 18.19
9/17 17.02 18.27
16.92 18.17
17.06 18.17
17.06 18.25
17.02 18.23
10/17 16.91 18.23
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended Inception (9/27/10)
10/31/17 10/31/17 to 10/31/17
FUND PERFORMANCE (3)
NAV 11.98% 7.13% 7.51%
Market Value 18.52% 5.84% 5.69%
INDEX PERFORMANCE
ICE BofAML US High Yield Constrained Index(4) 9.14% 6.30% 7.38%
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% OF LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS (5)
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Basic Industry 13.4%
Telecommunications 9.2
Healthcare 9.1
Energy 8.1
Capital Goods 7.5
Services 6.6
Technology & Electronics 6.6
Media 5.8
Banking 5.1
Leisure 5.0
Automotive 5.0
Consumer Goods 4.9
Insurance 3.3
Financial Services 3.0
Retail 2.9
Transportation 2.4
Commercial Mortgage-Backed Securities 0.7
Utility 0.5
Foreign Sovereign 0.5
Collateralized Mortgage Obligations 0.3
Asset-Backed Securities 0.1
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Total 100.0%
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% OF TOTAL
COUNTRY EXPOSURE INVESTMENTS (5)
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United States 79.6%
Luxembourg 4.7
Canada 4.0
United Kingdom 2.4
Netherlands 2.1
Ireland 1.4
Cayman Islands 0.9
France 0.8
Finland 0.8
Bermuda 0.7
Liberia 0.6
Jersey 0.5
Portugal 0.5
Australia 0.4
Mexico 0.3
Multinational 0.3
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Total 100.0%
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% OF LONG-TERM
ASSET CLASSIFICATION INVESTMENTS (5)
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Corporate Bonds and Notes 71.6%
Foreign Corporate Bonds and Notes 18.8
Capital Preferred Securities 6.8
Senior Floating-Rate Loan Interests 1.2
Mortgage-Backed Securities 1.0
Foreign Sovereign Bonds and Notes 0.5
Asset-Backed Securities 0.1
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Total 100.0%
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% OF LONG
FIXED-INCOME
CREDIT QUALITY (6) INVESTMENTS (5)
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BBB- and above 13.3%
BB 52.1
B 29.0
CCC+ and below 4.8
Not Rated 0.8
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Total 100.0%
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(1) Most recent distribution paid or declared through 10/31/2017. Subject to
change in the future. The distribution was increased subsequent to
10/31/2017.
(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 10/31/2017. 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
of less than one year. Past performance is not indicative of future
results.
(4) Effective October 22, 2017, the index name changed from BofA Merrill Lynch
US High Yield Constrained Index to ICE BofAML US High Yield Constrained
Index.
(5) Percentages are based on the long positions only. Short positions are
excluded.
(6) The credit quality and ratings information presented above reflect the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings, or a comparably rated NRSRO. For situations in which
a security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") is the investment advisor to the First
Trust High Income Long/Short Fund (the "Fund"). 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.
SUB-ADVISOR
MacKay Shields LLC is a registered investment adviser founded in 1938, and is
Sub-Advisor to First Trust High Income Long/Short Fund (the "Fund"). The Fund
trades under the ticker symbol FSD on the New York Stock Exchange. As of October
31, 2017, MacKay had approximately $97.8 billion in assets under management.
PORTFOLIO MANAGEMENT TEAM
DAN ROBERTS, PHD - EXECUTIVE MANAGING DIRECTOR, HEAD OF GLOBAL FIXED INCOME
DIVISION AND CHIEF INVESTMENT OFFICER
LOUIS N. COHEN, CFA - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
MICHAEL KIMBLE, CFA - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
MARKET RECAP
This report covers the Fund for the 12-month period ending October 31, 2017.
For the 12-month period ended October 31, 2017, risk-based assets rallied
following the strong performance which began in early 2016. The prolonged rally
in credit-sensitive fixed income markets has been driven by a generally sound
economic backdrop and optimistic investor outlook. Factors that contributed to
the market's robust performance were optimism following the U.S. presidential
election, a rebound in oil prices, buoyant job growth in the U.S., and a
positive global economic backdrop, including the Organization for Economic
Cooperation and Development's ("OECD") announcement that all 45 countries it
tracks have shown economic growth in 2017. This is the first instance of
simultaneous global growth since 2007. Concurrently, the International Monetary
Fund ("IMF") increased its global growth forecast to 3.5% for 2017, up from 3.2%
in 2016. Japan, Brazil, Spain, and Italy were among the countries to post
improved economic numbers recently, providing some reassurance for investors
worried about the future trajectory of Chinese and U.S. growth. As widely
anticipated, the Federal Reserve (the "Fed") also raised the Fed funds target
rate to 1.25% at their June meeting. Expectations remain high that the Federal
Open Market Committee ("FOMC") will embark on tapering before year end and that
the European Central Bank ("ECB") will begin to outline its plans for reducing
its own quantitative easing ("QE"). Hurricanes, tensions with North Korea, and
presidential tweets were not as friendly for risky assets during the last few
months, and we observed a brief period of softness in the markets during the
summer. For the fiscal year ended October 31, 2017, equities soared, delivering
high double-digit returns. The Russell 2000(R) Index, which tracks small-cap
U.S. equities, was the best performer during the period, delivering a return of
27.9%. The MSCI EAFE Index, which tracks international equities, followed with a
return of 24.0%, while the S&P 500(R) Index, which tracks large-cap U.S.
equities, increased by 23.6%. Outside of equities, U.S. high-yield securities
delivered respectable results, gaining 9.1% according to the ICE BofAML US High
Yield Constrained Index. U.S. Corporates were next in line, returning 3.5% for
this period, according to the Bloomberg Barclays US Corporate Index. U.S.
Treasuries, as measured by the ICE BofAML 10 Year US Treasury Index, declined by
3.0%.
At the start of the period (November, 2016), U.S. capital markets were highly
focused on the U.S. Presidential election and responded favorably to the Trump
victory. This marked a watershed moment as the Republican Party gained control
of both the executive and legislative branches of government. Sentiment-based
economic indicators continue to remain high in the U.S., although progress on
the Trump administration's economic, tax, trade, and infrastructure policies has
diminished given the confrontational political atmosphere in Washington, D.C.
Nevertheless, the U.S. economy continues to expand modestly although auto sales
are weakening. The outcome of the Dodd Frank bank exams was released in late
June, and all 34 of the largest banks in the U.S. cleared the Fed's stress test.
Fed Board of Governor Jerome Powell noted, "this year's results show that, even
during a severe recession, our large banks would remain well capitalized."
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2017 (UNAUDITED)
During the period, the Fed officially laid out plans to reduce its $4.5 trillion
balance sheet, announcing in September, an October start date for the plan. The
FOMC stated that it "intends to gradually reduce holdings by decreasing the
reinvestment of principal payments it receives". U.S. Treasuries and agency debt
and mortgage-backed securities holdings will be affected based on a formula and
schedule detailed in the Fed's press release. The FOMC added that it would cease
the incremental tapering if "a material deterioration of the economic outlook
was to warrant a sizeable reduction in the Committee's target for the federal
funds rate." Although the FOMC left short-term rates unchanged after its October
meeting, we believe the markets continue to attach a high probability of a final
2017 rate increase at the December meeting. On November 2, 2017, President Trump
announced Jerome Powell as his nominee to replace Janet Yellen as Fed Chair. If
confirmed by the Senate, Powell will be the first Fed Chairperson in four
decades to not have a Ph.D. in economics. Mr. Powell is an attorney and past Fed
governor with extensive regulatory experience and is considered a policy
centrist by many.
Other central banks were in the news as well. Although the ECB announced that it
will trim its corporate bond buying program from (euro)60 billion to (euro)30
billion per month commencing in January of 2018, the central bank indicated that
it intends to keep its main rate at zero for "an extended period of time, and
well past the horizon of net asset purchases."
Global growth continues to improve. The IMF revised its global growth forecasts,
and U.S. gross domestic product ("GDP") for the third quarter of 2017 came in at
3.0%, following 3.1% for the second quarter. These data follow a late September
rise in European business and consumer sentiment as tracked by the European
Commission. Second quarter investment in the Eurozone continued to advance at
3.5% for the entire region, with Germany up 6.2% and Italy up 3.6% according to
data released in early October, 2017.
PERFORMANCE ANALYSIS
Overall, U.S. high-yield (HY) securities have performed quite well for the
12-month period ended October 31, 2017. According to JP Morgan, par-weighted HY
defaults over the last 12 months ("LTM") have dropped, and the drop is largely
due to the rolling off of early 2016 energy company defaults. JP Morgan pegged
the HY default rate - including distressed exchanges - down to 1.34% as of
October 2017. LTM recoveries of 49.0% topped the 25-year historical average of
41.2% and have been improving throughout 2017. All sectors within the widely
watched ICE BofAML US High Yield Constrained Index(1) delivered positive
returns; the Transportation (17.0%), Financial Services (11.8%), and Services
(10.8%) sectors were the strongest performers.
The Fund outperformed its benchmark, the ICE BofAML US High Yield Constrained
Index, on a total gross return(2), share price and net asset value ("NAV") basis
for the 12-month period ended October 31, 2017. The Fund returned 18.52%2 and
11.98% on a share price and NAV basis, respectively, compared with the
benchmark, which gained 9.14% for the period. The Fund's exposure to insurance
hybrid preferred bonds as well as issue selection within the basic industries,
specifically the building & construction and steel producers subsectors, were
beneficial to performance, whereas the Fund's underweight positioning within the
energy sector detracted from relative results.
The Fund maintained short positions in U.S. Treasury bonds during the period,
which were used to reduce the portfolio's exposure to interest rate risk, while
at the same time purchasing additional high-yield securities to increase the
size of the portfolio. The Fund benefited from its additional long exposure to
high-yield bonds, offset slightly by the borrowing costs involved, as the
high-yield market rallied in the period. Given that the U.S. Treasury curve
exhibited a bear flattener during the period, the short U.S. Treasury position
added to results.
(1) The ICE BofAML US High Yield Constrained Index tracks the performance of
U.S. dollar denominated below investment grade corporate debt publicly
issued in the U.S. domestic market but caps issuer exposure at 2%. Indexes
are unmanaged and an investor cannot invest directly in an index.
(2) Total return is based on a combination of reinvested divindends, 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 affect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2017 (UNAUDITED)
OUTLOOK
While we believe the markets continue to embrace the 'reflation trade' supported
by an expectation of favorable corporate tax reform, we do expect U.S. economic
growth to slow over the coming months. Lower corporate tax rates could further
extend the current earnings cycle, but headwinds remain as the Fed continues to
tighten monetary conditions. We have observed that U.S. economic growth slows
substantially 24 to 36 months into a tightening cycle. While we do realize that
the pace of tightening has been unusually slow and therefore the lag could be
greater, we also recognize that the Fed has had to use every tool at its
disposal just to achieve moderate credit growth, which is the fuel of all
expansions. Given this relatively slow credit growth, it is not too hard to
imagine that credit might be more sensitive to tightening monetary policy than
has been the case in the past, in our opinion.
From a technical perspective, we believe there are also many signs that we are
in the later stages of an expansion as both high-yield and investment-grade
credit premiums have narrowed dramatically over the past year and the S&P 500(R)
Index's trailing price-to-earnings ratio is near a record. In our opinion,
market participants are indiscriminately chasing returns which is typical of the
final stages of a rally. While spreads could continue to tighten further,
incremental risk is being rewarded less and less.
This material contains the opinions of the Global Fixed Income team of MacKay
Shields LLC but not necessarily those of MacKay Shields LLC. The opinions
expressed herein are subject to change without notice. This material is
distributed for informational purposes only. Forecasts, estimates, and opinions
contained herein should not be considered as investment advice or a
recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be
reliable, but not guaranteed. No part of this document may be reproduced in any
form, or referred to in any other publication, without express written
permission of MacKay Shields LLC. (c) 2016, MacKay Shields LLC.
Page 5
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- --------- ------------ ---------------
CORPORATE BONDS AND NOTES - 88.8%
Automotive - 5.0%
$ 4,025,000 Dana, Inc. (a)................................................ 5.50% 12/15/24 $ 4,266,500
220,000 Ford Motor Co................................................. 8.90% 01/15/32 304,662
1,400,000 Ford Motor Co. (a)............................................ 7.75% 06/15/43 1,845,483
1,620,000 Ford Motor Co. (a)............................................ 9.98% 02/15/47 2,610,576
4,360,000 Gates Global LLC/Gates Global Co. (a) (b)..................... 6.00% 07/15/22 4,507,150
1,275,000 Goodyear Tire & Rubber (The) Co............................... 5.00% 05/31/26 1,311,656
3,300,000 Goodyear Tire & Rubber (The) Co............................... 4.88% 03/15/27 3,366,000
3,857,000 Navistar International Corp................................... 8.25% 11/01/21 3,873,006
1,970,000 Tenneco, Inc.................................................. 5.00% 07/15/26 2,028,509
3,155,000 ZF North America Capital, Inc. (b)............................ 4.75% 04/29/25 3,324,581
---------------
27,438,123
---------------
Banking - 1.7%
6,165,000 Ally Financial, Inc. (a)...................................... 8.00% 11/01/31 8,184,038
612,000 Ally Financial, Inc. (a)...................................... 8.00% 11/01/31 810,900
---------------
8,994,938
---------------
Basic Industry - 10.5%
650,000 AK Steel Corp................................................. 7.63% 10/01/21 677,625
1,000,000 AK Steel Corp................................................. 7.50% 07/15/23 1,086,250
2,100,000 AK Steel Corp................................................. 6.38% 10/15/25 2,073,750
1,865,000 Aleris International, Inc..................................... 7.88% 11/01/20 1,870,744
2,425,000 Beazer Homes USA, Inc......................................... 8.75% 03/15/22 2,700,723
4,600,000 CalAtlantic Group, Inc. (a)................................... 8.38% 05/15/18 4,761,000
500,000 CalAtlantic Group, Inc........................................ 5.88% 11/15/24 558,438
1,800,000 Cleveland-Cliffs, Inc. (a) (b)................................ 5.75% 03/01/25 1,750,500
800,000 Cleveland-Cliffs, Inc......................................... 4.88% 04/01/21 774,000
2,720,000 Core & Main L.P. (b).......................................... 6.13% 08/15/25 2,760,800
200,000 Freeport-McMoRan, Inc......................................... 4.00% 11/14/21 202,500
1,000,000 Freeport-McMoRan, Inc......................................... 3.55% 03/01/22 992,500
3,680,000 Freeport-McMoRan, Inc......................................... 3.88% 03/15/23 3,638,600
960,000 Freeport-McMoRan, Inc......................................... 4.55% 11/14/24 962,890
2,979,000 KB Home....................................................... 7.50% 09/15/22 3,463,087
1,100,000 Koppers, Inc. (a) (b)......................................... 6.00% 02/15/25 1,182,500
3,180,000 Meritage Homes Corp........................................... 6.00% 06/01/25 3,434,400
1,000,000 Novelis Corp. (b)............................................. 6.25% 08/15/24 1,057,500
2,862,000 Novelis Corp. (b)............................................. 5.88% 09/30/26 2,956,789
2,045,000 Olin Corp..................................................... 5.13% 09/15/27 2,154,919
1,760,000 PQ Corp. (a) (b).............................................. 6.75% 11/15/22 1,909,600
4,570,000 PulteGroup, Inc. (a).......................................... 7.88% 06/15/32 5,689,650
2,025,000 Shea Homes L.P./Shea Homes Funding Corp. (a) (b).............. 6.13% 04/01/25 2,116,125
4,250,000 Standard Industries, Inc. (b)................................. 5.00% 02/15/27 4,439,975
3,765,000 TRI Pointe Group, Inc./TRI Pointe Homes, Inc.................. 5.88% 06/15/24 4,094,437
---------------
57,309,302
---------------
Capital Goods - 6.9%
3,045,000 Ball Corp..................................................... 4.00% 11/15/23 3,140,156
4,100,000 BWAY Holding Co. (a) (b)...................................... 5.50% 04/15/24 4,284,500
Page 6 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- --------- ------------ ---------------
CORPORATE BONDS AND NOTES (Continued)
Capital Goods (Continued)
$ 3,500,000 Crown Americas LLC/Crown Americas Capital Corp. IV............ 4.50% 01/15/23 $ 3,652,600
4,645,000 KLX, Inc. (b)................................................. 5.88% 12/01/22 4,877,250
1,350,000 Orbital ATK, Inc.............................................. 5.50% 10/01/23 1,443,656
2,840,000 Owens-Brockway Glass Container, Inc. (a) (b).................. 5.00% 01/15/22 3,013,950
5,700,000 Reynolds Group Issuer, Inc./Reynolds Group Issuer LLC/
Reynolds Group Issuer LU (a) (b)........................... 5.13% 07/15/23 5,941,395
3,725,000 Sealed Air Corp. (b).......................................... 5.50% 09/15/25 4,116,125
3,770,000 Terex Corp. (b)............................................... 5.63% 02/01/25 4,000,913
2,925,000 Triumph Group, Inc............................................ 4.88% 04/01/21 2,910,375
---------------
37,380,920
---------------
Consumer Goods - 5.5%
4,895,000 B&G Foods, Inc................................................ 5.25% 04/01/25 5,011,256
3,245,000 Cott Holdings, Inc. (b)....................................... 5.50% 04/01/25 3,354,519
1,920,000 First Quality Finance Co., Inc. (b)........................... 5.00% 07/01/25 1,978,925
3,640,000 Kronos Acquisition Holdings, Inc. (b)......................... 9.00% 08/15/23 3,508,050
1,915,000 Lamb Weston Holdings, Inc. (b)................................ 4.63% 11/01/24 2,010,750
2,000,000 Pilgrim's Pride Corp. (b)..................................... 5.75% 03/15/25 2,122,500
1,765,000 Post Holdings, Inc. (b)....................................... 5.50% 03/01/25 1,844,425
3,610,000 Post Holdings, Inc. (b)....................................... 5.00% 08/15/26 3,637,075
3,910,000 Spectrum Brands, Inc. (a)..................................... 5.75% 07/15/25 4,172,674
2,040,000 US Foods, Inc. (b)............................................ 5.88% 06/15/24 2,164,950
---------------
29,805,124
---------------
Energy - 7.7%
5,100,000 AmeriGas Partners L.P./AmeriGas Finance Corp.................. 5.88% 08/20/26 5,329,500
1,875,000 Andeavor Logistics L.P./Tesoro Logistics Finance Corp. (a).... 5.25% 01/15/25 2,022,656
2,026,000 California Resources Corp. (b)................................ 8.00% 12/15/22 1,344,758
2,060,000 Carrizo Oil & Gas, Inc........................................ 6.25% 04/15/23 2,106,350
3,825,000 Continental Resources, Inc.................................... 5.00% 09/15/22 3,882,375
2,720,000 Crestwood Midstream Partners L.P./Crestwood Midstream
Finance Corp............................................... 6.25% 04/01/23 2,842,400
4,465,000 Denbury Resources, Inc........................................ 5.50% 05/01/22 2,824,112
1,955,000 Hilcorp Energy I L.P./Hilcorp Finance Co. (b)................. 5.00% 12/01/24 1,955,000
1,990,000 Sanchez Energy Corp. (a)...................................... 6.13% 01/15/23 1,671,600
2,020,000 SM Energy Co.................................................. 5.63% 06/01/25 1,974,550
2,110,000 Suburban Propane Partners L.P./Suburban Energy Finance
Corp....................................................... 5.75% 03/01/25 2,125,825
2,280,000 Suburban Propane Partners L.P./Suburban Energy Finance
Corp....................................................... 5.88% 03/01/27 2,274,300
1,300,000 Sunoco L.P./Sunoco Finance Corp. (a).......................... 5.50% 08/01/20 1,337,375
1,560,000 Sunoco L.P./Sunoco Finance Corp............................... 6.38% 04/01/23 1,665,300
4,000,000 Targa Resources Partners L.P./Targa Resources Partners
Finance Corp. (b).......................................... 5.00% 01/15/28 4,015,000
1,520,000 Ultra Resources, Inc. (b)..................................... 7.13% 04/15/25 1,518,100
3,135,000 Whiting Petroleum Corp........................................ 5.75% 03/15/21 3,166,350
---------------
42,055,551
---------------
See Notes to Financial Statements Page 7
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- --------- ------------ ---------------
CORPORATE BONDS AND NOTES (Continued)
Financial Services - 3.8%
$ 6,855,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp. (a).... 6.00% 08/01/20 $ 7,073,503
2,885,000 MSCI, Inc. (b)................................................ 5.75% 08/15/25 3,130,225
3,640,000 OneMain Financial Holdings LLC (b)............................ 7.25% 12/15/21 3,790,150
1,395,000 Springleaf Finance Corp....................................... 6.00% 06/01/20 1,468,238
4,555,000 Springleaf Finance Corp. (a).................................. 7.75% 10/01/21 5,135,762
---------------
20,597,878
---------------
Healthcare - 7.8%
1,265,000 Alere, Inc.................................................... 6.50% 06/15/20 1,291,881
3,345,000 Becton Dickinson and Co. (a).................................. 4.67% 06/06/47 3,520,918
3,825,000 Catalent Pharma Solutions, Inc. (b)........................... 4.88% 01/15/26 3,891,937
2,335,000 CHS/Community Health Systems, Inc............................. 6.88% 02/01/22 1,698,713
2,085,000 CHS/Community Health Systems, Inc............................. 6.25% 03/31/23 2,014,631
3,400,000 Greatbatch Ltd. (b)........................................... 9.13% 11/01/23 3,689,000
6,285,000 HCA, Inc. (a)................................................. 5.00% 03/15/24 6,638,531
3,910,000 Hologic, Inc. (a) (b)......................................... 5.25% 07/15/22 4,095,725
2,670,000 inVentiv Group Holdings, Inc./inVentiv Health, Inc./inVentiv
Health Clinical, Inc. (b).................................. 7.50% 10/01/24 2,957,025
3,665,000 MPH Acquisition Holdings LLC (b).............................. 7.13% 06/01/24 3,953,619
3,000,000 Quintiles IMS, Inc. (b)....................................... 5.00% 10/15/26 3,195,000
2,720,000 Tenet Healthcare Corp......................................... 8.13% 04/01/22 2,743,800
2,680,000 West Street Merger Sub, Inc. (b).............................. 6.38% 09/01/25 2,730,250
---------------
42,421,030
---------------
Leisure - 5.0%
2,500,000 Boyd Gaming Corp.............................................. 6.38% 04/01/26 2,750,000
2,500,000 Eldorado Resorts, Inc......................................... 6.00% 04/01/25 2,650,000
3,400,000 ESH Hospitality, Inc. (b)..................................... 5.25% 05/01/25 3,523,250
1,680,000 GLP Capital LP/GLP Financing II, Inc. (a)..................... 5.38% 04/15/26 1,822,800
3,120,000 Live Nation Entertainment, Inc. (b)........................... 4.88% 11/01/24 3,235,970
4,825,000 MGM Resorts International (a)................................. 6.75% 10/01/20 5,319,563
3,410,000 Scientific Games International, Inc........................... 10.00% 12/01/22 3,784,861
4,225,000 Wynn Las Vegas LLC/Wynn Las Vegas Capital Corp. (a) (b)....... 5.50% 03/01/25 4,452,094
---------------
27,538,538
---------------
Media - 4.4%
2,000,000 Clear Channel Worldwide Holdings, Inc., Series B.............. 7.63% 03/15/20 2,005,000
2,841,000 Clear Channel Worldwide Holdings, Inc., Series B.............. 6.50% 11/15/22 2,954,640
1,250,000 CSC Holdings LLC (b).......................................... 6.63% 10/15/25 1,373,125
2,325,000 CSC Holdings LLC (b).......................................... 5.50% 04/15/27 2,400,562
5,830,000 Dish DBS Corp................................................. 6.75% 06/01/21 6,136,075
4,765,000 iHeartCommunications, Inc..................................... 9.00% 03/01/21 3,448,669
2,115,000 Lamar Media Corp.............................................. 5.75% 02/01/26 2,289,488
3,150,000 Sirius XM Radio, Inc. (b)..................................... 5.38% 07/15/26 3,327,187
---------------
23,934,746
---------------
Page 8 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- --------- ------------ ---------------
CORPORATE BONDS AND NOTES (Continued)
Retail - 3.1%
$ 3,270,000 Dollar Tree, Inc.............................................. 5.75% 03/01/23 $ 3,445,763
5,445,000 Hanesbrands, Inc. (a) (b)..................................... 4.63% 05/15/24 5,621,962
1,320,000 KFC Holding Co./Pizza Hut Holdings LLC/Taco Bell of
America LLC (b)............................................ 5.00% 06/01/24 1,395,900
3,300,000 KFC Holding Co./Pizza Hut Holdings LLC/Taco Bell of
America LLC (b)............................................ 5.25% 06/01/26 3,514,995
2,975,000 Murphy Oil USA, Inc........................................... 6.00% 08/15/23 3,134,906
---------------
17,113,526
---------------
Services - 7.4%
4,000,000 Advanced Disposal Services, Inc. (b).......................... 5.63% 11/15/24 4,170,000
2,125,000 CoreCivic, Inc. (a)........................................... 5.00% 10/15/22 2,228,594
1,090,000 GEO (The) Group, Inc. (a)..................................... 5.88% 10/15/24 1,144,827
2,385,000 GEO (The) Group, Inc.......................................... 6.00% 04/15/26 2,504,250
950,000 H&E Equipment Services, Inc. (b).............................. 5.63% 09/01/25 1,005,813
2,654,000 Herc Rentals, Inc. (b)........................................ 7.50% 06/01/22 2,885,694
958,000 Herc Rentals, Inc. (b)........................................ 7.75% 06/01/24 1,056,195
2,280,000 Iron Mountain, Inc............................................ 5.75% 08/15/24 2,348,400
2,574,000 Iron Mountain, Inc. (b)....................................... 4.88% 09/15/27 2,619,843
4,615,000 KAR Auction Services, Inc. (a) (b)............................ 5.13% 06/01/25 4,788,062
3,055,000 ServiceMaster (The) Co. LLC (a) (b)........................... 5.13% 11/15/24 3,154,287
3,650,000 Tempo Acquisition LLC/Tempo Acquisition Finance
Corp. (b).................................................. 6.75% 06/01/25 3,704,750
1,400,000 United Rentals North America, Inc. (a)........................ 5.50% 07/15/25 1,507,625
2,900,000 United Rentals North America, Inc. (a)........................ 5.88% 09/15/26 3,171,875
2,250,000 United Rentals North America, Inc............................. 4.88% 01/15/28 2,266,875
1,975,000 Wrangler Buyer Corp. (b)...................................... 6.00% 10/01/25 2,029,313
---------------
40,586,403
---------------
Technology & Electronics - 7.0%
2,595,000 CDK Global, Inc. (b).......................................... 4.88% 06/01/27 2,711,775
590,000 CDW LLC/CDW Finance Corp...................................... 5.50% 12/01/24 656,375
145,000 CDW LLC/CDW Finance Corp...................................... 5.00% 09/01/25 152,794
3,700,000 CommScope Technologies LLC (a) (b)............................ 5.00% 03/15/27 3,612,125
2,800,000 CommScope, Inc. (b)........................................... 5.00% 06/15/21 2,866,500
4,166,000 Dell International LLC/EMC Corp. (a) (b)...................... 8.35% 07/15/46 5,415,688
5,783,000 First Data Corp. (a) (b)...................................... 7.00% 12/01/23 6,202,383
2,870,000 Match Group, Inc.............................................. 6.38% 06/01/24 3,128,300
4,015,000 NCR Corp. (a)................................................. 6.38% 12/15/23 4,286,254
3,019,000 PTC, Inc...................................................... 6.00% 05/15/24 3,283,012
3,825,000 Qorvo, Inc. (a)............................................... 7.00% 12/01/25 4,375,991
1,451,000 Zebra Technologies Corp. (a).................................. 7.25% 10/15/22 1,535,339
---------------
38,226,536
---------------
Telecommunications - 9.5%
4,260,000 CenturyLink, Inc., Series P................................... 7.60% 09/15/39 3,951,150
2,570,000 CyrusOne L.P./CyrusOne Finance Corp. (b)...................... 5.38% 03/15/27 2,753,113
3,025,000 Equinix, Inc.................................................. 5.88% 01/15/26 3,285,906
2,500,000 Equinix, Inc.................................................. 5.38% 05/15/27 2,684,375
See Notes to Financial Statements Page 9
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- --------- ------------ ---------------
CORPORATE BONDS AND NOTES (Continued)
Telecommunications (Continued)
$ 400,000 Frontier Communications Corp.................................. 6.25% 09/15/21 $ 329,000
4,750,000 Frontier Communications Corp. (a)............................. 11.00% 09/15/25 4,055,312
1,956,000 Hughes Satellite Systems Corp................................. 5.25% 08/01/26 2,007,501
3,070,000 Level 3 Financing, Inc........................................ 5.38% 01/15/24 3,196,637
2,900,000 Level 3 Financing, Inc........................................ 5.25% 03/15/26 3,004,255
1,850,000 Qualitytech L.P./QTS Finance Corp. (b)........................ 4.75% 11/15/25 1,893,475
8,825,000 Sprint Capital Corp. (a)...................................... 8.75% 03/15/32 10,722,375
570,000 Sprint Communications, Inc. (a)............................... 9.25% 04/15/22 701,100
6,295,000 T-Mobile USA, Inc. (a)........................................ 6.00% 03/01/23 6,649,094
2,925,000 T-Mobile USA, Inc............................................. 6.00% 04/15/24 3,137,063
3,375,000 Zayo Group LLC/Zayo Capital, Inc. (b)......................... 5.75% 01/15/27 3,564,844
---------------
51,935,200
---------------
Transportation - 2.9%
2,000,000 American Airlines Group, Inc.................................. 6.13% 06/01/18 2,045,000
752,018 Continental Airlines 2003-ERJ1 Pass Through Trust............. 7.88% 07/02/18 766,871
1,156,445 Continental Airlines 2005-ERJ1 Pass Through Trust (a)......... 9.80% 04/01/21 1,272,089
5,324,121 US Airways 2000-3C Pass Through Trust......................... 8.39% 03/01/22 5,843,223
5,775,000 XPO Logistics, Inc. (a) (b)................................... 6.50% 06/15/22 6,080,209
---------------
16,007,392
---------------
Utility - 0.6%
3,420,000 Calpine Corp.................................................. 5.75% 01/15/25 3,266,100
---------------
TOTAL CORPORATE BONDS AND NOTES.......................................................... 484,611,307
(Cost $462,105,436) ---------------
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
--------------- -------------------------------------------------------------- --------- ------------ ---------------
FOREIGN CORPORATE BONDS AND NOTES - 23.3%
Automotive - 0.1%
650,000 Dana Financing Luxembourg Sarl (USD) (b)...................... 5.75% 04/15/25 690,625
---------------
Banking - 0.7%
1,320,000 Barclays PLC (USD)............................................ 4.84% 05/09/28 1,378,554
2,400,000 Royal Bank of Scotland Group PLC (USD)........................ 5.13% 05/28/24 2,571,631
---------------
3,950,185
---------------
Basic Industry - 6.1%
409,000 Anglo American Capital PLC (USD) (b).......................... 4.13% 04/15/21 427,955
1,401,000 Anglo American Capital PLC (USD) (a) (b)...................... 4.88% 05/14/25 1,498,280
7,052,000 ArcelorMittal (USD) (a)....................................... 7.50% 10/15/39 8,841,445
1,700,000 Cemex SAB de CV (USD) (b)..................................... 7.75% 04/16/26 1,929,670
2,345,000 FMG Resources (August 2006) Pty Ltd. (USD) (b)................ 9.75% 03/01/22 2,626,400
2,825,000 MMC Norilsk Nickel OJSC via MMC Finance DAC
(USD) (b).................................................. 6.63% 10/14/22 3,180,622
1,625,000 SPCM S.A. (USD) (b)........................................... 4.88% 09/15/25 1,673,750
4,200,000 Stora Enso OYJ (USD) (a) (b).................................. 7.25% 04/15/36 5,218,500
Page 10 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
--------------- -------------------------------------------------------------- --------- ------------ ---------------
FOREIGN CORPORATE BONDS AND NOTES (Continued)
Basic Industry (Continued)
2,505,000 Teck Resources Ltd. (USD)..................................... 6.00% 08/15/40 $ 2,789,944
1,795,000 Teck Resources Ltd. (USD) (a)................................. 6.25% 07/15/41 2,059,116
2,975,000 Trinseo Materials Operating SCA/Trinseo Materials Finance,
Inc. (USD) (b)............................................. 5.38% 09/01/25 3,138,625
---------------
33,384,307
---------------
Capital Goods - 1.9%
5,100,000 Ardagh Packaging Finance PLC/Ardagh Holdings USA,
Inc. (USD) (a) (b)......................................... 7.25% 05/15/24 5,622,750
535,000 Ardagh Packaging Finance PLC/Ardagh Holdings USA,
Inc. (USD) (b)............................................. 6.00% 02/15/25 569,106
890,000 Bombardier, Inc. (USD) (b).................................... 6.00% 10/15/22 881,100
3,288,000 Bombardier, Inc. (USD) (b).................................... 6.13% 01/15/23 3,300,330
---------------
10,373,286
---------------
Consumer Goods - 0.6%
2,925,000 Minerva Luxembourg S.A. (USD) (b)............................. 6.50% 09/20/26 3,044,194
---------------
Energy - 2.4%
2,350,000 Gazprom OAO Via Gaz Capital S.A. (USD) (b).................... 8.63% 04/28/34 3,179,061
4,350,000 Petrobras Global Finance B.V. (USD) (a)....................... 6.88% 01/20/40 4,447,875
2,120,000 Petrobras Global Finance B.V. (USD)........................... 7.25% 03/17/44 2,228,650
3,350,000 Weatherford International Ltd. (USD).......................... 4.50% 04/15/22 3,048,500
---------------
12,904,086
---------------
Healthcare - 2.4%
2,275,000 Endo Dac./Endo Finance LLC/Endo Finco, Inc.
(USD) (a) (b).............................................. 6.00% 02/01/25 1,820,000
3,625,000 Valeant Pharmaceuticals International, Inc. (USD) (a) (b)..... 7.50% 07/15/21 3,575,156
5,319,000 Valeant Pharmaceuticals International, Inc. (USD) (a) (b)..... 5.88% 05/15/23 4,507,853
3,724,000 Valeant Pharmaceuticals International, Inc. (USD) (a) (b)..... 6.13% 04/15/25 3,142,125
---------------
13,045,134
---------------
Insurance - 0.9%
1,800,000 Aviva PLC (GBP) (e)........................................... 6.13% 11/14/36 2,846,792
2,220,000 Oil Insurance Ltd., 3 Mo. LIBOR + 2.98% (USD) (b) (c)......... 4.32% (d) 2,136,750
---------------
4,983,542
---------------
Leisure - 1.2%
3,205,000 Royal Caribbean Cruises Ltd. (USD) (a)........................ 7.50% 10/15/27 4,195,783
2,360,000 Wynn Macau Ltd. (USD) (b)..................................... 4.88% 10/01/24 2,404,368
---------------
6,600,151
---------------
Media - 2.8%
6,895,000 Altice Luxembourg S.A. (USD) (b).............................. 7.75% 05/15/22 7,308,700
3,695,000 UPCB Finance IV Ltd. (USD) (b)................................ 5.38% 01/15/25 3,796,613
2,800,000 Virgin Media Finance PLC (GBP)................................ 6.38% 10/15/24 4,039,180
---------------
15,144,493
---------------
See Notes to Financial Statements Page 11
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
--------------- -------------------------------------------------------------- --------- ------------ ---------------
FOREIGN CORPORATE BONDS AND NOTES (Continued)
Retail - 0.5%
2,720,000 1011778 BC ULC/New Red Finance, Inc. (USD) (b)................ 4.25% 05/15/24 $ 2,746,384
---------------
Services - 0.7%
2,040,000 GFL Environmental, Inc. (USD) (b)............................. 5.63% 05/01/22 2,126,700
1,690,000 Ritchie Bros. Auctioneers, Inc. (USD) (a) (b)................. 5.38% 01/15/25 1,782,950
---------------
3,909,650
---------------
Technology & Electronics - 1.1%
2,500,000 NXP B.V./NXP Funding LLC (USD) (b)............................ 4.63% 06/01/23 2,700,000
3,060,000 Sensata Technologies UK Financing Co., PLC (USD) (a) (b)...... 6.25% 02/15/26 3,366,000
---------------
6,066,000
---------------
Telecommunications - 1.9%
4,280,000 Telecom Italia Capital S.A. (USD) (a)......................... 7.72% 06/04/38 5,558,650
4,850,000 VEON Holdings B.V. (USD) (a) (b).............................. 4.95% 06/16/24 4,974,936
---------------
10,533,586
---------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.................................................. 127,375,623
(Cost $117,202,239) ---------------
PAR
AMOUNT
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (U.S. DOLLARS)
--------------- -------------------------------------------------------------- --------- ------------ ---------------
CAPITAL PREFERRED SECURITIES - 8.4%
Automotive - 0.8%
3,935,000 General Motors Financial Co., Inc., Series A (USD) (e)........ 5.75% (d) 4,121,913
---------------
Banking - 3.9%
5,155,000 Bank of America Corp., Series DD (USD) (a) (e)................ 6.30% (d) 5,885,876
2,475,000 Citigroup, Inc., Series M (USD) (e)........................... 6.30% (d) 2,693,518
2,775,000 Dresdner Funding Trust I (USD) (b)............................ 8.15% 06/30/31 3,624,877
4,370,000 Goldman Sachs Group (The), Inc., Series P (USD) (e)........... 5.00% (d) 4,386,387
2,400,000 HBOS Capital Funding L.P. (GBP) (e)........................... 6.46% (d) 3,345,761
1,450,000 RBS Capital Trust II (USD) (e)................................ 6.43% (d) 1,714,625
---------------
21,651,044
---------------
Capital Goods - 0.5%
3,210,000 Textron Financial Corp., 3 Mo. LIBOR + 1.74% (USD) (b) (c).... 3.05% 02/15/42 2,800,725
---------------
Insurance - 3.2%
2,700,000 Chubb (The) Corp., 3 Mo. LIBOR + 2.25% (USD) (c).............. 3.61% 04/15/37 2,693,250
3,000,000 CNP Assurances (EUR) (e)...................................... 5.25% (d) 3,931,367
6,950,000 Hartford Financial Services Group (The), Inc., 3 Mo. LIBOR +
2.13% (USD) (a) (b) (c).................................... 3.44% 02/12/47 6,689,375
1,000,000 Lincoln National Corp., 3 Mo. LIBOR + 2.04% (USD) (a) (c)..... 3.40% 04/20/67 911,500
3,500,000 Lincoln National Corp., 3 Mo. LIBOR + 2.36% (USD) (c)......... 3.67% 05/17/66 3,303,125
---------------
17,528,617
---------------
TOTAL CAPITAL PREFERRED SECURITIES....................................................... 46,102,299
(Cost $42,452,049) ---------------
Page 12 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL STATED
VALUE DESCRIPTION RATE (f) MATURITY (g) VALUE
--------------- -------------------------------------------------------------- --------- ------------ ---------------
SENIOR FLOATING-RATE LOAN INTERESTS - 1.5%
Automotive - 0.3%
$ 1,708,875 Navistar, Inc. Term Loan B, 1 Mo. LIBOR + 4.00%,
1.00% Floor................................................ 5.24% 08/07/20 $ 1,708,875
---------------
Healthcare - 1.2%
6,104,925 Ortho-Clinical Term Loan B3, 3 Mo. LIBOR + 4.00%,
1.00% Floor................................................ 5.08% 06/30/21 6,132,946
---------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS................................................ 7,841,821
(Cost $7,769,705) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- --------- ------------ ---------------
MORTGAGE-BACKED SECURITIES - 1.2%
Collateralized Mortgage Obligations - 0.4%
Morgan Stanley Mortgage Loan Trust
93,160 Series 2007-6XS, Class 2A1S, 1 Mo. LIBOR + 0.11% (c)....... 1.35% 02/25/47 92,753
Specialty Underwriting & Residential Finance Trust
1,357,502 Series 2006-BC4, Class A2B, 1 Mo. LIBOR + 0.11% (c)........ 1.35% 09/25/37 663,976
Wells Fargo Mortgage Backed Securities
1,414,542 Series 2006-AR7 Trust, Class 2A4 (h)....................... 3.33% 05/25/36 1,366,270
---------------
2,122,999
---------------
Commercial Mortgage-Backed Securities - 0.8%
Carrington Mortgage Loan Trust
174,913 Series 2006-NC4, Class A5, 1 Mo. LIBOR + 0.06% (c)......... 1.30% 10/25/36 174,813
HSI Asset Securitization Corp. Trust
12,893 Series 2007-NC1, Class A1, 1 Mo. LIBOR + 0.10% (c)......... 1.34% 04/25/37 9,120
Morgan Stanley ABS Capital I, Inc. Trust
616,467 Series 2006-HE6, Class A2B, 1 Mo. LIBOR + 0.10% (c)........ 1.34% 09/25/36 329,479
Securitized Asset Backed Receivables LLC Trust
7,955,492 Series 2006-FR4, Class A2A, 1 Mo. LIBOR + 0.08% (c)........ 1.32% 08/25/36 3,584,990
Soundview Home Loan Trust
707,057 Series 2006-EQ2, Class A2, 1 Mo. LIBOR + 0.11% (c)......... 1.35% 01/25/37 518,491
---------------
4,616,893
---------------
TOTAL MORTGAGE-BACKED SECURITIES......................................................... 6,739,892
(Cost $8,990,610) ---------------
ASSET-BACKED SECURITIES - 0.1%
Keycorp Student Loan Trust
669,631 Series 2000-A, Class A2, 3 Mo. LIBOR + 0.32% (c)........... 1.64% 05/25/29 666,239
(Cost $626,805) ---------------
See Notes to Financial Statements Page 13
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
--------------- -------------------------------------------------------------- --------- ------------ ---------------
FOREIGN SOVEREIGN BONDS AND NOTES - 0.6%
Portugal - 0.6%
3,000,000 Portugal Government International Bond (USD).................. 5.13% 10/15/24 $ 3,180,960
(Cost $2,970,202) ---------------
TOTAL INVESTMENTS - 123.9%............................................................... 676,518,141
(Cost $642,117,046) (i) ---------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- --------- ------------ ---------------
U.S. GOVERNMENT BONDS SOLD SHORT - (17.9%)
$ (101,950,000) United States Treasury Note................................... 1.38% 09/30/23 (97,688,853)
(Proceeds $98,822,755) ---------------
CORPORATE BONDS SOLD SHORT - (1.8%)
Energy - (0.9%)
(2,400,000) Noble Energy, Inc............................................. 4.15% 12/15/21 (2,534,067)
(2,100,000) Noble Energy, Inc............................................. 3.90% 11/15/24 (2,168,485)
---------------
(4,702,552)
---------------
Media - (0.9%)
(5,145,000) Netflix, Inc.................................................. 4.38% 11/15/26 (5,058,178)
---------------
TOTAL CORPORATE BONDS SOLD SHORT......................................................... (9,760,730)
(Proceeds $9,150,271) ---------------
TOTAL INVESTMENTS SOLD SHORT - (19.7%)................................................... (107,449,583)
(Proceeds $107,973,026)
OUTSTANDING LOAN - (5.2%)................................................................ (28,245,711)
NET OTHER ASSETS AND LIABILITIES - 1.0%.................................................. 5,224,249
---------------
NET ASSETS - 100.0%...................................................................... $ 546,047,096
===============
FORWARD FOREIGN CURRENCY CONTRACTS (see Note 2D - Forward Foreign Currency
Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
------------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED SOLD OCTOBER 31, 2017 OCTOBER 31, 2017 (DEPRECIATION)
--------------- ------------ ----------------- ----------------- ---------------- ---------------- ---------------
02/01/18 JPM USD 4,023,836 EUR 3,388,000 $ 4,023,836 $ 3,968,293 $ 55,543
02/01/18 JPM USD 10,438,500 GBP 7,854,000 10,438,500 10,462,418 (23,918)
---------------
Net Unrealized Appreciation (Depreciation)............................................................. $ 31,625
===============
Counterparty Abbreviations:
JPM JPMorgan Chase
Page 14 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
-----------------------------
(a) This security or a portion of this security is segregated as collateral
for investments sold short.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. Pursuant to procedures adopted
by the Fund's Board of Trustees, this security has been determined to be
liquid by MacKay Shields LLC, the Fund's sub-advisor (the "Sub-Advisor").
Although market instability can result in periods of increased overall
market illiquidity, liquidity for each security is determined based on
security-specific factors and assumptions, which require subjective
judgment. At October 31, 2017, securities noted as such amounted to
$298,970,230 of total investments or 54.8% of net assets.
(c) Floating or variable rate security.
(d) Perpetual maturity.
(e) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at October 31, 2017. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(f) 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.
(g) 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.
(h) Collateral Strip Rate security. Interest is based on the weighted net
interest rate of the investment's underlying collateral. The interest rate
resets periodically.
(i) Aggregate cost federal income tax purposes is $533,650,834. As of October
31, 2017, the aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost was $44,400,729 and
the aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value was $8,951,380. The net
unrealized appreciation was $35,449,349. The amounts presented are
inclusive of investments sold short and derivative contracts.
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, 2017
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2017 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
10/31/2017 PRICES INPUTS INPUTS
---------------- ---------------- ---------------- ----------------
Corporate Bonds and Notes*.................... $ 484,611,307 $ -- $ 484,611,307 $ --
Foreign Corporate Bonds and Notes*............ 127,375,623 -- 127,375,623 --
Capital Preferred Securities*................. 46,102,299 -- 46,102,299 --
Senior Floating-Rate Loan Interests*.......... 7,841,821 -- 7,841,821 --
Mortgage-Backed Securities
Collateralized Mortgage Obligations........ 2,122,999 -- 2,122,999 --
Commercial Mortgage-Backed Securities...... 4,616,893 -- 4,616,893 --
Asset-Backed Securities....................... 666,239 -- 666,239 --
Foreign Sovereign Bonds and Notes**........... 3,180,960 -- 3,180,960 --
---------------- ---------------- ---------------- ----------------
Total Investments............................. $ 676,518,141 $ -- $ 676,518,141 $ --
Forward Foreign Currency Contracts***......... 55,543 -- 55,543 --
---------------- ---------------- ---------------- ----------------
Total......................................... $ 676,573,684 $ -- $ 676,573,684 $ --
================ ================ ================ ================
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2017 PRICES INPUTS INPUTS
---------------- ---------------- ---------------- ----------------
U.S. Government Bonds Sold Short.............. $ (97,688,853) $ -- $ (97,688,853) $ --
Corporate Bonds Sold Short*................... (9,760,730) -- (9,760,730) --
Forward Foreign Currency Contracts***......... (23,918) -- (23,918) --
---------------- ---------------- ---------------- ----------------
Total......................................... $ (107,473,501) $ -- $ (107,473,501) $ --
================ ================ ================ ================
* See the Portfolio of Investments for industry breakout.
** See the Portfolio of Investments for country breakout.
*** See the Forward Foreign Currency Contracts table for contract and currency
detail.
All transfers in and out of the Levels during the period are assumed to occur on
the last day of the period at their current value. There were no transfers
between Levels at October 31, 2017.
Page 16 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2017
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, 2016
Corporate Bonds and Notes................ $ 2
Net Realized Gain (Loss).................... --
Net Change in Unrealized Appreciation/
Depreciation............................. --
Purchases................................... --
Sales:
Corporate Bonds and Notes................ (2)
Transfers In................................ --
Transfers Out............................... --
ENDING BALANCE AT OCTOBER 31, 2017
Corporate Bonds and Notes................ --
---------------
Total Level 3 holdings...................... $ --
===============
There was no net change in unrealized appreciation (depreciation) from Level 3
investments held as of October 31, 2017.
See Notes to Financial Statements Page 17
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2017
ASSETS:
Investments, at value
(Cost $642,117,046)........................................................................... $ 676,518,141
Cash............................................................................................... 323,025
Foreign currency (Cost $21,227).................................................................... 21,352
Unrealized appreciation on forward foreign currency contracts...................................... 55,543
Receivables:
Interest...................................................................................... 9,472,783
Investment securities sold.................................................................... 3,175,701
Miscellaneous................................................................................. 16,998
Prepaid expenses................................................................................... 12,277
--------------
Total Assets.................................................................................. 689,595,820
--------------
LIABILITIES:
Borrowings......................................................................................... 28,245,711
Investments sold short, at value (proceeds $107,973,026)........................................... 107,449,583
Due to broker...................................................................................... 133,785
Unrealized depreciation on forward foreign currency contracts...................................... 23,918
Payables:
Investment securities purchased............................................................... 6,765,889
Investment advisory fees...................................................................... 462,981
Interest on investments sold short............................................................ 302,805
Audit and tax fees............................................................................ 57,200
Printing fees................................................................................. 38,545
Administrative fees........................................................................... 38,468
Custodian fees................................................................................ 18,724
Transfer agent fees........................................................................... 3,967
Legal fees.................................................................................... 3,494
Trustees' fees and expenses................................................................... 1,366
Financial reporting fees...................................................................... 771
Other liabilities.................................................................................. 1,517
--------------
Total Liabilities............................................................................. 143,548,724
--------------
NET ASSETS......................................................................................... $ 546,047,096
==============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $ 567,524,206
Par value.......................................................................................... 299,472
Accumulated net investment income (loss)........................................................... 539,374
Accumulated net realized gain (loss) on investments, forward foreign currency contracts,
swap contracts, foreign currency transactions, futures and investments sold short............... (57,279,655)
Net unrealized appreciation (depreciation) on investments, forward foreign currency contracts,
foreign currency translation and investments sold short......................................... 34,963,699
--------------
NET ASSETS......................................................................................... $ 546,047,096
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... $ 18.23
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)........ 29,947,157
==============
Page 18 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2017
INVESTMENT INCOME:
Interest........................................................................................... $ 46,191,740
Other.............................................................................................. 33,627
--------------
Total investment income....................................................................... 46,225,367
--------------
EXPENSES:
Investment advisory fees........................................................................... 6,065,739
Margin interest expense............................................................................ 2,456,071
Interest expense on investments sold short......................................................... 1,657,995
Administrative fees................................................................................ 327,242
Offering costs..................................................................................... 224,000
Legal fees......................................................................................... 201,197
Printing fees...................................................................................... 111,530
Custodian fees..................................................................................... 82,355
Audit and tax fees................................................................................. 58,124
Transfer agent fees................................................................................ 24,631
Trustees' fees and expenses........................................................................ 17,555
Short sale fees.................................................................................... 14,228
Financial reporting fees........................................................................... 9,250
Other.............................................................................................. 56,833
--------------
Total expenses................................................................................ 11,306,750
--------------
NET INVESTMENT INCOME (LOSS)....................................................................... 34,918,617
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................... 7,700,655
Forward foreign currency contracts............................................................ (698,285)
Foreign currency transactions................................................................. 46,573
Short sales................................................................................... 270,006
Swap contracts................................................................................ 136,492
--------------
Net realized gain (loss)........................................................................... 7,455,441
--------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................... 20,113,005
Forward foreign currency contracts............................................................ 53,693
Foreign currency translation.................................................................. 45,778
Short positions............................................................................... 1,059,810
--------------
Net change in unrealized appreciation (depreciation)............................................... 21,272,286
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ 28,727,727
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 63,646,344
==============
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
10/31/2017 10/31/2016
-------------- --------------
OPERATIONS:
Net investment income (loss)..................................................... $ 34,918,617 $ 35,407,079
Net realized gain (loss)......................................................... 7,455,441 (26,171,825)
Net change in unrealized appreciation (depreciation)............................. 21,272,286 41,241,069
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................. 63,646,344 50,476,323
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................ (36,417,879) (37,536,441)
Return of capital................................................................ (11,394,759) --
-------------- --------------
Total distributions to shareholders.............................................. (47,812,638) (37,536,441)
-------------- --------------
CAPITAL TRANSACTIONS:
Purchase of Common Shares pursuant to a tender offer*............................ (93,689,849) --
Repurchase of Common Shares**.................................................... (205,540) (9,139,757)
-------------- --------------
Net increase (decrease) in net assets resulting from capital transactions........ (93,895,389) (9,139,757)
-------------- --------------
Total increase (decrease) in net assets.......................................... (78,061,683) 3,800,125
NET ASSETS:
Beginning of period.............................................................. 624,108,779 620,308,654
-------------- --------------
End of period.................................................................... $ 546,047,096 $ 624,108,779
============== ==============
Accumulated net investment income (loss) at end of period........................ $ 539,374 $ 3,518,287
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................. 35,245,603 35,902,223
Common Shares purchased pursuant to a tender offer*.............................. (5,284,792) --
Common Shares repurchased**...................................................... (13,654) (656,620)
-------------- --------------
Common Shares at end of period................................................... 29,947,157 35,245,603
============== ==============
-----------------------------
* On June 14, 2017, the Fund commenced a tender offer for up to 15% of its
outstanding common shares for cash at a price per share equal to 98% of
the net asset value per share determined on the expiration date. The
Fund's tender offer expired at 5:00 p.m. New York City time on Thursday,
July 13, 2017. Since the Fund's tender offer was oversubscribed, the Fund
purchased 5,284,792 (15%) of its outstanding common shares on a pro-rata
basis based on the number of shares properly tendered.
** On September 15, 2015, the Fund commenced a share repurchase program. The
program originally expired on March 15, 2016, but the Board of Trustees of
the Fund has subsequently authorized the continuation of the Fund's share
repurchase program until March 15, 2018. For the years ended October 31,
2017 and 2016, the Fund repurchased 13,654 and 656,620, respectively, of
its shares at a weighted-average discount of 13.69% and 15.14%,
respectively, from net asset value per share. The Fund expects to continue
to repurchase its outstanding shares until the earlier of (i) the
repurchase of an additional 978,598 common shares (for an aggregate of
1,802,808), or (ii) March 15, 2018.
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, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.................. $ 63,646,344
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................... (391,651,780)
Borrowed investments sold short............................................. 49,909,325
Sales, maturities and paydowns of investments............................... 520,437,742
Borrowed investments purchased.............................................. (55,504,082)
Net amortization/accretion of premiums/discounts on investments............. (294,488)
Net realized gain/loss on investments....................................... (7,700,655)
Net realized gain/loss on investments sold short............................ (270,006)
Net change in unrealized appreciation/depreciation on
forward foreign currency contracts....................................... (53,693)
Net change in unrealized appreciation/depreciation on
investments sold short................................................... (1,059,810)
Net change in unrealized appreciation/depreciation on investments........... (20,113,005)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in due from broker................................................. 825,573
Decrease in interest receivable............................................. 2,660,076
Increase in miscellaneous receivable........................................ (16,998)
Increase in prepaid expenses................................................ (12,277)
Increase in due to broker................................................... 133,785
Decrease in interest payable on investments sold short...................... (7,945)
Decrease in investment advisory fees payable................................ (68,486)
Decrease in legal fees payable.............................................. (1,469)
Decrease in printing fees payable........................................... (4,903)
Increase in administrative fees payable..................................... 7,980
Decrease in custodian fees payable.......................................... (11,977)
Decrease in transfer agent fees payable..................................... (304)
Decrease in Trustees' fees and expenses payable............................. (78)
Decrease in financial reporting fees payable................................ (2)
Decrease in other liabilities............................................... (1,684)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................ $ 160,847,183
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Common Shares pursuant to a tender offer........................ (93,689,849)
Repurchase of Common Shares................................................. (205,540)
Distributions to Common Shareholders from net investment income............. (36,417,879)
Distributions to Common Shareholders from return of capital................. (11,394,759)
Net proceeds from borrowing................................................. (18,954,073)
--------------
CASH USED IN FINANCING ACTIVITIES................................................ (160,662,100)
--------------
Increase in cash and foreign currency (a)........................................ 185,083
Cash and foreign currency at beginning of period................................. 159,294
--------------
Cash and foreign currency at end of period....................................... $ 344,377
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................ $ 4,122,011
==============
-----------------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $45,778.
See Notes to Financial Statements Page 21
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
2017 2016 2015 2014 2013
---------- ---------- ---------- ---------- ----------
Net asset value, beginning of period........... $ 17.71 $ 17.28 $ 19.47 $ 19.63 $ 19.05
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................... 1.04 1.00 1.11 1.31 1.35
Net realized and unrealized gain (loss)........ 0.83 0.44 (2.05) (0.15) 0.64
-------- -------- -------- -------- --------
Total from investment operations............... 1.87 1.44 (0.94) 1.16 1.99
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.......................... (1.07) (1.06) (1.26) (1.32) (1.33)
Return of capital.............................. (0.34) -- -- -- (0.08)
-------- -------- -------- -------- --------
Total distributions to Common Shareholders..... (1.41) (1.06) (1.26) (1.32) (1.41)
-------- -------- -------- -------- --------
Common share repurchases....................... 0.00 (a) 0.05 0.01 -- --
Tender offer purchases......................... 0.06 -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of period................. $ 18.23 $ 17.71 $ 17.28 $ 19.47 $ 19.63
======== ======== ======== ======== ========
Market value, end of period.................... $ 16.91 $ 15.52 $ 14.96 $ 17.19 $ 17.62
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (b)...... 11.98% 10.24% (3.89)% 6.86% 11.32%
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (b)......... 18.52% 11.58% (5.76)% 5.12% 1.36%
======== ======== ======== ======== ========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........... $546,047 $624,109 $620,309 $701,955 $707,807
Ratio of total expenses to average net
assets...................................... 1.86% 1.54% 1.66% 1.75% 1.72%
Ratio of total expenses to average net assets
excluding interest expense.................. 1.19% 1.16% 1.21% 1.26% 1.27%
Ratio of net investment income (loss) to
average net assets.......................... 5.76% 5.92% 6.05% 6.59% 6.93%
Portfolio turnover rate........................ 39% 36% 26% 28% 28%
-----------------------------
(a) Amount represents less than $0.01 per share.
(b) 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 of less than one year. Past performance is not
indicative of future results.
Page 22 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017
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 ICE BofAML US High Yield Constrained Index,
formerly BofA Merrill Lynch US High Yield Constrained Index (the "Index"). The
Fund will take short positions in securities that the Sub-Advisor believes in
the aggregate will underperform the Index. The Fund's long positions, either
directly or through derivatives, may total up to 130% of the Fund's Managed
Assets. The Fund's short positions, either directly or through derivatives, may
total up to 30% of the Fund's Managed Assets. "Managed Assets" means the average
daily gross asset value of the Fund (which includes the principal amount of any
borrowings), minus the sum of the Fund's liabilities. There can be no assurance
that the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 946, "Financial
Services-Investment Companies." The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund's NAV per Common
Share is calculated by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service, or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 23
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017
Corporate bonds, notes, capital preferred securities, 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 a third-party 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.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding The Nasdaq Stock Market LLC ("Nasdaq") and the
London Stock Exchange Alternative Investment Market ("AIM")) are valued at
the last sale price on the exchange on which they are principally traded
or, for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Credit default swaps are fair valued using a third-party pricing service
or, if the third-party pricing service does not provide a value, by quotes
provided by the selling dealer or financial institution.
The Senior Loans held in the Fund are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while
having grown substantially since its inception, generally has fewer trades
and less liquidity than the secondary market for other types of
securities. Some Senior Loans have few or no trades, or trade
infrequently, and information regarding a specific Senior Loan may not be
widely available or may be incomplete. Accordingly, determinations of the
market value of Senior Loans may be based on infrequent and dated
information. Because there is less reliable, objective data available,
elements of judgment may play a greater role in valuation of Senior Loans
than for other types of securities. Typically, Senior Loans are fair
valued using information provided by a third-party pricing service. The
third-party pricing service primarily uses over-the-counter pricing from
dealer runs and broker quotes from indicative sheets to value the Senior
Loans.
Forward foreign currency contracts are fair valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by a third-party pricing service.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a third-party pricing service is unable to provide a
market price; securities whose trading has been formally suspended; a security
whose market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
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, 2017
the third-party pricing service, does not reflect the security's fair value. As
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) the borrower's/issuer's competitive position within the industry;
13) the borrower's/issuer's ability to access additional liquidity
through public and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2017, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded using the effective interest method.
Securities purchased on a when-issued, delayed-delivery or forward purchase
commitment basis may have extended settlement periods. The value of the security
so purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At October 31, 2017, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
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, 2017
C. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund did not have any unfunded delayed draw loan
commitments as of October 31, 2017.
D. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation (depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or the cost of) the closing transaction
and the Fund's basis in the contract. This realized gain or loss is included in
"Net realized gain (loss) on forward foreign currency contracts" on the
Statement of Operations. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movement in
currency and securities values and interest rates. Due to the risks, the Fund
could incur losses in excess of the net unrealized value shown on the Forward
Foreign Currency Contracts table in the Portfolio of Investments. In the event
of default by the Counterparty, the Fund will provide notice to the Counterparty
of the Fund's intent to convert the currency held by the Fund into the currency
that the Counterparty agreed to exchange with the Fund. If a Counterparty
becomes bankrupt or otherwise fails to perform its obligations due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain
only limited recovery or may obtain no recovery in such circumstances.
E. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statement of Operations.
F. 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 by the Fund, but are
not currently owned in the Fund's portfolio. When the Fund engages in a short
sale, the Fund must borrow the security sold short and deliver the security to
the counterparty. Short selling allows the Fund to profit from a decline in a
market price to the extent such decline exceeds the transaction costs and the
costs of borrowing the securities. The Fund will pay a fee or premium to borrow
the securities sold short and is obligated to repay the lenders of the
securities. Any dividends or interest that accrues on the securities during the
period of the loan are due to the lenders. A gain, limited to the price at which
the security was sold short, or a loss, unlimited in size, will be recognized
upon the termination of the short sale; which is effected by the Fund purchasing
the security sold short and delivering the security to the lender. Any such gain
or loss may be offset, completely or in part, by the change in the value of the
long portion of the Fund's portfolio. The Fund is subject to the risk that it
may be unable to reacquire a security to terminate a short position except at a
price substantially in excess of the last quoted price. Also, there is the risk
that the counterparty to a short sale may fail to honor its contractual terms,
causing a loss to the Fund.
The Fund has established an account with Pershing, LLC ("Pershing") for the
purpose of purchasing or borrowing securities on margin. At October 31, 2017,
the Fund had $28,245,711 in borrowings, which approximates fair value,
associated with investments sold short as shown in "Borrowings" on the Statement
of Assets and Liabilities. The borrowings are categorized as Level 2 within the
fair value hierarchy. At October 31, 2017, the Fund had $107,449,583 of
investments sold short as shown in "Investments sold short, at value" on the
Statement of Assets and Liabilities. Interest is charged on these balances at a
rate equal to the Overnight Bank Funding Rate plus 75 basis points and is
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017
charged on payable credit margin balances at a rate equal to the Overnight Bank
Funding Rate less 40 basis points. At October 31, 2017, the Fund had a debit
margin balance with an interest rate of 1.91%. For the year ended October 31,
2017, margin interest expense was $2,456,071, as shown on the Statement of
Operations. For the year ended October 31, 2017, the average margin balance and
interest rate were $152,617,842 and 1.63%, respectively.
G. CREDIT DEFAULT SWAPS
The Fund may enter into credit default swap contracts ("CDS") for investment
purposes or to manage credit risk. A CDS is an agreement between two parties
("Counterparties") to exchange the credit risk of an issuer. Swap agreements may
be privately negotiated in the over-the-counter market as a bilateral contract
or centrally cleared.
A buyer of a CDS is said to buy protection by paying a fixed payment over the
life of the agreement and in some situations an upfront payment to the seller of
the CDS. If a defined credit event occurs (such as payment default or
bankruptcy), the Fund as a protection buyer would cease paying its fixed
payment, the Fund would deliver eligible bonds issued by the reference entity to
the seller, and the seller would pay the full notional value, or the "par
value," of the referenced obligation to the Fund. A seller of a CDS is said to
sell protection and thus would receive a fixed payment over the life of the
agreement and an upfront payment, if applicable. If a credit event occurs, the
Fund as a protection seller would cease to receive the fixed payment stream, the
Fund would pay the buyer "par value" or the full notional value of the
referenced obligation, and the Fund would receive the eligible bonds issued by
the reference entity. In turn, these bonds may be sold in order to realize a
recovery value. Alternatively, the seller of the CDS and its Counterparty may
agree to net the notional amount and the market value of the bonds and make a
cash payment equal to the difference to the buyer of protection. If no credit
event occurs, the Fund receives the fixed payment over the life of the
agreement. As the seller, the Fund would effectively add leverage to its
portfolio because, in addition to its total net assets, the Fund would be
subject to investment exposure on the notional amount of the CDS. In connection
with these agreements, cash and securities may be identified as collateral in
accordance with the terms of the respective swap agreements to provide assets of
value and recourse in the event of default under the swap agreement or
bankruptcy/insolvency of a party to the swap agreement. In the event of a
default by the Counterparty, the Fund will seek withdrawal of this collateral
and may incur certain costs exercising its right with respect to the collateral.
If a Counterparty becomes bankrupt or otherwise fails to perform its obligations
due to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization proceeding. The
Fund may obtain only limited recovery or may obtain no recovery in such
circumstances.
Upon entering into a centrally cleared swap, the Fund is required to deposit
initial margin with the broker in the form of cash or securities in an amount
that varies depending on the size and risk profile of the particular swap. Cash
deposited is segregated and included in "restricted cash" on the Statement of
Assets and Liabilities. The daily change in valuation of centrally cleared swaps
is included in "variation margin on swaps payable" in the Statement of Assets
and Liabilities. Payments received from (paid to) the Counterparty, including at
termination, are recorded as "net realized gain (loss) on swap contracts" on the
Statement of Operations.
Credit default swap contracts are marked to market daily based upon quotations
from brokers, market makers or a third-party pricing service and the change in
value, if any, is recorded as unrealized appreciation (depreciation). For a
credit default swap contract sold by the Fund, payment of the agreed upon amount
made by the Fund in the event of default of the referenced debt obligation is
recorded as the cost of the reference debt obligation purchased/received. The
fund did not hold any swap contracts as of October 31, 2017.
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
U.S. income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future. Permanent differences
incurred during the fiscal year ended October 31, 2017, resulting in book and
tax accounting differences, have been reclassified at year end to reflect a
decrease in accumulated net investment income (loss) by $1,479,651, an increase
in accumulated net realized gain (loss) on investments by $1,703,651 and a
decrease to paid-in capital of $224,000. Net assets were not affected by this
reclassification.
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, 2017
The tax character of distributions paid during the fiscal years ended October
31, 2017 and 2016 was as follows:
2017 2016
Distributions paid from:
Ordinary income..................................... $ 36,417,879 $ 37,536,441
Capital gain........................................ -- --
Return of capital................................... 11,394,759 --
As of October 31, 2017, 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................ (57,233,467)
Net unrealized appreciation (depreciation).......... 35,456,885
------------
Total accumulated earnings (losses)................. (21,776,582)
Other............................................... --
Paid-in capital..................................... 567,823,678
------------
Net assets.......................................... $546,047,096
============
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 and 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 for
up to 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, 2017, the Fund had no pre-enactment net
capital losses for federal income tax purposes. At October 31, 2017, the Fund
had post-enactment net capital losses for federal income tax purposes of
$57,233,467 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.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended October 31, 2017, the Fund did
not incur any net ordinary losses.
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 2014, 2015,
2016 and 2017 remain open to federal and state audit. As of October 31, 2017,
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. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. In part, the
new and amended rules and forms amend Regulation S-X and require standardized,
enhanced disclosures about derivatives in a fund's financial statements, as well
as other amendments. The compliance date for the amendments of Regulation S-X
was August 1, 2017, which resulted in additional disclosure for variable
interest rate securities and derivative instruments within the Portfolio of
Investments. The new form types and other rule amendments will be effective for
the First Trust funds, including the Fund, for reporting periods beginning on
and after June 1, 2018. Management is evaluating the new form types and other
rule amendments that are effective on and after June 1, 2018 to determine the
impact to the Fund.
Page 28
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017
L. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
MacKay serves as the Fund's sub-advisor and manages the Fund's portfolio subject
to First Trust's supervision. The Sub-Advisor receives a portfolio management
fee at an annual rate of 0.50% of Managed Assets that is paid by First Trust
from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. 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 administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BNYM 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 custodian, BNYM is responsible for custody
of the Fund's assets. BNYM IS and BNYM are subsidiaries of The Bank of New York
Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
or is an index fund.
Additionally, The Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investments, excluding
short-term investments and investments sold short, for the year ended October
31, 2017, were $231,293,743 and $358,290,532, respectively. The cost of
purchases to cover short sales and the proceeds of short sales were $55,504,082
and $49,909,325, respectively.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at
October 31, 2017, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
---------------------------------------- ----------------------------------------
DERIVATIVE RISK STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENTS EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------------ ------------------ --------------------------- ---------- --------------------------- ----------
Unrealized appreciation on Unrealized depreciation on
Forward foreign Currency forward foreign currency forward foreign currency
currency contracts Risk contracts $ 55,543 contracts $ 23,918
Page 29
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
October 31, 2017, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
CURRENCY RISK
Net realized gain (loss) on forward foreign currency contracts $ (698,285)
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts 53,693
CREDIT RISK
Net realized gain (loss) on swap contracts 136,492
During the year ended October 31, 2017, the notional values of forward foreign
currency contracts opened and closed were $110,930,810 and $120,485,533,
respectively.
The average volume of credit default swap contracts was $2,224,658 for the year
ended October 31, 2017.
The Fund does not have the right to offset financial assets and financial
liabilities related to forward foreign currency contracts and swap contracts on
the Statement of Assets and Liabilities.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. TENDER OFFER
As previously announced, the Fund conducted a tender offer for up to 15% of its
outstanding common shares for cash at a price per share equal to 98% of the net
asset value per share determined on the expiration date. The Fund's tender offer
expired at 5:00 p.m. New York City time on Thursday, July 13, 2017.
Since the Fund's tender offer was oversubscribed, the Fund purchased 15% of its
outstanding common shares on a pro-rata basis based on the number of shares
properly tendered (Pro-Ration Factor). The final results of the tender offer are
provided in the table below.
Number of
Number of Pro- Purchase Price Outstanding
Number of Tendered Shares Ration (98% of NAV on Shares after
Shares Tendered to be Purchased Factor Expiration Date) Tender Offer
---------------- ---------------- ---------------- ---------------- ----------------
12,762,491 5,284,792 41.42% $17.7282 29,947,157
8. DISTRIBUTION POLICY
As previously announced, the Fund's Board of Trustees approved the commencement,
effective with the monthly distribution declared in February 2017 and continuing
for all distributions declared during the following eleven months, of a
distribution policy that provides for the declaration of monthly distributions
to common shareholders of the Fund at an annual minimum fixed rate of 8.5% based
on the Fund's average monthly NAV per share over the prior 12 months. Under the
distribution policy, monthly distributions may be sourced from income, paid-in
capital, and/or capital gains, if any.
9. 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 no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 30
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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TO THE SHAREHOLDERS AND THE BOARD OF TRUSTEES 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, 2017, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2017, by correspondence with the Fund's
custodian, brokers, and agent banks; when replies were not received from
brokers, 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 First
Trust High Income Long/Short Fund as of October 31, 2017, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 20, 2017
Page 31
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017 (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 32
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Qs
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2017, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
Distributions paid to foreign shareholders during the Fund's fiscal year ended
October 31, 2017 that were properly designated by the Fund as "interest-related
dividends" or "short-term capital gain dividends," may not be subject to federal
income tax provided that the income was earned directly by such foreign
shareholders.
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 1, 2017, 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 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 Fund held its Annual Meeting of Shareholders ("Annual Meeting") on April 24,
2017. At the Annual Meeting, Robert F. Keith was elected by the Common
Shareholders of the First Trust High Income Long/Short Fund as a Class I Trustee
for a three-year term expiring at the Fund's annual meeting of shareholders in
2020. The number of votes cast in favor of Mr. Keith was 31,245,467, the number
of votes against was 198,895 and the number of broker non-votes was 3,787,587.
James A. Bowen, Richard E. Erickson, Thomas R. Kadlec and Niel B. Nielson are
the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
Page 33
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017 (UNAUDITED)
securities of companies in similar industries. Distressed securities frequently
do not produce income while they are outstanding. The Fund may be required to
incur certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Sub-Advisor seeks capital appreciation
through investment in distressed securities, the ability to achieve current
income may be diminished.
ECONOMIC CONDITIONS RISK: Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a high-yield issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Under adverse
market or economic conditions, the secondary market for high-yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer and these securities may become illiquid. As a
result, the Sub-Advisor could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded.
FIXED-INCOME SECURITIES RISK: Debt securities, including high-yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are reinvested at market interest rates that are below the portfolio's
current earnings rate; (iii) prepayment risk, which is the risk that during
periods of declining interest rates, the issuer of a security may exercise its
option to prepay principal earlier than scheduled, forcing the reinvestment in
lower yielding securities; and (iv) credit risk, which is the risk that a
security in the Fund's portfolio will decline in price or the issuer fails to
make interest payments when due because the issuer of the security experiences a
decline in its financial status.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
SHORT SELLING RISK: Short selling allows the Fund to profit from a decline in
market price to the extent such decline exceeds the transaction costs and the
costs of borrowing the securities. If a security sold short increases in price,
the Fund may have to cover its short position at a higher price than the short
sale price, resulting in a loss. The Fund may have substantial short positions
and must borrow those securities to make delivery to the buyer. The Fund may not
be able to borrow a security that it needs to deliver or it may not be able to
close out a short position at an acceptable price and may have to sell related
long positions before it had intended to do so. Thus, the Fund may not be able
to successfully implement its short sale strategy due to limited availability of
desired securities or for other reasons. Also, there is the risk that the
counterparty to a short sale may fail to honor its contractual terms, causing a
loss to the Fund. Because losses on short sales arise from increases in the
value of the security sold short, such losses are theoretically unlimited. The
use of short sales in combination with long positions in the Fund's portfolio in
an attempt to improve performance or reduce overall portfolio risk may not be
successful and may result in greater losses or lower positive returns than if
the Fund held only long positions. It is possible that the Fund's long
securities positions will decline in value at the same time that the value of
its short securities positions increase, thereby increasing potential losses to
the Fund.
By investing the proceeds received from selling securities short, the Fund could
be deemed to be employing a form of leverage, which creates special risks. The
use of leverage may increase the Fund's exposure to long securities positions
and make any change in the Fund's NAV greater than it would be without the use
of leverage. This could result in increased volatility of returns. There is no
guarantee that any leveraging strategy the Fund employs will be successful
during any period in which it is employed.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
PREFERRED SECURITIES RISK: Preferred Securities combine some of the
characteristics of both common stocks and bonds. Preferred Securities are
typically subordinated to bonds and other debt instruments in a company's
capital structure, in terms of priority to corporate income, and therefore will
be subject to greater credit risk than those debt instruments. Preferred
Securities are also subject to credit risk, interest rate risk and income risk.
Page 34
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017 (UNAUDITED)
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT AND SUB-ADVISORY AGREEMENT
The Board of Trustees (the "Board") of First Trust High Income Long/Short Fund
(the "Fund"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Advisory Agreement")
between the Fund and First Trust Advisors L.P. (the "Advisor") and the
Investment Sub Advisory Agreement (the "Sub Advisory Agreement" and together
with the Advisory Agreement, the "Agreements") among the Fund, the Advisor and
MacKay Shields LLC (the "Sub-Advisor") for a one-year period ending June 30,
2018 at a meeting held on June 12, 2017. The Board determined that the
continuation of the Agreements is in the best interests of the Fund in light of
the extent and quality of the services provided and such other matters as the
Board considered to be relevant in the exercise of its reasonable business
judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 24, 2017 and June 12, 2017, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor to the Fund (including the relevant
personnel responsible for these services and their experience); the advisory fee
rate payable by the Fund and the sub-advisory fee rate as compared to fees
charged to a peer group of funds compiled by Management Practice, Inc. ("MPI"),
an independent source (the "MPI Peer Group"), and as compared to fees charged to
other clients of the Advisor and the Sub-Advisor; expenses of the Fund as
compared to expense ratios of the funds in the MPI Peer Group; performance
information for the Fund; the nature of expenses incurred in providing services
to the Fund and the potential for economies of scale, if any; financial data on
the Advisor and the Sub-Advisor; any fall out benefits to the Advisor and the
Sub-Advisor; and information on the Advisor's and the Sub-Advisor's compliance
programs. The Board reviewed initial materials with the Advisor at the meeting
held on April 24, 2017, prior to which the Independent Trustees and their
counsel met separately to discuss the information provided by the Advisor and
the Sub-Advisor. Following the April meeting, independent legal counsel on
behalf of the Independent Trustees requested certain clarifications and
supplements to the materials provided, and the information provided in response
to those requests was considered at an executive session of the Independent
Trustees and independent legal counsel held prior to the June 12, 2017 meeting,
as well as at the meeting held that day. 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 continue to be reasonable business
arrangements from the Fund's perspective as well as from the perspective of
shareholders. The Board determined that, given the totality of the information
provided with respect to the Agreements, the Board had received sufficient
information to renew the Agreements. 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 the services provided by the Advisor and the Sub-Advisor under the
Agreements. With respect to the Advisory Agreement, the Board considered that
the Advisor is responsible for the overall management and administration of the
Fund and reviewed all of the services provided by the Advisor to the Fund,
including the oversight of the Sub-Advisor, as well as the background and
experience of the persons responsible for such services. The Board noted that
the Advisor oversees the Sub-Advisor's day-to-day management of the Fund's
investments, including portfolio risk monitoring and performance review. In
reviewing the services provided, the Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Advisor's, the Sub-Advisor's and the Fund's compliance with
the 1940 Act, as well as the Fund's compliance with its investment objectives
and policies. The Board also considered a report from the advisor with respect
to its risk management functions related to the operation of the Fund. Finally,
as part of the Board's consideration of the Advisor's services, the Advisor, in
its written materials and at the April 24, 2017 meeting, described to the Board
the scope of its ongoing investment in additional infrastructure and personnel
to maintain and improve the quality of services provided to the Fund and the
other funds in the First Trust Fund Complex. With respect to the Sub-Advisory
Agreement, in addition to the written materials provided by the Sub-Advisor, at
the June 12, 2017 meeting, the Board also received a presentation from a
portfolio manager of the Sub-Advisor discussing 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 considering the Sub-Advisor's
management of the Fund, the Board noted the background and experience of the
Sub-Advisor's portfolio management team. In light of the information presented
and the considerations made, the Board concluded that the nature, extent and
quality of the 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.
Page 35
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017 (UNAUDITED)
The Board considered the advisory and sub-advisory fee rates payable under the
Agreements for the services provided. The Board noted that the sub-advisory fee
is paid by the Advisor from its advisory fee. The Board received and reviewed
information showing the advisory fee rates and expense ratios of the peer funds
in the MPI Peer Group, as well as advisory fee rates charged by the Advisor and
the Sub-Advisor to other fund and non-fund clients, as applicable. With respect
to the MPI Peer Group, the Board discussed with representatives of the Advisor
how the MPI Peer Group was assembled and limitations in creating a relevant peer
group for the Fund, including that (i) the Fund is unique in its composition,
which makes assembling peers with similar strategies and asset mix difficult;
(ii) peer funds may use different amounts and types of leverage with different
costs associated with them or may use no leverage, noting that the Fund uses
non-traditional leverage by shorting bonds and reinvesting the proceeds; (iii)
only two of the peer funds employ an advisor/sub-advisor management structure
with an unaffiliated sub-advisor; and (iv) some of the peer funds are part of a
larger fund complex that may allow for additional economies of scale. The Board
took these limitations into account in considering the peer data, and noted that
the advisory fee rate payable by the Fund, based on average net assets, was
above the median of the MPI Peer Group. With respect to fees charged to other
clients, the Board considered differences between the Fund and other clients
that limited their comparability. In considering the advisory fee rate overall,
the Board also considered the Advisor's statement that it seeks to meet investor
needs through innovative and value-added investment solutions and the Advisor's
description of its long-term commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor and Sub-Advisor for the Fund. The Board determined that this process
continues to be effective for reviewing the Fund's performance. The Board
received and reviewed information comparing the Fund's performance for periods
ended December 31, 2016 to the performance of the MPI Peer Group and to that of
a benchmark index. In reviewing the Fund's performance as compared to the
performance of the MPI Peer Group, the Board took into account the limitations
described above with respect to creating a relevant peer group for the Fund.
Based on the information provided on net asset value performance, the Board
noted that the Fund underperformed the MPI Peer Group average for the one-year
period and outperformed the MPI Peer Group average for the three- and five-year
periods ended December 31, 2016. The Board also noted that the Fund
underperformed the benchmark index in the one- and three-year periods but
outperformed the benchmark index in the five-year period ended December 31,
2016. In addition, the Board considered information provided by the Advisor on
the impact of leverage on the Fund's returns, noting that the Sub-Advisor
increased leverage during 2016. The Board also received information on the
Fund's annual distribution rate as of December 31, 2016 and the Fund's average
trading discount during 2016 and comparable information for the peer group.
On the basis of all the information provided on the fees, expenses and
performance of the Fund and the ongoing oversight by the Board, the Board
concluded that the advisory and sub-advisory fees continue to be reasonable and
appropriate in light of the nature, extent and quality of the services provided
by the Advisor and the Sub-Advisor to the Fund under the Agreements.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. 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
considered the revenues and allocated costs (including the allocation
methodology) of the Advisor in serving as investment advisor to the Fund for the
twelve months ended December 31, 2016 and the estimated profitability level for
the Fund calculated by the Advisor based on such data, as well as complex-wide
and product-line profitability data for the same period. The Board noted the
inherent limitations in the profitability analysis and concluded that, based on
the information provided, the Advisor's profitability level for the Fund was not
unreasonable. In addition, the Board considered fall-out benefits described by
the Advisor that may be realized from its relationship with the Fund, including
the Advisor's compensation for fund reporting services pursuant to a separate
Fund Reporting Services Agreement. The Board concluded that the character and
amount of potential fall-out benefits to the Advisor were not unreasonable.
The Board noted the Sub-Advisor's expenses in providing investment services to
the Fund and considered the Sub-Advisor's statement that it will not experience
significant economies of scale based on the current level of assets of the Fund
and the level of other assets under the management of the portfolio management
team. The Board did not review the profitability of the Sub-Advisor with respect
to the Fund. The Board noted that the Advisor pays the Sub-Advisor from its
advisory fee and its understanding that the Fund's sub advisory fee rate was the
product of an arm's length negotiation. The Board concluded that the
profitability analysis for the Advisor was more relevant. The Board considered
fall-out benefits that may be realized by the Sub-Advisor from its relationship
with the Fund, noting that the Sub-Advisor did not identify any material
fall-out benefits. The Board concluded that the character and amount of
potential fall-out benefits to the Sub-Advisor were not unreasonable.
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 36
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017 (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, Officer, Wheaton Orthopedics; 151 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 E. Liberty Drive, o Since Fund Limited Partnership (June 1992 to
Suite 400 Inception December 2016); Member, Sportsmed LLC
Wheaton, IL 60187 (April 2007 to November 2015)
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President, ADM Investor Services, Inc. 151 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International,
D.O.B.: 11/57 Futures Industry
Association, and
National Futures
Association
Robert F. Keith, Trustee o Three-Year Term President, Hibs Enterprises (Financial 151 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 E. Liberty Drive, o Since Fund Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 151 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Covenant
120 E. Liberty Drive, o Since Fund Pelita Harapan Educational Foundation Transport Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products
and Services); President and Chief
Executive Officer (June 2012 to
September 2014), Dew Learning LLC
(Educational Products and Services);
President (June 2002 to June 2012),
Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee o Three Year Term Chief Executive Officer, First Trust 151 None
and Chairman of the Board Advisors L.P. and First Trust Portfolios
120 E. Liberty Drive, o Since Fund L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development
Wheaton, IL 60187 Company) and Stonebridge Advisors LLC
D.O.B.: 09/55 (Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer 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 2020 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2018 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2019 annual meeting of shareholders.
Page 37
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January
Suite 400 o Since January 2016 2011 to January 2016), Senior Vice President
Wheaton, IL 60187 (April 2007 to January 2016), First Trust
D.O.B.: 01/66 Advisors L.P. and First Trust Portfolios L.P.;
Chief Financial Officer (January 2016 to Present),
BondWave LLC (Software Development
Company) and Stonebridge Advisors LLC
(Investment Advisor)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust
Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 08/72
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Fund Counsel, BondWave LLC; Secretary,
Wheaton, IL 60187 Inception Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director, First Trust Advisors L.P.
120 E. Liberty Drive, and First Trust Portfolios L.P.
Suite 400 o Since Fund
Wheaton, IL 60187 Inception
D.O.B: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since
D.O.B.: 12/66 January 2011
o Assistant Secretary
since Fund Inception
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 38
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2017 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
Sources of Information
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
USE OF WEB ANALYTICS
We currently use third party analytics tools, Google Analytics and AddThis, to
gather information for purposes of improving First Trust's website and marketing
our products and services to you. These tools employ cookies, which are small
pieces of text stored in a file by your web browser and sent to websites that
you visit, to collect information, track website usage and viewing trends such
as the number of hits, pages visited, videos and PDFs viewed and the length of
user sessions in order to evaluate website performance and enhance navigation of
the website. We may also collect other anonymous information, which is generally
limited to technical and web navigation information such as the IP address of
your device, internet browser type and operating system for purposes of
analyzing the data to make First Trust's website better and more useful to our
users. The information collected does not include any personal identifiable
information such as your name, address, phone number or email address unless you
provide that information through the website for us to contact you in order to
answer your questions or respond to your requests. To find out how to opt-out of
these services click on: Google Analytics and AddThis.
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).
May 2017
Page 39
This Page Left Blank Intentionally.
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
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
ADMINISTRATOR,
FUND ACCOUNTANT,
AND 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, 2016 and $52,000 for the fiscal
year ended October 31, 2017.
(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 $3,000 for the fiscal year ended October 31, 2016 and $0 for the
fiscal year ended October 31, 2017. The 2016 audit-related fees reflect fees for
auditing data after migration to new fund accounting software.
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, 2016 and $0 for
the fiscal year ended October 31, 2017.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning were $5,200 for the fiscal year
ended October 31, 2016 and $5,200 for the fiscal year ended October 31, 2017.
The fees for 2016 and 2017 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, 2016 and $0 for the fiscal year ended October 31,
2017.
(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, 2016 and
$0 for the fiscal year ended October 31, 2017.
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, 2016 and
$0 for the fiscal year ended October 31, 2017.
(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, 2016 were $5,200 for the Registrant and $13,000
for the Registrant's investment adviser and for the Registrant's fiscal year
ended October 31, 2017 were $5,200 for the Registrant and $44,000 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) (1) Bombardier Inc.
(2) Not Applicable
(3) 097751BJ9
(4) $2,914,813
(5) July 6, 2017, September 27, 2017, September 28, 2017
(6) Not Applicable, 097751BJ9, $881,100; Not Applicable, C10602AW7,
$3,300,330
(7) Sudan Accountability and Divestment Act of 2007 (50 U.S.C. 1701 note)
(1) Dresdner Bank AG
(2) Not Applicable
(3) 26156FAA1
(4) $596,808
(5) June 28, 2017
(6) Not Applicable, 26156FAA1, $596,808
(7) Sudan Accountability and Divestment Act of 2007 (50 U.S.C. 1701 note)
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
INFORMATION PROVIDED AS OF DECEMBER 15, 2017
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, 2017, MacKay Shields had approximately $97.8
billion in assets under management.
DAN ROBERTS, PHD, EXECUTIVE MANAGING DIRECTOR, CHIEF INVESTMENT OFFICER AND HEAD
AND CHIEF INVESTMENT OFFICER OF GLOBAL FIXED INCOME DIVISION
Mr. Roberts has 41 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 40 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 34 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. MacKay Shields utilizes a team approach in all
aspects of investment management and decision-making. No one portfolio manager
is singularly responsible for any particular account. Investment decisions are
carried across all portfolios with similar guidelines. While portfolio managers
conduct their own industry-specific research, all information is continually
shared with the other members of the investment team. Additionally, portfolio
managers will cross-train to gain familiarity with other industries.
The portfolio managers within the Global Fixed Income Team generally come to a
consensus on the appropriateness of a security for inclusion or removal from the
portfolio. On the rare occasions this is not possible, Dan Roberts, as Head of
the Team, is ultimately responsible and has final decision-making power.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
INFORMATION PROVIDED AS OF OCTOBER 31, 2017.
# of Accounts
Managed for Total Assets for
Total # of which Advisory which Advisory
Name of Portfolio Accounts Fee is Based Fee is Based on
Manager or Team Member* Type of Accounts* Managed Total Assets on Performance Performance
------------------------- -------------------------- ------------ ------------------- --------------- ------------------
1. Dan Roberts Registered Investment 12 $ 5.86 Bil 0 $0
Companies:
Other Pooled Investment 29 $11.669 Bil 4 $1.323 Bil
Vehicles:
Other Accounts: 141 $26.934 Bil 2 $1.341 Bil
Registered Investment 10 $ 5.567 Bil 0 $ 0
2. Louis Cohen Companies:
Other Pooled Investment 29 $11.669 Bil 4 $1.323 Bil
Vehicles:
Other Accounts: 141 $26.934 Bil 2 $1.341 Bil
Registered Investment 7 $ 4.119 Bil 0 $ 0
3. Michael Kimble Companies:
Other Pooled Investment 29 $11.669 Bil 4 $1.323 Bil
Vehicles:
Other Accounts: 141 $26.934 Bil 2 $1.341 Bil
* The Global Fixed Income Team utilizes a team approach in all aspects of
investment management and decision-making. No one portfolio manager is
singularly responsible for any particular account. Information provided
are assets and number of accounts managed by the team.
POTENTIAL CONFLICTS OF INTERESTS
Most of our clients pay us an investment advisory or management fee that is
based on the amount of assets in the clients' accounts. These are commonly
referred to as "asset-based fees". Some of our clients pay us fees calculated as
a percentage of returns, or as a percentage of the increase in net asset value.
These fees may be tied to a client-directed benchmark and may be subject to a
loss carry forward. They are commonly referred to as "performance-based fees".
The Global Fixed Income team that manages the Fund provides portfolio management
services for other MacKay Shields accounts, including: mutual funds;
institutional managed accounts; private commingled funds; and hedge funds.
Managing accounts that have a performance-based fee at the same time that we
manage accounts that only have an asset-based fee is commonly referred to as
"side-by-side management." Except for distinctions based on investment
objectives, investment guidelines and cash flow, all accounts are treated the
same, regardless of fee structure. This creates a conflict of interest by giving
us an incentive to favor those accounts for which we receive a performance-based
fee because we will receive a higher fee if their performance exceeds the
applicable benchmark. Consistent with its policy not to favor any one client
over another, MacKay Shields has the following procedures, among others: (1)
trade allocation procedures that provide for the pro rata allocation of
investment opportunities among clients in a particular strategy, with certain
exceptions; (2) a general prohibition against same day opposite direction
transactions; and (3) short sale trade procedures requiring pre-approval of
short sales and restricting certain short sales.
The Trade Allocation Policy provides that: (1) no client will be favored over
any other client; (2) trades should be pre-allocated, subject to certain
exceptions, and allocations should be in writing; and (3) MacKay Shields'
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 two
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 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, 2017.
Fixed compensation is primarily paid through a portfolio manager's annual
salary, which is paid in monthly installments in arrears. Salaries are set by
reference to a range of factors, taking account of seniority and
responsibilities and the market rate of pay for the relevant position. Annual
salaries are set at competitive levels to attract and maintain the best
professional talent. Variable or incentive compensation, both cash bonus and
deferred awards, are a significant component of total compensation for portfolio
managers at MacKay Shields. Incentive compensation received by portfolio
managers is based on both quantitative and qualitative factors. This approach
instills a strong sense of commitment towards the overall success of the firm.
Deferred awards are provided to attract, retain, motivate and reward key
personnel. As such, MacKay Shields maintains a phantom equity plan and awards
vest and pay out after several years. Thus, portfolio managers share in the
results and success of the firm.
MacKay Shields has performance-based fee arrangements with "eligible clients"
(as that term is defined under Rule 205-3 of the Advisers Act). In these cases a
portion of these performance-based fees may be included in the incentive program
described above.
MacKay Shields does not align the portfolio managers' compensation to the
investment performance of specific Funds or of other accounts they manage. The
compensation received by portfolio managers is based on both quantitative and
qualitative factors. The quantitative factors may include: (i) investment
performance; (ii) assets under their management; (iii) revenue and
profitability; and (iv) industry benchmarks. The qualitative factors include,
among others, leadership, adherence to the firm's policies and procedures, and
contribution to the firm's goals and objectives. To the extent that an increase
in the size of a Fund or another account managed by a portfolio manager results
in an increase in profitability, the portfolio manager's compensation may also
increase. There is no difference between the method used in determining
portfolio managers' compensation with respect to a Fund and other accounts they
manage. We do not believe the compensation structure provides an incentive for
an employee who provides services to a Fund to take undue risks in managing the
assets of the Fund.
Variable or incentive compensation, both cash bonus and deferred awards, are a
significant component of total compensation for portfolio managers at MacKay
Shields. Deferred awards are provided to attract, retain, motivate and reward
key personnel. As such, MacKay Shields maintains a phantom equity plan. For
those portfolio managers whose total compensation exceeds a pre-determined
threshold, a portion of their total compensation is paid in plan awards which
vest and pay out after several years. Thus, portfolio managers share in the
business results and success of the firm. The portfolio managers involved in
managing the Fund's investments participate in the phantom equity plan.
Receipt of an award from the phantom equity plan is conditioned upon execution
of an Executive Employment Agreements with MacKay, which include provisions
relating to fixed and variable compensation. The Executive Employment Agreements
are renewable for one year terms and can be terminated on 60 days' prior written
notice. There is also a provision for termination by MacKay for cause, as
defined in the Agreements. The Agreements contain restrictions regarding
non-solicitation of clients and non-hiring of employees following termination of
the portfolio managers' employment. None of the portfolio managers is subject to
a non-compete agreement that could potentially affect the portfolio manager's
ability to manage the Fund.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF OCTOBER 31, 2017.
Dollar Range of Fund Shares
Name Beneficially Owned
Dan Roberts $0
Louis Cohen $100,001-$500,000
Michael Kimble $0
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
REGISTRANT PURCHASES OF EQUITY SECURITIES
(A) TOTAL (C) TOTAL NUMBER OF (D) MAXIMUM NUMBER (OR
NUMBER OF (B) AVERAGE SHARES (OR UNITS) APPROXIMATE DOLLAR VALUE) OF
SHARES (OR PRICE PAID PURCHASED AS PART OF SHARES (OR UNITS) THAT MAY YET
UNITS) PER SHARE PUBLICLY ANNOUNCED BE PURCHASED UNDER THE PLANS
PERIOD PURCHASED (OR UNIT) PLANS OR PROGRAMS OR PROGRAMS
-------------------------------------------------------------------------------------------------------------
Month #1 13,654 $15.05 824,210 978,598
(11/01/2016-
11/30/2016)
Month #2 0 - 824,210 978,598
(12/01/2016-
12/31/2016)
Month #3 0 - 824,210 978,598
(1/01/2017-
1/31/2017)
Month #4 0 - 824,210 978,598
(2/01/2017-
2/28/2017)
Month #5 0 - 824,210 978,598
(3/01/2017-
3/31/2017)
Month #6 0 - 824,210 978,598
(4/01/2017-
4/30/2017)
Month #7 0 - 824,210 978,598
(5/01/2017-
5/31/2017)
Month #8 0 - 824,210 978,598
(6/01/2017-
6/30/2017)
Month #9 5,284,792 $17.73 6,109,002 978,598
(7/01/2017-
7/31/2017)
Month #10 0 - 6,109,002 978,598
(8/01/2017-
8/31/2017)
Month #11 0 - 6,109,002 978,598
(9/01/2017-
9/30/2017)
Month #12 0 - 6,109,002 978,598
(10/01/2017-
10/31/2017)
Total 5,298,446 $17.72 6,109,002 978,598
On September 15, 2015, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which the
Fund's shares trade from their net asset value. The program originally expired
on March 15, 2016, but the Board of Trustees of the Fund (the "Board") has
subsequently authorized the continuation of the Fund's share repurchase program
until March 15, 2018 authorized the continuation of the Fund's share repurchase
program. For the year ended October 31, 2017, and the year ended October 31,
2016, the Fund repurchased 13,654 and 656,620, respectively, of its shares at a
weighted-average discount of 13.69% and 15.14%, respectively, from net asset
value per share. The Fund expects to continue to repurchase its outstanding
shares as it believes such activity will further the accomplishment of the
foregoing objectives, until the earlier of (i) the repurchase of an additional
978,598 common shares (for an aggregate of 1,802,808), or (ii) March 15, 2018.
On June 14, 2017, the Fund commenced a tender offer for up to 15% of its
outstanding common shares for cash at a price per share equal to 98% of the net
asset value per share determined on the expiration date. The Fund's tender offer
expired at 5:00 p.m. New York City time on Thursday, July 13, 2017. Since the
Fund's tender offer was oversubscribed, the Fund purchased 5,284,792 (15%) of
its outstanding common shares on a pro-rata basis based on the number of shares
properly tendered.
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/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: December 21, 2017
-------------------
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/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: December 21, 2017
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 21, 2017
-------------------
* Print the name and title of each signing officer under his or her signature.