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, 2016
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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, 2016
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, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 17
Statement of Operations..................................................... 18
Statements of Changes in Net Assets......................................... 19
Statement of Cash Flows..................................................... 20
Financial Highlights........................................................ 21
Notes to Financial Statements............................................... 22
Report of Independent Registered Public Accounting Firm..................... 30
Additional Information...................................................... 31
Board of Trustees and Officers.............................................. 36
Privacy Policy.............................................................. 38
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 relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
MacKay are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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First Trust High Income Long/Short Fund (FSD)
Annual Letter from the Chairman and CEO
October 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust High Income Long/Short Fund.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close June
30, 2016 at a combined market capitalization of $62 trillion. As of October 31,
2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to
Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index
was also in positive territory at 4.51%. The last few months have had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy. I will discuss that more in
my next letter.
The current bull market (measuring from March 9, 2009 through October 31, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 25 years ago.
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 helping
investors like 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, 2016 (Unaudited)
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FUND STATISTICS
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Symbol on NYSE FSD
Common Share Price $15.52
Common Share Net Asset Value ("NAV") $17.71
Premium (Discount) to NAV (12.37)%
Net Assets Applicable to Common Shares $624,108,779
Current Monthly Distribution per Common Share (1) $0.0950
Current Annualized Distribution per Common Share $1.1400
Current Distribution Rate on Closing Common Share Price (2) 7.35%
Current Distribution Rate on NAV (2) 6.44%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/15 14.96 17.28
14.63 17.11
14.26 16.83
14.34 16.78
11/15 14.15 16.75
14.11 16.65
13.58 16.30
13.93 16.29
14.21 16.38
12/15 14.08 16.41
13.90 16.27
13.28 15.94
13.28 15.97
1/16 13.73 16.14
13.45 15.88
13.28 15.60
13.66 15.79
2/16 13.73 16.06
14.32 16.37
14.59 16.51
14.80 16.67
3/16 14.60 16.57
14.51 16.55
14.56 16.62
14.61 16.83
14.86 16.95
4/16 14.90 17.02
14.55 16.78
14.54 16.83
14.62 16.84
5/16 14.82 16.96
14.78 16.89
14.90 17.04
14.77 16.90
6/16 14.66 16.93
14.73 17.02
14.98 17.23
15.14 17.48
15.27 17.53
7/16 15.31 17.45
15.33 17.47
15.50 17.62
15.74 17.69
8/16 15.80 17.74
15.76 17.69
15.45 17.68
15.45 17.51
15.47 17.71
9/16 15.59 17.79
15.45 17.78
15.39 17.78
15.61 17.89
15.53 17.78
10/16 15.52 17.71
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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)
10/31/16 10/31/16 to 10/31/16
FUND PERFORMANCE (3)
NAV 10.24% 8.09% 6.80%
Market Value 11.58% 6.74% 3.72%
INDEX PERFORMANCE
BofA Merrill Lynch US High Yield Constrained Index 10.18% 7.07% 7.10%
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% OF LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS (4)
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Basic Industry 13.3%
Energy 9.1
Telecommunications 8.8
Capital Goods 8.4
Healthcare 8.1
Media 7.0
Technology & Electronics 5.8
Automotive 5.3
Leisure 5.3
Services 5.2
Banking 4.9
Transportation 3.7
Financial Services 3.7
Consumer Goods 3.3
Insurance 3.2
Retail 2.3
Commercial Mortgage-Backed Securities 0.9
Utility 0.7
Real Estate 0.5
Collateralized Mortgage Obligations 0.4
Asset-Backed Securities 0.1
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Total 100.0%
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% OF TOTAL
COUNTRY EXPOSURE INVESTMENTS (4)
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United States 83.5%
Luxembourg 4.6
Canada 2.6
Ireland 1.6
Netherlands 1.3
United Kingdom 1.1
Liberia 0.9
Germany 0.7
Finland 0.6
Jersey 0.6
Australia 0.6
Cayman Islands 0.6
France 0.5
Bermuda 0.4
Mexico 0.3
Sweden 0.1
Brazil 0.0*
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Total 100.0%
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% OF LONG-TERM
ASSET CLASSIFICATION INVESTMENTS (4)
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Corporate Bonds and Notes 74.3%
Foreign Corporate Bonds and Notes 15.2
Capital Preferred Securities 6.9
Senior Floating-Rate Loan Interests 2.2
Mortgage-Backed Securities 1.3
Asset-Backed Securities 0.1
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Total 100.0%
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% OF LONG
FIXED-INCOME
CREDIT QUALITY (5) INVESTMENTS (4)
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BBB- and above 11.7%
BB 50.9
B 30.8
CCC+ and below 6.0
NR 0.6
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Total 100.0%
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* Amount is less than 0.1%.
(1) Most recent distribution paid or declared through 10/31/2016. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 10/31/2016. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) Percentages are based on the long positions only. Short positions are
excluded.
(5) 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.
NR - Not Rated
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
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, 2016, MacKay had approximately $96.6 billion in assets under management.
PORTFOLIO MANAGEMENT TEAM
DAN ROBERTS, PHD - EXECUTIVE MANAGING DIRECTOR, HEAD OF GLOBAL FIXED INCOME
DIVISION AND ITS CHIEF INVESTMENT OFFICER
LOUIS N. COHEN, CFA - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
MICHAEL KIMBLE, CFA - SENIOR MANAGING DIRECTOR, GLOBAL FIXED INCOME DIVISION
Taylor Wagenseil has stepped down from the Portfolio Management Team pursuant to
his plans to retire in 2017.
MARKET RECAP
This report covers the Fund for the 12-month period ended October 31, 2016.
During the 12-month period ended October 31, 2016, the appetite for risk in
general shifted dramatically from high anxiety into a large rally fueled by
rebounding commodity prices, stable global economic growth, and accommodative
central banks. U.S. high-yield bonds were the best-performing risk sector for
the period, returning 10.18%, as measured by the BofA Merrill Lynch US High
Yield Constrained Index. The S&P 500(R) Index, which tracks large capitalization
U.S. equities, gained 4.51%. U.S. Treasuries followed; the BofA Merrill Lynch 10
Year US Treasury returned 4.24%. Alternatively, international equities, as
measured by the MSCI EAFE Index, delivered a negative return for the year,
declining -2.74%.
Reflecting back to the end of 2015, markets experienced a spike in risk aversion
during November and December following strong positive performance in October. A
variety of events exacerbated investors' anxiety during the fourth quarter. Oil
prices continued to decline, stocks exhibited increased volatility, and
credit-sensitive fixed-income mutual fund outflows accelerated -- especially
domestic high-yield funds. Despite a tough start to the new calendar year, the
first quarter of 2016 concluded with a significant rally in credit-sensitive
assets. A variety of market positive catalysts emerged that alleviated the major
concerns surrounding central bank activity, weak commodity prices, and global
growth. Citing "global economic and financial developments", Federal Open Market
Committee ("FOMC") minutes dampened fears that the pace of future rate hikes
were on auto-pilot. The European Central Bank ("ECB") announced additional
Quantitative Easing ("QE") by increasing their monthly bond purchase limit from
(euro)60 billion to (euro)80 billion. West Texas Intermediate ("WTI") oil prices
rebounded from a low of approximately $26 per barrel, and the prices of other
major industrial commodities rose from their lows as well.
The second quarter of 2016 was dominated by the surprise advisory vote in the UK
to leave the European Union ("Brexit") which will not take effect until
Parliament actually votes to invoke Article 50 of the Lisbon Treaty. Capital
markets remained orderly the day after the Brexit vote, and bid/ask spreads for
credit were within normal bands. Prior to the 'Leave' vote, the quarter was
marked by an increasingly narrow rally in high yield with commodities-oriented
credits performing the best.
During the third quarter, developed market central banks continued on a path of
extraordinary accommodation that flattened yield curves and drove a global reach
for yield that benefited U.S. credit and other higher beta markets such as
emerging market debt. Developed market macro-economic results remained sluggish
but positive with China growth holding up, the macro impact of Brexit less than
feared (or simply delayed), and some deflationary concerns abating. Energy
prices remain a focal point for markets. WTI gyrated during the period; it
plummeted 15% to approximately $41 a barrel in July but recovered to $48 a
barrel after the Organization of the Petroleum Exporting Countries ("OPEC")
agreed to unspecified production limits in the future.
In summary, quantitative easing abroad remains highly impactful. Approximately
75% of the investable universe of global bonds yielded 2% or less by mid-year
with around 25% yielding zero or less. As measured by the widely watched
Bloomberg Barclays Global Aggregate Bond Index, $11.6 trillion of debt has
negative yields which is down slightly from June's peak of $11.9 trillion. Low
and/or negative yields abroad have provided a technical bid for U.S high-yield
bonds.
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, 2016 (UNAUDITED)
The high-yield asset class delivered strong returns over the last year,
primarily led by commodities (metals & mining, steel and energy) as well as
lower-rated assets (CCC and below rated securities). For the 12-month period
ended October 31, 2016, there were net outflows of $4.4 billion from high-yield
mutual funds, according to Lipper, largely representing the outflow experienced
at the end of 2015. This is a great improvement from outflows of $9.3 billion
experienced the prior year. $11 billion has flowed into the asset class calendar
year-to-date, with October representing the fourth consecutive month of inflows.
New issuance, according to JP Morgan, was $280 billion for the 12-month period
ended October 31, 2016, slightly down from the prior year which experienced $300
billion in issuance.
PERFORMANCE ANALYSIS
The Fund outperformed its benchmark, the BofA Merrill Lynch US High Yield
Constrained Index(1), on a total gross return(2), share price and net asset
value ("NAV") basis for the 12-month period ended October 31, 2016. The Fund
returned 11.58% and 10.24% on a share price and NAV basis respectively, compared
with the benchmark, which gained 10.18% during the period. The Fund's overweight
positioning within the steel sector, as well as the underweight exposure to the
retail sector was beneficial to performance, whereas the Fund's underweight
positioning within the energy sector as well overweight exposure in the services
sector detracted from relative performance.
Given the improved conditions in the high-yield market, effective leverage from
short sales within the Fund was increased during the year, primarily focusing on
the non-commodity related sectors. We maintained a short position in U.S.
Treasury bonds which is expressed at the front end of the curve and used to
reduce the portfolio's exposure to interest rate risk, while at the same time
purchasing additional high-yield securities to lever up the portfolio. Given the
general decline in U.S. Treasury rates over the year, the short U.S. Treasury
positions detracted from performance, however, 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.
Aside from resource producers and a handful of idiosyncratic names with credit
deterioration, the credit fundamentals of the high-yield market are broadly
sound in our view. However, we note that low profit growth in the U.S.,
generally, has led to a variety of outcomes that are not always beneficial to
bond holders. Low return on capital, an uptick in leverage, and downtick in
interest coverage ratios have led to an increase in idiosyncratic risk as some
company managers stretch to boost profits. We are also monitoring stock
buybacks, the squeezing of suppliers and strategic partners, and merger and
acquisition activity designed to improve the bottom line and/or equity prices.
At this time, we remain comfortable with our positioning in FSD.
OUTLOOK
With regard to the results of the recent U.S. presidential election, our pre-
and post-election views are unchanged. Leading up to the elections, we
anticipated immediate market volatility in the event of a Trump victory but we
did not believe there would be a sudden deterioration of credit fundamentals. In
fact within the week following the election, corporate bonds, both investment
grade and high yield, have been well bid and credit spreads have tightened. The
biggest move we have seen is in the US Treasury market, where the yield curve
continues to steepen as rates back-up. While the steepening of the yield curve
may continue, in anticipation of greater fiscal stimulus and higher potential
for inflation, the magnitude will ultimately depend on the scope and scale of
infrastructure spending and tax cuts that President elect Trump is proposing. We
think there is a ceiling to rates until greater clarity is offered from the new
administration next year. On the economy, Trump's fiscal platform calls for an
increase in fiscal spending (especially on infrastructure) and lower taxes for
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(1) The BofA Merrill Lynch US High Yield Constrained Index tracks the
performance of U.S. dollar denominated below investment grade corporate
debt publicly issued in the U.S. domestic market but caps issuer exposure
at 2%. Indexes are unmanaged and an investor cannot invest directly in an
index.
(2) Total return is based on the combination of reinvested dividends, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
This material contains the opinions of the Global Fixed Income team of MacKay
Shields LLC but not necessarily those of MacKay Shields LLC. The opinions
expressed herein are subject to change without notice. This material is
distributed for informational purposes only. Forecasts, estimates, and certain
information contained herein should not be considered as investment advice or a
recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be
reliable, but not guaranteed.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
households and businesses. This should be stimulative for the economy in the
short to medium term as it should lead to an increase in confidence, jobs, and
discretionary income. We expect these policies would also result in an increase
in the deficit and debt levels in the country. In order to fund the deficit we
would expect to see the government issue more bonds. We expect all of this to
result in the continuation of spread compression in the corporate bond markets
and upward pressure on interest rates.
Overall, we do not expect the US to fall into a recession anytime soon for a
number of fundamental reasons outside of the political arena. The fundamental
economic backdrop in the U.S. has been durable. Consumption is being supported
by a healthy consumer enjoying wage gains from a tighter labor market, and an
increase in wealth from a burgeoning housing market. Government expenditures
have been increasing and real non-residential fixed investment is still growing
outside of the commodity-related sectors. Continued economic growth, coupled
with strong credit market technicals emanating from yield-seeking investors
should lead to a further compression in credit premiums.
Notwithstanding our positive view on macro-economic conditions, extraordinary
monetary accommodation is having an impact that bears monitoring. As we have
communicated previously, cheap capital has been made available by a prolonged
period of low interest rates. The result has been a world awash with capital and
liquidity. As return on capital has fallen in concert with weakening
demographics and fast-moving changes from technology, leverage has increased,
interest coverage ratios have declined, and profit margins have come under
pressure. As a result, a number of companies have taken on greater risk in an
effort to boost profits, leading to a rise in idiosyncratic risk for bond
investors. Consequently, unlike prior expansions, our positive view of the
market is tempered by the need to avoid unusually high levels of idiosyncratic
risk.
While we acknowledge these important risk factors, on balance credit
fundamentals among U.S. issuers are broadly sound in our view. Accordingly, we
believe it is still too early to step away from the market while being mindful
that the next turn in the cycle may not be solely affected by central banks.
Page 5
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES - 92.3%
AUTOMOTIVE - 6.0%
$ 4,725,000 Dana, Inc. (a)................................................ 5.50% 12/15/24 $ 4,914,000
1,376,000 Ford Motor Co................................................. 9.22% 09/15/21 1,779,213
220,000 Ford Motor Co................................................. 8.90% 01/15/32 302,096
2,000,000 Ford Motor Co. (a)............................................ 7.75% 06/15/43 2,567,282
1,620,000 Ford Motor Co................................................. 9.98% 02/15/47 2,557,585
4,635,000 Gates Global LLC/Gates Global Co. (b)......................... 6.00% 07/15/22 4,403,250
4,396,000 Goodyear Tire & Rubber (The) Co. (a).......................... 7.00% 05/15/22 4,632,285
1,500,000 Goodyear Tire & Rubber (The) Co............................... 5.00% 05/31/26 1,516,875
4,720,000 MPG Holdco I, Inc. (a)........................................ 7.38% 10/15/22 4,832,100
3,472,000 Navistar International Corp. (a).............................. 8.25% 11/01/21 3,415,580
2,320,000 Tenneco, Inc.................................................. 5.00% 07/15/26 2,337,400
3,705,000 ZF North America Capital, Inc. (b)............................ 4.75% 04/29/25 3,922,669
--------------
37,180,335
--------------
Banking - 1.4%
612,000 Ally Financial, Inc........................................... 8.00% 11/01/31 735,930
6,595,000 Ally Financial, Inc. (a)...................................... 8.00% 11/01/31 7,914,000
--------------
8,649,930
--------------
Basic Industry - 11.0%
440,000 AK Steel Corp................................................. 7.63% 05/15/20 444,400
650,000 AK Steel Corp. (a)............................................ 7.63% 10/01/21 650,000
4,500,000 AK Steel Corp................................................. 8.38% 04/01/22 4,567,500
925,000 AK Steel Corp................................................. 7.50% 07/15/23 999,000
4,604,000 Aleris International, Inc..................................... 7.88% 11/01/20 4,627,020
2,875,000 Beazer Homes USA, Inc. (b).................................... 8.75% 03/15/22 3,061,875
5,500,000 CalAtlantic Group, Inc. (a)................................... 8.38% 05/15/18 6,022,500
500,000 CalAtlantic Group, Inc........................................ 5.88% 11/15/24 536,250
1,580,000 Cliffs Natural Resources, Inc................................. 4.88% 04/01/21 1,339,050
200,000 Freeport-McMoRan, Inc......................................... 4.00% 11/14/21 190,000
2,010,000 Freeport-McMoRan, Inc......................................... 3.55% 03/01/22 1,854,225
3,070,000 Freeport-McMoRan, Inc......................................... 3.88% 03/15/23 2,786,025
2,470,000 Hexion, Inc. (a).............................................. 8.88% 02/01/18 2,360,085
1,873,000 K Hovnanian Enterprises, Inc. (b)............................. 7.00% 01/15/19 1,320,465
2,800,000 K Hovnanian Enterprises, Inc. (b)............................. 7.25% 10/15/20 2,534,000
3,479,000 KB Home (a)................................................... 7.50% 09/15/22 3,783,412
3,730,000 Meritage Homes Corp........................................... 6.00% 06/01/25 3,953,800
1,840,000 Momentive Performance Escrow Claim (c) (d) (e) (f)............ N/A N/A 2
1,840,000 Momentive Performance Materials, Inc. (a) (c)................. 4.69% 04/24/22 1,444,400
1,815,000 Novelis Corp. (b)............................................. 6.25% 08/15/24 1,892,138
2,862,000 Novelis Corp. (b)............................................. 5.88% 09/30/26 2,904,930
2,060,000 PQ Corp. (b).................................................. 6.75% 11/15/22 2,227,375
1,780,000 PulteGroup, Inc. (a).......................................... 7.63% 10/15/17 1,886,800
4,570,000 PulteGroup, Inc. (a).......................................... 7.88% 06/15/32 5,232,650
2,375,000 Shea Homes L.P./Shea Homes Funding Corp. (b).................. 6.13% 04/01/25 2,351,250
4,465,000 TRI Pointe Group, Inc./TRI Pointe Homes, Inc. (a)............. 5.88% 06/15/24 4,649,181
1,114,000 United States Steel Corp...................................... 7.38% 04/01/20 1,114,000
Page 6 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (Continued)
Basic Industry (Continued)
$ 4,000,000 USG Corp. (b)................................................. 5.88% 11/01/21 $ 4,195,000
--------------
68,927,333
--------------
Capital Goods - 7.7%
3,595,000 Ball Corp..................................................... 4.00% 11/15/23 3,649,824
4,000,000 Crown Americas LLC/Crown Americas Capital Corp. IV (a)........ 4.50% 01/15/23 4,120,000
5,445,000 KLX, Inc. (b)................................................. 5.88% 12/01/22 5,568,601
2,595,000 Milacron LLC/Mcron Finance Corp. (b).......................... 7.75% 02/15/21 2,666,363
1,575,000 Orbital ATK, Inc.............................................. 5.50% 10/01/23 1,645,875
3,315,000 Owens-Brockway Glass Container, Inc. (b)...................... 5.00% 01/15/22 3,480,750
432,000 Reynolds Group Issuer, Inc./Reynolds Group Issuer
LLC/Reynolds Group Issuer LU................................ 9.88% 08/15/19 443,340
1,775,000 Reynolds Group Issuer, Inc./Reynolds Group Issuer
LLC/Reynolds Group Issuer LU................................ 8.25% 02/15/21 1,855,763
6,700,000 Reynolds Group Issuer, Inc./Reynolds Group Issuer
LLC/Reynolds Group Issuer LU (a) (b)........................ 5.13% 07/15/23 6,886,327
4,375,000 Sealed Air Corp. (b).......................................... 5.50% 09/15/25 4,675,781
5,050,000 Terex Corp.................................................... 6.00% 05/15/21 5,157,312
3,590,000 TransDigm, Inc. (a)........................................... 6.00% 07/15/22 3,760,525
4,500,000 Triumph Group, Inc............................................ 4.88% 04/01/21 4,185,000
--------------
48,095,461
--------------
Consumer Goods - 3.6%
2,567,000 Kraft Heinz Foods Co. (b)..................................... 4.88% 02/15/25 2,822,529
3,565,000 Kronos Acquisition Holdings, Inc. (b)......................... 9.00% 08/15/23 3,671,950
2,325,000 Pilgrim's Pride Corp. (b)..................................... 5.75% 03/15/25 2,388,938
3,610,000 Post Holdings, Inc. (b)....................................... 5.00% 08/15/26 3,510,725
2,240,000 Smithfield Foods, Inc......................................... 6.63% 08/15/22 2,371,600
4,585,000 Spectrum Brands, Inc.......................................... 5.75% 07/15/25 4,986,187
2,400,000 US Foods, Inc. (b)............................................ 5.88% 06/15/24 2,508,000
--------------
22,259,929
--------------
Energy - 8.6%
5,000,000 AmeriGas Partners L.P./AmeriGas Finance Corp.................. 5.88% 08/20/26 5,262,500
1,426,000 California Resources Corp. (b)................................ 8.00% 12/15/22 969,680
2,410,000 Carrizo Oil & Gas, Inc........................................ 6.25% 04/15/23 2,488,325
5,470,000 CITGO Petroleum Corp. (b)..................................... 6.25% 08/15/22 5,620,425
4,475,000 Continental Resources, Inc.................................... 5.00% 09/15/22 4,396,687
3,170,000 Crestwood Midstream Partners L.P./Crestwood Midstream
Finance Corp............................................... 6.25% 04/01/23 3,225,475
6,700,000 Denbury Resources, Inc. (a)................................... 5.50% 05/01/22 5,326,500
2,305,000 Hilcorp Energy I L.P./ Hilcorp Finance Co. (b)................ 5.00% 12/01/24 2,258,900
3,960,000 Hornbeck Offshore Services, Inc. (a).......................... 5.00% 03/01/21 2,376,000
3,535,000 PHI, Inc. (a)................................................. 5.25% 03/15/19 3,437,788
3,440,000 Sanchez Energy Corp........................................... 6.13% 01/15/23 2,958,400
545,000 SM Energy Co. (a)............................................. 5.00% 01/15/24 509,575
2,670,000 SM Energy Co.................................................. 5.63% 06/01/25 2,556,525
2,910,000 Suburban Propane Partners L.P./Suburban Energy Finance
Corp....................................................... 5.75% 03/01/25 2,982,750
1,900,000 Sunoco L.P./ Sunoco Finance Corp.............................. 5.50% 08/01/20 1,930,875
See Notes to Financial Statements Page 7
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (Continued)
Energy (Continued)
$ 1,560,000 Sunoco L.P./ Sunoco Finance Corp.............................. 6.38% 04/01/23 $ 1,602,900
1,395,000 Valero Energy Corp............................................ 6.63% 06/15/37 1,637,448
4,325,000 Whiting Petroleum Corp........................................ 5.75% 03/15/21 4,033,063
--------------
53,573,816
--------------
Financial Services - 4.5%
6,855,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp. (a).... 6.00% 08/01/20 6,769,312
1,190,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp......... 5.88% 02/01/22 1,137,938
7,265,000 Navient Corp. (a)............................................. 8.00% 03/25/20 7,900,687
5,150,000 OneMain Financial Holdings, Inc. (a) (b)...................... 7.25% 12/15/21 5,356,000
2,395,000 Springleaf Finance Corp....................................... 6.00% 06/01/20 2,424,938
4,555,000 Springleaf Finance Corp. (a).................................. 7.75% 10/01/21 4,762,936
--------------
28,351,811
--------------
Healthcare - 7.7%
3,999,000 Alere, Inc.................................................... 7.25% 07/01/18 4,071,482
1,265,000 Alere, Inc.................................................... 6.50% 06/15/20 1,287,656
4,175,000 CHS/Community Health Systems, Inc............................. 6.88% 02/01/22 3,204,312
2,500,000 DaVita, Inc. (a).............................................. 5.75% 08/15/22 2,571,925
3,775,000 DaVita, Inc................................................... 5.00% 05/01/25 3,652,312
3,900,000 Double Eagle Acquisition Sub, Inc. (b)........................ 7.50% 10/01/24 4,026,750
4,000,000 Greatbatch Ltd. (b)........................................... 9.13% 11/01/23 3,850,000
1,500,000 HCA, Inc...................................................... 5.88% 05/01/23 1,595,160
10,850,000 HCA, Inc. (a)................................................. 5.00% 03/15/24 11,327,400
4,585,000 Hologic, Inc. (b)............................................. 5.25% 07/15/22 4,866,290
4,315,000 MPH Acquisition Holdings LLC (a) (b).......................... 7.13% 06/01/24 4,627,406
3,195,000 Tenet Healthcare Corp......................................... 8.13% 04/01/22 3,139,088
--------------
48,219,781
--------------
Leisure - 5.4%
4,225,000 ClubCorp Club Operations, Inc. (b)............................ 8.25% 12/15/23 4,520,750
1,980,000 GLP Capital L.P./GLP Financing II, Inc........................ 5.38% 04/15/26 2,108,700
1,475,000 Isle of Capri Casinos, Inc.................................... 5.88% 03/15/21 1,534,922
3,670,000 Live Nation Entertainment, Inc. (b)........................... 4.88% 11/01/24 3,670,000
9,175,000 MGM Resorts International (a)................................. 6.75% 10/01/20 10,230,125
2,765,000 Scientific Games International, Inc. (a) (b).................. 7.00% 01/01/22 2,954,679
2,175,000 Scientific Games International, Inc. (a)...................... 10.00% 12/01/22 2,022,750
6,975,000 Wynn Las Vegas LLC/Wynn Las Vegas Capital Corp. (b)........... 5.50% 03/01/25 7,009,875
--------------
34,051,801
--------------
Media - 6.2%
7,245,000 CCO Holdings LLC/CCO Holdings Capital Corp. (a)............... 5.75% 01/15/24 7,679,700
2,370,000 CCO Holdings LLC/CCO Holdings Capital Corp. (a) (b)........... 5.75% 02/15/26 2,475,169
2,730,000 Clear Channel Worldwide Holdings, Inc., Series B.............. 7.63% 03/15/20 2,654,925
2,841,000 Clear Channel Worldwide Holdings, Inc., Series B.............. 6.50% 11/15/22 2,907,764
180,000 CSC Holdings LLC (b).......................................... 6.63% 10/15/25 195,525
2,325,000 CSC Holdings LLC (b).......................................... 5.50% 04/15/27 2,364,234
6,430,000 Dish DBS Corp. (a)............................................ 6.75% 06/01/21 6,924,338
559,000 iHeartCommunications, Inc..................................... 5.50% 12/15/16 553,410
8,790,000 iHeartCommunications, Inc. (a)................................ 9.00% 03/01/21 6,317,813
Page 8 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (Continued)
Media (Continued)
$ 2,515,000 Lamar Media Corp.............................................. 5.75% 02/01/26 $ 2,702,116
3,725,000 Sirius XM Radio, Inc. (a) (b)................................. 5.38% 07/15/26 3,792,534
--------------
38,567,528
--------------
Real Estate - 0.6%
4,000,000 ESH Hospitality, Inc. (b)..................................... 5.25% 05/01/25 3,970,000
--------------
Retail - 2.8%
3,845,000 Dollar Tree, Inc.............................................. 5.75% 03/01/23 4,114,150
6,395,000 Hanesbrands, Inc. (a) (b)..................................... 4.63% 05/15/24 6,534,891
3,300,000 KFC Holding Co./Pizza Hut Holdings LLC/Taco Bell of America
LLC (b).................................................... 5.25% 06/01/26 3,448,500
3,500,000 Murphy Oil USA, Inc........................................... 6.00% 08/15/23 3,701,250
--------------
17,798,791
--------------
Services - 5.4%
2,120,000 Acosta, Inc. (a) (b).......................................... 7.75% 10/01/22 1,828,500
1,095,000 Ashtead Capital, Inc. (b)..................................... 6.50% 07/15/22 1,153,856
3,380,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc........... 5.50% 04/01/23 3,358,875
1,810,000 GEO (The) Group, Inc.......................................... 6.00% 04/15/26 1,570,175
4,075,000 Herc Rentals, Inc. (b)........................................ 7.50% 06/01/22 4,085,188
1,200,000 Herc Rentals, Inc. (b)........................................ 7.75% 06/01/24 1,209,000
3,000,000 Hertz (The) Corp. (b)......................................... 5.50% 10/15/24 2,920,200
4,607,000 Iron Mountain, Inc. (b)....................................... 6.00% 10/01/20 4,889,179
4,250,000 Iron Mountain, Inc............................................ 5.75% 08/15/24 4,377,500
367,000 United Rentals North America, Inc............................. 7.63% 04/15/22 392,095
3,097,000 United Rentals North America, Inc............................. 6.13% 06/15/23 3,251,850
1,400,000 United Rentals North America, Inc. (a)........................ 5.50% 07/15/25 1,422,750
2,900,000 United Rentals North America, Inc............................. 5.88% 09/15/26 2,968,440
--------------
33,427,608
--------------
Technology & Electronics - 6.1%
3,780,000 CommScope, Inc. (b)........................................... 5.00% 06/15/21 3,879,225
6,433,000 First Data Corp. (a) (b)...................................... 7.00% 12/01/23 6,754,650
3,370,000 Match Group, Inc.............................................. 6.38% 06/01/24 3,652,238
3,385,000 MSCI, Inc. (b)................................................ 5.75% 08/15/25 3,615,688
4,715,000 NCR Corp...................................................... 6.38% 12/15/23 5,009,687
3,519,000 PTC, Inc...................................................... 6.00% 05/15/24 3,730,140
4,475,000 Qorvo, Inc.................................................... 7.00% 12/01/25 4,922,500
5,910,000 Zebra Technologies Corp. (a).................................. 7.25% 10/15/22 6,397,575
--------------
37,961,703
--------------
Telecommunications - 10.3%
4,985,000 CenturyLink, Inc., Series P (a)............................... 7.60% 09/15/39 4,461,575
2,640,000 Diamond 1 Finance Corp./Diamond 2 Finance Corp. (b)........... 8.35% 07/15/46 3,208,727
2,025,000 Equinix, Inc. (a)............................................. 5.88% 01/15/26 2,169,626
1,550,000 Frontier Communications Corp.................................. 6.25% 09/15/21 1,480,250
6,450,000 Frontier Communications Corp. (a)............................. 11.00% 09/15/25 6,628,342
2,500,000 Frontier Communications Corp. (a)............................. 9.00% 08/15/31 2,187,500
2,306,000 Hughes Satellite Systems Corp. (b)............................ 5.25% 08/01/26 2,277,175
See Notes to Financial Statements Page 9
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- -------- -------- --------------
CORPORATE BONDS AND NOTES (Continued)
Telecommunications (Continued)
$ 4,070,000 Level 3 Financing, Inc. (a)................................... 5.38% 01/15/24 $ 4,161,575
2,900,000 Level 3 Financing, Inc. (b)................................... 5.25% 03/15/26 2,950,750
2,570,000 Sprint Capital Corp........................................... 6.88% 11/15/28 2,370,825
11,425,000 Sprint Capital Corp. (a)...................................... 8.75% 03/15/32 11,624,937
3,070,000 Sprint Communications, Inc. (a)............................... 9.25% 04/15/22 3,423,050
7,900,000 T-Mobile USA, Inc. (a)........................................ 6.00% 03/01/23 8,334,500
2,925,000 T-Mobile USA, Inc............................................. 6.00% 04/15/24 3,118,781
1,700,000 T-Mobile USA, Inc............................................. 6.50% 01/15/26 1,867,790
2,428,000 ViaSat, Inc. (a).............................................. 6.88% 06/15/20 2,514,498
1,500,000 Windstream Services LLC....................................... 6.38% 08/01/23 1,335,000
--------------
64,114,901
--------------
Transportation - 4.1%
2,000,000 American Airlines Group, Inc.................................. 6.13% 06/01/18 2,087,500
3,400,000 American Airlines Group, Inc. (b)............................. 4.63% 03/01/20 3,434,000
1,532,210 Continental Airlines 2003-ERJ1 Pass Through Trust............. 7.88% 07/02/18 1,600,210
1,504,881 Continental Airlines 2005-ERJ1 Pass Through Trust (a)......... 9.80% 04/01/21 1,661,012
1,190,105 Delta Air Lines 2009-1 Series B Pass Through Trust............ 9.75% 12/17/16 1,204,041
1,786,561 Northwest Airlines 2001-1 Class B Pass Through Trust.......... 7.69% 04/01/17 1,829,885
5,935,912 US Airways 2000-3C Pass Through Trust......................... 8.39% 03/01/22 6,588,862
6,775,000 XPO Logistics, Inc. (a) (b)................................... 6.50% 06/15/22 7,062,938
--------------
25,468,448
--------------
Utility - 0.9%
5,660,000 Calpine Corp. (a)............................................. 5.75% 01/15/25 5,525,575
--------------
TOTAL CORPORATE BONDS AND NOTES.................................................... 576,144,751
(Cost $561,567,426) --------------
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
--------------- -------------------------------------------------------------- -------- -------- --------------
FOREIGN CORPORATE BONDS AND NOTES - 18.8%
Basic Industry - 5.4%
709,000 Anglo American Capital PLC (USD) (b).......................... 4.13% 04/15/21 720,255
1,401,000 Anglo American Capital PLC (USD) (b).......................... 4.88% 05/14/25 1,432,523
2,648,000 ArcelorMittal (USD)........................................... 7.25% 02/25/22 3,018,720
8,362,000 ArcelorMittal (USD) (a)....................................... 8.00% 10/15/39 9,030,960
2,000,000 Cemex SAB de CV (USD) (b)..................................... 7.75% 04/16/26 2,246,200
1,670,000 FMG Resources (August 2006) Pty Ltd. (USD) (b)................ 6.88% 04/01/22 1,728,784
2,345,000 FMG Resources (August 2006) Pty Ltd. (USD) (b)................ 9.75% 03/01/22 2,731,925
140,000 Masonite International Corp. (USD) (b)........................ 5.63% 03/15/23 145,600
3,300,000 MMC Norilsk Nickel OJSC via MMC Finance DAC (USD) (b)......... 6.63% 10/14/22 3,690,076
4,200,000 Stora Enso OYJ (USD) (b)...................................... 7.25% 04/15/36 4,756,920
2,505,000 Teck Resources Ltd. (USD)..................................... 6.00% 08/15/40 2,429,850
1,795,000 Teck Resources Ltd. (USD)..................................... 6.25% 07/15/41 1,786,025
--------------
33,717,838
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
--------------- -------------------------------------------------------------- -------- -------- --------------
FOREIGN CORPORATE BONDS AND NOTES (Continued)
Capital Goods - 2.2%
3,000,000 Albea Beauty Holdings S.A. (USD) (b).......................... 8.38% 11/01/19 $ 3,123,750
900,000 Ardagh Packaging Finance PLC/Ardagh Holdings USA, Inc.
(USD) (b).................................................. 6.00% 06/30/21 927,000
5,100,000 Ardagh Packaging Finance PLC/Ardagh Holdings USA, Inc.
(USD) (a) (b).............................................. 7.25% 05/15/24 5,406,000
3,730,000 Bombardier, Inc. (USD) (b).................................... 6.00% 10/15/22 3,329,025
1,390,000 Bombardier, Inc. (USD) (b).................................... 6.13% 01/15/23 1,213,498
--------------
13,999,273
--------------
Consumer Goods - 0.5%
3,425,000 Minerva Luxembourg S.A. (USD) (b)............................. 6.50% 09/20/26 3,367,289
--------------
Energy - 2.8%
1,875,000 Cenovus Energy, Inc. (USD).................................... 6.75% 11/15/39 2,099,451
1,500,000 CGG S.A. (USD)................................................ 6.50% 06/01/21 765,000
1,323,000 CHC Helicopter S.A. (USD) (g)................................. 9.25% 10/15/20 658,192
2,750,000 Gazprom OAO Via Gaz Capital S.A. (USD) (b).................... 8.63% 04/28/34 3,540,369
970,000 Petrobras Global Finance B.V. (USD)........................... 6.25% 03/17/24 961,270
4,350,000 Petrobras Global Finance B.V. (USD)........................... 6.88% 01/20/40 3,915,000
2,120,000 Petrobras Global Finance B.V. (USD)........................... 7.25% 03/17/44 1,961,000
100,000 Petrobras Global Finance B.V. (USD)........................... 8.75% 05/23/26 112,900
1,600,000 Precision Drilling Corp. (USD)................................ 6.63% 11/15/20 1,566,000
1,735,000 Precision Drilling Corp. (USD)................................ 6.50% 12/15/21 1,685,119
--------------
17,264,301
--------------
Healthcare - 1.4%
2,625,000 Endo Ltd./Endo Finance LLC/Endo Finco, Inc. (USD) (a) (b)..... 6.50% 02/01/25 2,224,687
605,000 Mallinckrodt International Finance S.A./Mallinckrodt CB LLC
(USD) (b).................................................. 5.75% 08/01/22 576,263
5,375,000 Valeant Pharmaceuticals International, Inc. (USD) (b)......... 7.50% 07/15/21 4,803,906
1,490,000 Valeant Pharmaceuticals International, Inc. (USD) (b)......... 5.88% 05/15/23 1,180,825
--------------
8,785,681
--------------
Insurance - 0.5%
3,500,000 Oil Insurance Ltd. (USD) (b) (h).............................. 3.82% (i) 2,817,500
--------------
Leisure - 1.1%
5,755,000 Royal Caribbean Cruises Ltd. (USD) (a)........................ 7.50% 10/15/27 7,049,875
--------------
Media - 2.5%
8,120,000 Altice Luxembourg S.A. (USD) (a) (b).......................... 7.75% 05/15/22 8,500,625
2,500,000 Unitymedia Hessen GmbH & Co. KG / Unitymedia NRW GmbH (EUR)... 4.63% 02/15/26 2,926,286
4,345,000 UPCB Finance IV Ltd. (USD) (b)................................ 5.38% 01/15/25 4,431,900
--------------
15,858,811
--------------
See Notes to Financial Statements Page 11
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
--------------- -------------------------------------------------------------- -------- -------- --------------
FOREIGN CORPORATE BONDS AND NOTES (Continued)
Technology & Electronics - 1.1%
2,925,000 NXP B.V./NXP Funding LLC (USD) (b)............................ 4.63% 06/01/23 $ 3,210,188
3,585,000 Sensata Technologies UK Financing Co., PLC (USD) (b).......... 6.25% 02/15/26 3,898,687
--------------
7,108,875
--------------
Telecommunications - 0.7%
880,000 Telecom Italia Capital S.A. (USD) (a)......................... 7.20% 07/18/36 954,800
2,900,000 Telecom Italia Capital S.A. (USD)............................. 7.72% 06/04/38 3,211,750
--------------
4,166,550
--------------
Transportation - 0.6%
2,850,000 Hapag-Lloyd AG (USD) (b)...................................... 9.75% 10/15/17 2,842,875
725,000 Stena AB (USD) (b)............................................ 7.00% 02/01/24 592,688
--------------
3,435,563
--------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES............................................ 117,571,556
(Cost $113,538,664) --------------
PAR
AMOUNT
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (U.S. DOLLARS)
--------------- -------------------------------------------------------------- -------- -------- --------------
CAPITAL PREFERRED SECURITIES - 8.6%
Banking - 4.7%
5,155,000 Bank of America Corp., Series DD (USD) (a) (j)................ 6.30% (i) 5,637,766
2,675,000 Capital One Financial Corp., Series E (USD) (a) (j)........... 5.55% (i) 2,711,404
6,700,000 Citigroup, Inc., Series M (USD) (j)........................... 6.30% (i) 6,867,500
3,250,000 Dresdner Funding Trust I (USD) (b)............................ 8.15% 06/30/31 3,871,563
2,825,000 HBOS Capital Funding L.P. (GBP) (j)........................... 6.46% (i) 3,693,378
700,000 HSBC Bank Capital Funding Sterling 1 L.P. (GBP) (j)........... 5.84% (i) 982,732
1,850,000 Mellon Capital III (GBP) (h).................................. 1.87% 09/05/66 2,124,129
2,370,000 Wells Fargo & Co., Series S (USD) (j)......................... 5.90% (i) 2,482,575
610,000 Wells Fargo Capital X (USD)................................... 5.95% 12/15/36 655,750
--------------
29,026,797
--------------
Capital Goods - 0.4%
3,760,000 Textron Financial Corp. (USD) (b) (j)......................... 6.00% 02/15/67 2,726,000
--------------
Insurance - 3.5%
1,800,000 Aviva PLC (GBP) (j)........................................... 6.13% 11/14/36 2,386,367
3,175,000 Chubb (The) Corp. (USD) (j)................................... 6.38% 04/15/37 3,000,375
3,500,000 CNP Assurances (EUR) (j)...................................... 5.25% (i) 3,496,350
11,000,000 Glen Meadow Pass-Through Trust (USD) (a) (b) (j).............. 6.51% 02/12/67 8,690,000
3,500,000 Lincoln National Corp. (USD) (a) (h).......................... 3.16% 05/17/66 2,854,775
1,800,000 Lincoln National Corp. (USD) (j).............................. 6.05% 04/20/67 1,408,500
--------------
21,836,367
--------------
TOTAL CAPITAL PREFERRED SECURITIES................................................. 53,589,164
(Cost $55,289,338) --------------
Page 12 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (K) MATURITY (L) VALUE
--------------- -------------------------------------------------------------- -------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 2.7%
Automotive - 0.7%
$ 2,473,255 Allison Transmission, Inc. Term Loan B3....................... 3.25% 09/23/22 $ 2,490,123
1,726,313 Navistar, Inc. Term Loan B.................................... 6.50% 08/07/20 1,735,375
--------------
4,225,498
--------------
Healthcare - 0.9%
6,168,025 Ortho-Clinical Initial Term Loan.............................. 4.75% 06/30/21 6,018,944
--------------
Services - 1.1%
6,630,000 Aramark Corp. F Term Loan..................................... 3.33% 02/24/21 6,663,150
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS............................................ 16,907,592
(Cost $16,913,857) --------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- -------- -------- --------------
MORTGAGE-BACKED SECURITIES - 1.6%
Collateralized Mortgage Obligations - 0.5%
421,972 Morgan Stanley Mortgage Loan Trust
Series 2007-6XS, Class 2A1S (h)............................ 0.64% 02/25/47 410,209
1,440,295 Specialty Underwriting & Residential Finance Trust
Series 2006-BC4, Class A2B (h)............................. 0.64% 09/25/37 735,135
1,965,081 Wells Fargo Mortgage Backed Securities
Series 2006-AR7 Trust, Class 2A4 (h)....................... 3.09% 05/25/36 1,874,996
--------------
3,020,340
--------------
Commercial Mortgage-Backed Securities - 1.1%
2,565,323 Ace Securities Corp. Home Equity Loan Trust
Series 2007-HE2, Class A2A (h)............................. 0.65% 12/25/36 1,589,609
728,347 Carrington Mortgage Loan Trust
Series 2006-NC4, Class A5 (h).............................. 0.59% 10/25/36 714,541
13,860 HSI Asset Securitization Corp. Trust
Series 2007-NC1, Class A1 (h).............................. 0.63% 04/25/37 10,012
650,193 Morgan Stanley ABS Capital I, Inc. Trust
Series 2006-HE6, Class A2B (h)............................. 0.63% 09/25/36 325,164
8,371,630 Securitized Asset Backed Receivables LLC
Trust Series 2006-FR4, Class A2A (h)....................... 0.61% 08/25/36 3,704,387
793,387 Soundview Home Loan Trust
Series 2006-EQ2, Class A2 (h)................................. 0.64% 01/25/37 573,026
--------------
6,916,739
--------------
TOTAL MORTGAGE-BACKED SECURITIES................................................... 9,937,079
(Cost $12,588,681) --------------
ASSET-BACKED SECURITIES - 0.2%
970,783 Keycorp Student Loan Trust
Series 2000-A, Class A2 (h)................................... 1.15% 05/25/29 935,647
(Cost $899,733) --------------
See Notes to Financial Statements Page 13
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
--------------- ----------------------------------------------------------------------------------- --------------
SHORT-TERM INVESTMENT - 0.0%
57,946 Dreyfus Government Cash Management - Institutional Shares.......................... $ 57,946
(Cost $57,946) --------------
TOTAL INVESTMENTS - 124.2%......................................................... 775,143,735
(Cost $760,855,645) (m) --------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------- -------- -------- --------------
U.S. GOVERNMENT BONDS SOLD SHORT - (15.9%)
$ (45,200,000) United States Treasury Note................................... 0.88% 02/28/17 (45,283,032)
(54,750,000) United States Treasury Note................................... 1.38% 09/30/23 (53,888,126)
--------------
TOTAL U.S. GOVERNMENT BONDS SOLD SHORT............................................. (99,171,158)
(Proceeds $99,266,130) --------------
CORPORATE BONDS SOLD SHORT - (2.4%)
Consumer Goods - (0.9%)
(5,350,000) ACCO Brands Corp.............................................. 6.75% 04/30/20 (5,644,250)
--------------
Energy - (0.7%)
(2,400,000) Noble Energy, Inc............................................. 4.15% 12/15/21 (2,548,707)
(2,100,000) Noble Energy, Inc............................................. 3.90% 11/15/24 (2,162,710)
--------------
(4,711,417)
--------------
Healthcare - (0.8%)
(4,770,000) Mylan N.V. (b)................................................ 5.25% 06/15/46 (4,847,331)
--------------
TOTAL CORPORATE BONDS SOLD SHORT................................................... (15,202,998)
(Proceeds $14,571,659) --------------
TOTAL INVESTMENTS SOLD SHORT - (18.3%)............................................. (114,374,156)
(Proceeds $113,837,789)
OUTSTANDING LOAN - (7.6%).......................................................... (47,199,784)
NET OTHER ASSETS AND LIABILITIES - 1.7%............................................ 10,538,984
--------------
NET ASSETS - 100.0%................................................................ $ 624,108,779
==============
-----------------------------
(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, 2016, securities noted as such amounted to
$277,500,521 of total investments and $(4,847,331) of corporate
bonds sold short, or 44.5% and (0.8)% of net assets, respectively.
(c) On October 24, 2014, Momentive Performance Materials, Inc. completed
a Bankruptcy Plan of Reorganization. As part of the Bankruptcy Plan
of Reorganization, the holders of Momentive Performance Materials,
Inc. Senior Secured Lien Notes ("Senior Secured Lien Notes")
scheduled to mature on October 15, 2020, received new Momentive
Performance Materials, Inc. Second Priority Senior Secured Notes
maturing on April 24, 2022, in an exchange for the existing Senior
Secured Lien Notes, and received an escrow claim, Momentive
Performance Escrow Claim. The escrow claim represents a claim on any
cash that remains in a Fee Reserve account. It is unknown if any
remaining cash held in the Fee Reserve account will be available
after future legal and financial costs are paid.
(d) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees,
and in accordance with the provisions of the Investment Company Act
Page 14 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
of 1940, as amended. At October 31, 2016, securities noted as such
are valued at $2 or 0.0% of net assets.
(e) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by the Fund's
Sub-Advisor.
(f) Non-income producing security.
(g) The issuer is in default and interest is not being accrued.
(h) Floating rate security. The interest rate shown reflects the rate in
effect at October 31, 2016.
(i) Perpetual maturity.
(j) Fixed-to-floating or fixed-to-variable rate security. The interest
rate shown reflects the fixed rate in effect at October 31, 2016. At
a predetermined date, the fixed rate will change to a floating rate
or a variable rate.
(k) Senior Floating-Rate Loan Interests ("Senior Loans") in which the
Fund invests pay interest at rates which are periodically
predetermined by reference to a base lending rate plus a premium.
These base lending rates are generally (i) the lending rate offered
by one or more major European banks, such as the London Inter-Bank
Offered Rate ("LIBOR"), (ii) the prime rate offered by one or more
United States banks or (iii) the certificate of deposit rate.
Certain Senior Loans are subject to a LIBOR floor that establishes a
minimum LIBOR rate. The interest rate shown reflects the rate in
effect at October 31, 2016. When a range of rates is disclosed, the
Fund holds more than one contract within the same tranche at varying
rates.
(l) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior
Loans may be substantially less than the stated maturities shown.
(m) Aggregate cost for federal income tax purposes is $760,025,774. As
of October 31, 2016, the aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost
was $37,527,934 and the aggregate gross unrealized depreciation for
all securities in which there was an excess of tax cost over value
was $22,409,973.
Currency Abbreviations:
EUR Euro
GBP British Pound Sterling
USD United States Dollar
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2016 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
10/31/2016 PRICES INPUTS INPUTS
---------------- ---------------- ---------------- ----------------
Corporate Bonds and Notes:
Basic Industry............................. $ 68,927,333 $ -- $ 68,927,331 $ 2
Other Industry Categories*................. 507,217,418 -- 507,217,418 --
Foreign Corporate Bonds and Notes*............ 117,571,556 -- 117,571,556 --
Capital Preferred Securities*................. 53,589,164 -- 53,589,164 --
Senior Floating-Rate Loan Interests*.......... 16,907,592 -- 16,907,592 --
Mortgage-Backed Securities:...................
Collateralized Mortgage Obligations........ 3,020,340 -- 3,020,340 --
Commercial Mortgage-Backed Securities...... 6,916,739 -- 6,916,739 --
Asset-Backed Securities....................... 935,647 -- 935,647 --
Short-Term Investment......................... 57,946 57,946 -- --
---------------- ---------------- ---------------- ----------------
Total Investments............................. $ 775,143,735 $ 57,946 $ 775,085,787 $ 2
================ ================ ================ ================
See Notes to Financial Statements Page 15
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2016 PRICES INPUTS INPUTS
---------------- ---------------- ---------------- ----------------
U.S. Government Bonds Sold Short.............. $ (99,171,158) $ -- $ (99,171,158) $ --
Corporate Bonds Sold Short*................... (15,202,998) -- (15,202,998) --
Forward Foreign Currency Contracts**.......... (22,068) -- (22,068) --
---------------- ---------------- ---------------- ----------------
Total......................................... $ (114,396,224) $ -- $ (114,396,224) $ --
================ ================ ================ ================
* See the Portfolio of Investments for industry breakout.
** See the Forward Foreign Currency Contracts table for contract and currency
detail.
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, 2015
Corporate Bonds and Notes................ $ 2
Net Realized Gain (Loss).................... --
Net Change in Unrealized Appreciation/
Depreciation............................. --
Purchases................................... --
Sales....................................... --
Transfers In................................ --
Transfers Out............................... --
ENDING BALANCE AT OCTOBER 31, 2016
Corporate Bonds and Notes................ 2
----------------
Total Level 3 holdings...................... $ 2
================
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2016.
There was no net change in unrealized appreciation (depreciation) from Level 3
investments held as of October 31, 2016.
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, 2016 OCTOBER 31, 2016 (DEPRECIATION)
---------- ------------ -------------- -------------- ---------------- ---------------- --------------
02/01/17 JPM USD 6,555,386 EUR 5,960,000 $ 6,555,386 $ 6,571,053 $ (15,667)
02/01/17 JPM USD 9,524,730 GBP 7,770,000 9,524,730 9,531,131 (6,401)
--------------
Net Unrealized Appreciation (Depreciation)....................................................... $ (22,068)
==============
+ Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
JPM JPMorgan Chase
Page 16 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value
(Cost $760,855,645)........................................................................... $ 775,143,735
Foreign currency (Cost $165,519)................................................................... 159,294
Receivables:
Interest...................................................................................... 12,132,859
Due from broker............................................................................... 825,573
Investment securities sold.................................................................... 504,611
--------------
Total Assets.................................................................................. 788,766,072
--------------
LIABILITIES:
Borrowings......................................................................................... 47,199,784
Investments sold short, at value (proceeds $113,837,789)........................................... 114,374,156
Unrealized depreciation on forward foreign currency contracts...................................... 22,068
Payables:
Investment securities purchased............................................................... 2,042,579
Investment advisory fees...................................................................... 531,467
Interest on investments sold short............................................................ 310,750
Audit and tax fees............................................................................ 57,200
Printing fees................................................................................. 43,448
Custodian fees................................................................................ 30,701
Administrative fees........................................................................... 30,488
Legal fees.................................................................................... 4,963
Transfer agent fees........................................................................... 4,271
Trustees' fees and expenses................................................................... 1,444
Financial reporting fees...................................................................... 773
Other liabilities.................................................................................. 3,201
--------------
Total Liabilities............................................................................. 164,657,293
--------------
NET ASSETS......................................................................................... $ 624,108,779
==============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $ 672,985,370
Par value.......................................................................................... 352,456
Accumulated net investment income (loss)........................................................... 3,518,287
Accumulated net realized gain (loss) on investments, forward foreign currency contracts,
swap contracts, foreign currency transactions, futures and investments sold short............... (66,438,747)
Net unrealized appreciation (depreciation) on investments, forward foreign currency contracts,
swap contracts, foreign currency translation and investments sold short......................... 13,691,413
--------------
NET ASSETS......................................................................................... $ 624,108,779
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... $ 17.71
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)........ 35,245,603
==============
See Notes to Financial Statements Page 17
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Interest........................................................................................... $ 44,462,875
Dividends.......................................................................................... 12,366
Other.............................................................................................. 118,495
--------------
Total investment income....................................................................... 44,593,736
--------------
EXPENSES:
Investment advisory fees........................................................................... 5,977,649
Interest expense on investments sold short......................................................... 1,405,117
Margin interest expense............................................................................ 869,077
Administrative fees................................................................................ 309,942
Short sale fees.................................................................................... 184,442
Printing fees...................................................................................... 132,974
Custodian fees..................................................................................... 64,422
Audit and tax fees................................................................................. 61,352
Excise tax expense................................................................................. 40,958
Transfer agent fees................................................................................ 26,368
Trustees' fees and expenses........................................................................ 19,056
Legal fees......................................................................................... 18,823
Financial reporting fees........................................................................... 9,250
Other.............................................................................................. 67,227
--------------
Total expenses................................................................................ 9,186,657
--------------
NET INVESTMENT INCOME (LOSS)....................................................................... 35,407,079
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................... (30,213,945)
Forward foreign currency contracts............................................................ 3,659,193
Swap contracts................................................................................ (292,935)
Foreign currency transactions................................................................. 99,740
Short sales................................................................................... 576,122
--------------
Net realized gain (loss)........................................................................... (26,171,825)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................... 42,147,288
Forward foreign currency contracts............................................................ (230,290)
Swap contracts................................................................................ 681,792
Foreign currency translation.................................................................. (38,592)
Short positions............................................................................... (1,319,129)
--------------
Net change in unrealized appreciation (depreciation)............................................... 41,241,069
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ 15,069,244
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 50,476,323
==============
Page 18 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2016 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)..................................................... $ 35,407,079 $ 39,955,911
Net realized gain (loss)......................................................... (26,171,825) (19,247,511)
Net change in unrealized appreciation (depreciation)............................. 41,241,069 (54,704,824)
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................. 50,476,323 (33,996,424)
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................ (37,536,441) (45,376,676)
-------------- --------------
Total distributions to shareholders.............................................. (37,536,441) (45,376,676)
-------------- --------------
CAPITAL TRANSACTIONS:
Repurchase of Common Shares*..................................................... (9,139,757) (2,272,860)
-------------- --------------
Net increase (decrease) in net assets resulting from capital transactions........ (9,139,757) (2,272,860)
-------------- --------------
Total increase (decrease) in net assets.......................................... 3,800,125 (81,645,960)
NET ASSETS:
Beginning of period.............................................................. 620,308,654 701,954,614
-------------- --------------
End of period.................................................................... $ 624,108,779 $ 620,308,654
============== ==============
Accumulated net investment income (loss) at end of period........................ $ 3,518,287 $ 3,499,351
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................. 35,902,223 36,056,159
Common Shares repurchased........................................................ (656,620) (153,936)
-------------- --------------
Common Shares at end of period................................................... 35,245,603 35,902,223
============== ==============
-----------------------------
* On September 15, 2015, the Fund commenced a share repurchase program. The
program originally expired on March 15, 2016, but on March 15, 2016, the
Fund announced that the Board of Trustees of the Fund (the "Board")
authorized the continuation of the Fund's share repurchase program. The
program again expired on September 15, 2016, but on September 15, 2016,
the Fund again announced that the Board authorized the continuation of the
Fund's share repurchase program. For the year ended October 31, 2016, and
the year ended October 31, 2015, the Fund repurchased 656,620 and 153,936,
respectively, of its shares at a weighted-average discount of 15.14% and
14.45%, 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 992,252 common shares (for an aggregate of
1,802,808), or (ii) March 15, 2017.
See Notes to Financial Statements Page 19
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.................. $ 50,476,323
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................... (436,895,763)
Borrowed investments sold short............................................. 106,089,727
Sales, maturities and paydowns of investments............................... 344,529,038
Borrowed investments purchased.............................................. (51,673,058)
Net amortization/accretion of premiums/discounts on investments............. (130,582)
Net realized gain/loss on investments....................................... 30,213,945
Net realized gain/loss on investments sold short............................ (576,122)
Net change in unrealized appreciation/depreciation on
forward foreign currency contracts....................................... 230,290
Net change in unrealized appreciation/depreciation on
investments sold short................................................... 1,319,129
Net change in unrealized appreciation/depreciation on investments........... (42,147,288)
Net decrease in restricted cash............................................. 658,466
CHANGES IN ASSETS AND LIABILITIES:
Increase in due from broker................................................. (825,573)
Increase in interest receivable............................................. (1,053,093)
Decrease in prepaid expenses................................................ 14,444
Decrease in interest payable on investments sold short...................... (11,051)
Increase in investment advisory fees payable................................ 7,003
Increase in legal fees payable.............................................. 1,427
Increase in printing fees payable........................................... 8,738
Decrease in administrative fees payable..................................... (102,489)
Increase in custodian fees payable.......................................... 9,171
Increase in transfer agent fees payable..................................... 1,981
Decrease in Trustees' fees and expenses payable............................. (553)
Increase in financial reporting fees payable................................ 2
Decrease in variation margin fees payable................................... (16,169)
Increase in other liabilities payable....................................... 1,883
--------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................ $ 129,826
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares................................................. (9,473,707)
Distributions to Common Shareholders from net investment income............. (37,536,441)
Net proceeds from borrowing................................................. 46,621,169
--------------
CASH USED IN FINANCING ACTIVITIES................................................ (388,979)
--------------
Decrease in cash and foreign currency (a)........................................ (259,153)
Cash and foreign currency at beginning of period................................. 418,447
--------------
Cash and foreign currency at end of period....................................... $ 159,294
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................ $ 2,285,245
==============
-----------------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(38,592).
Page 20 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
2016 2015 2014 2013 2012
---------- ---------- ---------- ---------- ----------
Net asset value, beginning of period............ $ 17.28 $ 19.47 $ 19.63 $ 19.05 $ 17.82
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 1.00 1.11 1.31 1.35 1.41
Net realized and unrealized gain (loss)......... 0.44 (2.05) (0.15) 0.64 1.42
-------- -------- -------- -------- --------
Total from investment operations................ 1.44 (0.94) 1.16 1.99 2.83
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (1.06) (1.26) (1.32) (1.33) (1.44)
Net realized gain............................... -- -- -- -- (0.16)
Return of capital............................... -- -- -- (0.08) --
-------- -------- -------- -------- --------
Total distributions to Common Shareholders...... (1.06) (1.26) (1.32) (1.41) (1.60)
-------- -------- -------- -------- --------
Capital share repurchases....................... 0.05 0.01 -- -- --
-------- -------- -------- -------- --------
Net asset value, end of period.................. $ 17.71 $ 17.28 $ 19.47 $ 19.63 $ 19.05
======== ======== ======== ======== ========
Market value, end of period..................... $ 15.52 $ 14.96 $ 17.19 $ 17.62 $ 18.78
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (a)....... 10.24% (3.89)% 6.86% 11.32% 17.09%
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (a).......... 11.58% (5.76)% 5.12% 1.36% 23.69%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $624,109 $620,309 $701,955 $707,807 $686,715
Ratio of total expenses to average net assets... 1.54% 1.66% 1.75% 1.72% 1.88%
Ratio of total expenses to average net assets
excluding interest expense................... 1.16% 1.21% 1.26% 1.27% 1.32%
Ratio of net investment income (loss) to
average net assets........................... 5.92% 6.05% 6.59% 6.93% 7.83%
Portfolio turnover rate......................... 36% 26% 28% 28% 24%
-----------------------------
(a) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
See Notes to Financial Statements Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016
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 (the "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 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 Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP") requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund's NAV per Common
Share is calculated by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service, or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Corporate bonds, notes, U.S. government securities, mortgage-backed
securities, asset-backed securities and other debt securities are valued
on the basis of valuations provided by dealers who make markets in such
securities or by a third-party pricing service approved by the Fund's
Board of Trustees, which may use the following valuation inputs when
available:
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 22
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016
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.
Exchange-traded futures contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded futures contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price.
Forward foreign currency contracts are fair valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by a third-party pricing service.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a 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
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
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016
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, 2016, 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, 2016, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
C. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund did not have any unfunded delayed draw loan
commitments as of October 31, 2016.
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, 2016
D. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation/(depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or the cost of) the closing transaction
and the Fund's basis in the contract. This realized gain or loss is included in
"Net realized gain (loss) on forward foreign currency contracts" on the
Statement of Operations. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movement in
currency and securities values and interest rates. Due to the risks, the Fund
could incur losses in excess of the net unrealized value shown on the Forward
Foreign Currency Contracts table in the Portfolio of Investments. In the event
of default by the Counterparty, the Fund will provide notice to the Counterparty
of the Fund's intent to convert the currency held by the Fund into the currency
that the Counterparty agreed to exchange with the Fund. If a Counterparty
becomes bankrupt or otherwise fails to perform its obligations due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain
only limited recovery or may obtain no recovery in such circumstances.
E. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statement of Operations.
F. FUTURES CONTRACTS
The Fund purchases or sells (i.e., is long or short) futures contracts to hedge
against changes in interest rates (interest rate risk). Futures contracts are
agreements between the Fund and a counterparty to buy or sell a specific
quantity of an underlying instrument at a specified price and at a specified
date. Depending on the terms of the contract, futures contracts are settled
either through physical delivery of the underlying instrument on the settlement
date or by payment of a cash settlement amount on the settlement date. Open
futures contracts can also be closed out prior to settlement by entering into an
offsetting transaction in a matching futures contract. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue to be required
to maintain margin deposits on the futures contract. When the contract is closed
or expires, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed or expired. This gain or loss is included in "Net realized
gain (loss) on futures" on the Statement of Operations.
Upon entering into a futures contract, the Fund must deposit funds, called
margin, with its custodian in the name of the clearing broker equal to a
specified percentage of the current value of the contract. Open futures contacts
are marked to market daily with the change in value recognized as a component of
"Net change in unrealized appreciation (depreciation) on futures" on the
Statement of Operations. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin
and are included in "Variation margin payable or receivable" on the Statement of
Assets and Liabilities.
If market conditions change unexpectedly, the Fund may not achieve the
anticipated benefits of the futures contracts and may realize a loss. The use of
futures contracts involves the risk of imperfect correlation in movements in the
price of the futures contracts, interest rates and the underlying instruments.
The Fund did not hold any futures contracts during the year ended October 31,
2016.
Page 25
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016
G. SHORT SALES
Short sales are utilized for investment and risk management purposes and are
transactions in which securities or other instruments (such as options,
forwards, futures or other derivative contracts) are sold 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, 2016,
the Fund had $47,199,784 in borrowings associated with investments sold short as
shown in "Borrowings" on the Statement of Assets and Liabilities and
$114,374,156 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 charged on payable credit margin balances at a rate equal to the
Overnight Bank Funding Rate less 40 basis points. On September 1, 2016, the
Overnight Bank Funding Rate replaced the Federal Funds Rate. At October 31,
2016, the Fund had a debit margin balance with an interest rate of 1.16%. For
the year ended October 31, 2016, margin interest expense was $869,077, as shown
on the Statement of Operations. For the year ended October 31, 2016, the average
margin balance and interest rate were $77,744,832 and 1.09%, respectively.
H. CREDIT DEFAULT SWAPS
The Fund may enter into credit default swap contracts ("CDS") for investment
purposes or to manage credit risk. A CDS is an agreement between two parties
("Counterparties") to exchange the credit risk of an issuer. Swap agreements may
be privately negotiated in the 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, 2016.
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, 2016
I. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Level dividend distributions are declared and paid monthly to Common
Shareholders after the payment of interest and/or dividends in connection with
leverage. The level dividend rate may be modified by the Board of Trustees from
time to time. If, for any monthly distribution, net investment company taxable
income, if any (which term includes net short-term capital gain), is less than
the amount of the distribution, the difference will generally be a tax-free
return of capital distributed from the Fund's assets. Distributions of any net
long-term capital gains earned by the Fund are distributed at least annually.
Distributions will automatically be reinvested into additional Common Shares
pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are
elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
U.S. income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future. Permanent differences
incurred during the fiscal year ended October 31, 2016, resulting in book and
tax accounting differences, have been reclassified at year end to reflect an
increase in accumulated net investment income (loss) by $2,148,298, a decrease
in accumulated net realized gain (loss) on investments by $2,107,340 and a
decrease to paid-in capital of $40,958. Net assets were not affected by this
reclassification.
The tax character of distributions paid during the fiscal years ended October
31, 2016 and October 31, 2015 was as follows:
2016 2015
Distributions paid from:
Ordinary income..................................... $ 37,536,441 $ 45,376,676
Capital gain........................................ -- --
Return of capital................................... -- --
As of October 31, 2016, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income....................... $ 2,962,105
Undistributed capital gains......................... --
------------
Total undistributed earnings........................ 2,962,105
Accumulated capital and other losses................ (66,385,309)
Net unrealized appreciation (depreciation).......... 14,543,352
------------
Total accumulated earnings (losses)................. (48,879,852)
Other............................................... (349,195)
Paid-in capital..................................... 673,337,826
------------
Net assets.......................................... $624,108,779
============
J. INCOME AND OTHER TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward 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, 2016, the Fund had no pre-enactment net
capital losses for federal income tax purposes. At October 31, 2016 the Fund had
post-enactment net capital losses for federal income tax purposes of $66,385,309
to be carried forward indefinitely.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2013, 2014,
2015 and 2016 remain open to federal and state audit. As of October 31, 2016,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016
K. EXPENSES
The Fund will pay all expenses directly related to its operations.
L. 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. The new and
amended rules and forms 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 and amended rules and forms to determine the impact to the
Fund.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
MacKay serves as the Fund's sub-advisor and manages the Fund's portfolio subject
to First Trust's supervision. The Sub-Advisor receives a portfolio management
fee at an annual rate of 0.50% of Managed Assets that is paid by First Trust
from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets. 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. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
other actively managed fund, or is an index fund.
Additionally, The Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
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
Cost of purchases and proceeds from sales of investments, excluding short-term
investments and investments sold short, for the year ended October 31, 2016,
were $257,405,992 and $157,750,902, respectively. The cost of purchases to cover
short sales and the proceeds of short sales were $51,673,058 and $106,089,727,
respectively.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at
October 31, 2016, 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
------------------ ------------------ --------------------------- ---------- --------------------------- ----------
Forward foreign Currency Risk Unrealized appreciation $ -- Unrealized depreciation $ 22,068
currency contracts on forward foreign on forward foreign
currency contracts currency contracts
Page 28
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016
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, 2016, 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 $ 3,659,193
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts (230,290)
CREDIT RISK
Net realized gain (loss) on swap contracts (292,935)
Net change in unrealized appreciation (depreciation) on
swap contracts 681,792
During the year ended October 31, 2016, the notional values of forward foreign
currency contracts opened and closed were $247,345,398 and $231,036,399,
respectively.
The average volume of credit default swap contracts was $10,747,268 for the year
ended October 31, 2016.
The Fund does not have the right to offset financial assets and financial
liabilities related to forward foreign currency contracts, futures contracts and
swap contracts on the Statement of Assets and Liabilities.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On November 21, 2016, the Fund declared a distribution of $0.100 per share to
Common Shareholders of record on December 5, 2016, payable December 12, 2016.
On December 12, 2016, the Board of Trustees approved a change in the Fund's
non-fundamental investment policy to allow the Fund to hold up to 300 issues in
its portfolio at any time. Previously, the Fund had been limited to holding up
to 200 issues.
Page 29
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST HIGH INCOME LONG/SHORT
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust High Income Long/Short Fund (the "Fund"), including the portfolio of
investments, as of October 31, 2016, 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, 2016, by correspondence with the Fund's
custodian, brokers, and agent banks; where 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 the
First Trust High Income Long/Short Fund as of October 31, 2016, 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 21, 2016
Page 30
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ADDITIONAL INFORMATION
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016 (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 31
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016 (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, 2016, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
Distributions paid to foreign shareholders between the period January 1, 2016
and October 31, 2016 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 April 26, 2016, 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 Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust High Income Long/Short Fund, First Trust Energy Infrastructure
Fund, First Trust MLP and Energy Income Fund, First Trust Intermediate Duration
Preferred & Income Fund and First Trust New Opportunities MLP & Energy Fund was
held on April 22, 2016 (the "Annual Meeting"). At the Annual Meeting, James A.
Bowen and Niel B. Nielson were elected by the Common Shareholders of the First
Trust High Income Long/Short Fund as Class III Trustees for a three-year term
expiring at the Fund's annual meeting of shareholders in 2019. The number of
votes cast in favor of Mr. Bowen was 29,389,996, the number of votes against was
1,505,145 and the number of broker non-votes was 4,504,174. The number of votes
cast in favor of Mr. Nielson was 29,367,327, the number of votes against was
1,527,814 and the number of broker non-votes was 4,504,174. Richard E. Erickson,
Thomas R. Kadlec and Robert F. Keith are the other current and continuing
Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
Page 32
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016 (UNAUDITED)
DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
securities of companies in similar industries. Distressed securities frequently
do not produce income while they are outstanding. The Fund may be required to
incur certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Sub-Advisor seeks capital appreciation
through investment in distressed securities, the ability to achieve current
income may be diminished.
ECONOMIC CONDITIONS RISK: Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a high-yield issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Under adverse
market or economic conditions, the secondary market for high-yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer and these securities may become illiquid. As a
result, the Sub-Advisor could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded.
FIXED-INCOME SECURITIES RISK: Debt securities, including high-yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are reinvested at market interest rates that are below the portfolio's
current earnings rate; (iii) prepayment risk, which is the risk that during
periods of declining interest rates, the issuer of a security may exercise its
option to prepay principal earlier than scheduled, forcing the reinvestment in
lower yielding securities; and (iv) credit risk, which is the risk that a
security in the Fund's portfolio will decline in price or the issuer fails to
make interest payments when due because the issuer of the security experiences a
decline in its financial status.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
SHORT SELLING RISK: Short selling allows the Fund to profit from a decline in
market price to the extent such decline exceeds the transaction costs and the
costs of borrowing the securities. If a security sold short increases in price,
the Fund may have to cover its short position at a higher price than the short
sale price, resulting in a loss. The Fund may have substantial short positions
and must borrow those securities to make delivery to the buyer. The Fund may not
be able to borrow a security that it needs to deliver or it may not be able to
close out a short position at an acceptable price and may have to sell related
long positions before it had intended to do so. Thus, the Fund may not be able
to successfully implement its short sale strategy due to limited availability of
desired securities or for other reasons. Also, there is the risk that the
counterparty to a short sale may fail to honor its contractual terms, causing a
loss to the Fund. Because losses on short sales arise from increases in the
value of the security sold short, such losses are theoretically unlimited. The
use of short sales in combination with long positions in the Fund's portfolio in
an attempt to improve performance or reduce overall portfolio risk may not be
successful and may result in greater losses or lower positive returns than if
the Fund held only long positions. It is possible that the Fund's long
securities positions will decline in value at the same time that the value of
its short securities positions increase, thereby increasing potential losses to
the Fund.
By investing the proceeds received from selling securities short, the Fund could
be deemed to be employing a form of leverage, which creates special risks. The
use of leverage may increase the Fund's exposure to long securities positions
and make any change in the Fund's NAV greater than it would be without the use
of leverage. This could result in increased volatility of returns. There is no
guarantee that any leveraging strategy the Fund employs will be successful
during any period in which it is employed.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
Page 33
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016 (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,
2017 at a meeting held on June 13, 2016. 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 22, 2016 and June 13, 2016, 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 fees for the Fund 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 a special meeting held on April 22, 2016, 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 13, 2016 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. 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. In addition, as part of the Board's consideration of the Advisor's
services, the Advisor, in its written materials and at the April 22, 2016
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, the Board reviewed the
materials provided by the Sub-Advisor and considered the services that the
Sub-Advisor provides to the Fund, including the Sub-Advisor's day-to-day
management of the Fund's investments. In 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.
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
Page 34
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016 (UNAUDITED)
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
the limitations in creating a relevant peer group for the Fund, including that
(i) the Fund is unique in its composition, which makes assembling peers with
similar strategies and asset mix difficult; (ii) peer funds may use different
amounts and types of leverage with different costs associated with them or may
use no leverage, noting that the Fund uses non-traditional leverage by shorting
bonds and reinvesting the proceeds; (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 slightly 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, 2015 to the performance of the MPI Peer Group and to a
benchmark index. In reviewing the Fund's performance as compared to the
performance of the MPI Peer Group, the Board took into account the limitations
described above with respect to creating a relevant peer group for the Fund.
Based on the information provided on net asset value performance, the Board
noted that the Fund outperformed the MPI Peer Group average for the one- and
three-year periods and underperformed the MPI Peer Group average of the
five-year period ended December 31, 2015. The Board also noted that the Fund
underperformed the benchmark index in the one- and five-year periods, but
outperformed the benchmark index in the three-year period ended December 31,
2015. 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
reduced leverage during 2015. The Board also received information on the Fund's
annual distribution rate as of December 31, 2015 and the Fund's average trading
discount during 2015 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, 2015 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 noted the Sub-Advisor's expenses in providing investment services to
the Fund and considered the Sub-Advisor's statement that it will not experience
significant economies of scale based on the current level of assets of the Fund
and the level of other assets under the management of the portfolio management
team. The Board considered that the sub-advisory fee rate was negotiated at
arm's length between the Advisor and the Sub-Advisor, an unaffiliated third
party. The Board also considered information provided by the Sub-Advisor as to
the profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board
noted the inherent limitations in the profitability analysis and concluded that
the profitability analysis for the Advisor was more relevant. The Board
considered fall-out benefits that may be realized by the Sub-Advisor from its
relationship with the Fund, noting that the Sub-Advisor did not identify any
material fall-out benefits.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 35
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE (2) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 137 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership; Member, Sportsmed
Suite 400 Inception LLC (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President, ADM Investor Services, 137 Director of ADM
c/o First Trust Advisors L.P. Inc. (Futures Commission Merchant) Investor Services,
120 East Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President, Hibs Enterprises (Financial and 137 Director of Trust
c/o First Trust Advisors L.P. Management Consulting) Company of
120 East Liberty Drive, o Since June 2006 Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 137 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June
2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee, o Three-Year Term Chief Executive Officer, First Trust 137 None
Chairman of the Board Advisors L.P. and First Trust Portfolios
120 East 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
D.O.B.: 09/55 LLC (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 2017 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2018 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2019 annual meeting of shareholders.
Page 36
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016 (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
120 E. Liberty Drive, Executive Officer Officer (January 2016 to Present), Controller
Suite 400 o Since January 2016 (January 2011 to January 2016), Senior Vice
Wheaton, IL 60187 President (April 2007 to January 2016), First
D.O.B.: 01/66 Trust Advisors L.P. and First Trust
Portfolios L.P.; Chief Financial Officer,
BondWave LLC (Software Development
Company) (January 2016 to Present) and
Stonebridge Advisors LLC (Investment
Advisor) (January 2016 to Present)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present),
120 E. Liberty Drive, Officer and Chief Vice President (April 2012 to July 2016), First
Suite 400 Accounting Officer o Since January 2016 Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.; Vice President (September
D.O.B.: 08/72 2006 to April 2012), Guggenheim Funds
Investment Advisors, LLC/Claymore
Securities, Inc.
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 Inception Counsel, BondWave LLC; Secretary of
Wheaton, IL 60187 Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Fund Inception First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust
120 E. Liberty Drive, and Assistant Secretary Advisors L.P. and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since
D.O.B.: 12/66 January 2011
o Assistant Secretary
since Fund Inception
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 37
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
OCTOBER 31, 2016 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 38
This Page Left Blank Intentionally.
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
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless
of whether these individuals are employed by the registrant or a third
party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, that relates to one or more of the items set forth in
paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years were
$52,000 for the fiscal year ended October 31, 2015 and $52,000 for the fiscal
year ended October 31, 2016.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years for assurance and related services by the principal
accountant that are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph (a) of
this Item were $0 for the fiscal year ended October 31, 2015 and $3,000 for the
fiscal year ended October 31, 2016. 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, 2015 and $0 for
the fiscal year ended October 31, 2016.
(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, 2015 and $5,200 for the fiscal year ended October 31, 2016.
The fees for 2015 and 2016 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, 2015 and $0 for the fiscal year ended October 31,
2016.
(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, 2015 and
$0 for the fiscal year ended October 31, 2016.
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, 2015 and
$0 for the fiscal year ended October 31, 2016.
(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, 2015 were $5,200 for the Registrant and $12,500
for the Registrant's investment adviser and for the Registrant's fiscal year
ended October 31, 2016 were $8,200 for the Registrant and $13,000 for the
Registrant's investment adviser.
(h) The Registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
INFORMATION PROVIDED AS OF DECEMBER 14, 2016
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, 2016, MacKay Shields had approximately $96.6
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 40 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 39 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 33 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, 2016.
# 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 $ 6.016 Bil 0 $ 0
Companies:
Other Pooled Investment 35 $15.385 Bil 4 $1.503 Bil
Vehicles:
Other Accounts: 143 $27.646 Bil 4 $1.511 Bil
Registered Investment 12 $ 5.816 Bil 0 $ 0
2. Louis Cohen Companies:
Other Pooled Investment 35 $15.385 Bil 4 $1.503 Bil
Vehicles:
Other Accounts: 143 $27.646 Bil 4 $1.511 Bil
Registered Investment 9 $ 4.289 Bil 0 $ 0
3. Michael Kimble Companies:
Other Pooled Investment 35 $15.385 Bil 4 $1.503 Bil
Vehicles:
Other Accounts: 143 $27.646 Bil 4 $1.511 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'
Legal/Compliance Department conducts periodic reviews of client account
performance as a function of allocation to assure that no account or group of
accounts is being preferred systematically in the allocation process. The policy
contains a procedure for limited offerings, which provides that in a limited
offering, the allocations may be pro-rata based on size of the order or account
size and within a strategy pro-rata based on account size. Under this policy,
when determining which accounts will participate in a trade, the portfolio
managers will consider various objective criteria which may include but are not
limited to: client cash limitations, actual and anticipated account inflows and
outflows, duration and/or average maturity, account size, deal size, trade lots,
existing exposure to an issuer or industry type, other concentration limits,
specific investment objectives, borrowing capacity, and other practical
limitations. If the aggregated order is filled in its entirety, it will be
allocated among clients in accordance with the target allocation. If the order
is partially filled, it will be allocated pro rata based on the allocation
methodology recorded in the trade order management system.
Our Valuation Procedures provide, among other requirements, that any fair
valuation of a security recommended by a portfolio manager be approved by at
least two disinterested portfolio managers from one or more other distinct
portfolio management areas. In addition, on a monthly basis, a Fair Valuation
Committee meeting convenes to review all securities that are being fair valued.
The Firm's cross trading policy provides that all cross trades must be
pre-cleared by the Legal/Compliance Department and requires, among other things,
that the transaction (i) be a purchase or sale for no consideration other than
cash payments against prompt delivery of the security, (ii) be effected at the
independent market price of the security determined in accordance with
applicable methodology; and (iii) be effected with no brokerage transaction.
Special considerations pertain to situations where one investment strategy may
conflict with another. It is the policy of MacKay that no one client be favored
over another. For example, one strategy may focus on selling certain securities
short, with the expectation of profit in the event that the prices for such
securities decrease, while another strategy may involve acquiring securities
"long". As stated above, it is the policy of MacKay that no one client be
favored over another. To effect that policy in cases where investment strategies
compete or conflict with each other, MacKay has adopted the following
procedures:
a) Each portfolio manager will determine, separately from any other managers the
securities to purchase and sell on any given day with respect to the clients and
strategies for which they are responsible.
b) In the event that the same strategy purchases or sells the same security on
the same trading day, all accounts participating in the transaction for that
security shall be average-priced (same-day trades executed on behalf of
different strategies may not be average-priced), provided, however, that short
sales for a particular security shall not be average-priced with purchases of
the same security.
c) If a portfolio manager enters a buy or sell order for the same security for
more than one client or strategy, and the orders are worked concurrently and not
completely filled, each applicable client or strategy will be allotted
securities pro-rata, in proportion to the amounts specified in the portfolio
manager's orders as described above.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF OCTOBER 31, 2016.
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, 2016.
Dollar Range of Fund Shares
Name Beneficially Owned
Dan Roberts $0
Louis Cohen $100,001-$500,000
Michael Kimble $0
(B) Taylor Wagenseil has stepped down from the Portfolio Management Team
purusuant to his plans to retire in 2017.
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 #1 190,522 $14.359 344,458 1,458,350
(11/01/2015-
11/30/2015)
Month #2 136,177 $13.873 480,635 1,322,173
(12/01/2015-
12/31/2015)
Month #3 188,309 $13.631 668,944 1,133,864
(1/01/2016-
1/31/2016)
Month #4 114,608 $13.359 783,552 1,019,256
(2/01/2016-
2/29/2016)
Month #5 0 -- 783,552 1,019,256
(3/01/2016-
3/31/2016)
Month #6 0 -- 783,552 1,019,256
(4/01/2016-
4/30/2016)
Month #7 0 -- 783,552 1,019,256
(5/01/2016-
5/31/2016)
Month #8 0 -- 783,552 1,019,256
(6/01/2016-
6/30/2016)
Month #9 0 -- 783,552 1,019,256
(7/01/2016-
7/31/2016)
Month #10 0 -- 783,552 1,019,256
(8/01/2016-
8/31/2016)
Month #11 0 -- 783,552 1,019,256
(9/01/2016-
9/30/2016)
Month #12 27,004 $15.443 810,556 992,252
(10/01/2016-
10/31/2016)
Total 656,620 $13.919 810,556 992,252
-------------------------------------------------------------------------------------------------------------
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 on March 15, 2016, the Fund announced that the Board of
Trustees of the Fund (the "Board") authorized the continuation of the Fund's
share repurchase program. The program again expired on September 15, 2016, but
on September 15, 2016, the Fund again announced that the Board authorized the
continuation of the Fund's share repurchase program. For the year ended October
31, 2016, and the year ended October 31, 2015, the Fund repurchased 656,620 and
153,936, respectively, of its shares at a weighted-average discount of 15.14%
and 14.45%, 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 992,252 common shares (for an aggregate of
1,802,808), or (ii) March 15, 2017.
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 20, 2016
-------------------
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 20, 2016
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 20, 2016
-------------------
* Print the name and title of each signing officer under his or her signature.