UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-22442
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First Trust High Income Long/Short Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: April 30, 2014
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
First Trust
High Income
Long/Short Fund
(FSD)
Semi-Annual Report
For the Six Months Ended
April 30, 2014
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TABLE OF CONTENTS
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
SEMI-ANNUAL REPORT
APRIL 30, 2014
Shareholder Letter........................................................... 1
At a Glance.................................................................. 2
Portfolio Commentary......................................................... 3
Portfolio of Investments..................................................... 5
Statement of Assets and Liabilities.......................................... 17
Statement of Operations...................................................... 18
Statements of Changes in Net Assets.......................................... 19
Statement of Cash Flows...................................................... 20
Financial Highlights......................................................... 21
Notes to Financial Statements................................................ 22
Additional Information....................................................... 29
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or MacKay Shields LLC ("MacKay" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust High Income Long/Short Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund's
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information for a discussion of certain other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
MacKay are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2014
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust High Income Long/Short Fund (the "Fund").
As a shareholder, twice a year you receive a detailed report about your
investment, including portfolio commentary from the Fund's management team, a
performance analysis and a market and Fund outlook. Additionally, First Trust
Advisors L.P. ("First Trust") compiles the Fund's financial statements for you
to review. These reports are intended to keep you up-to-date on your investment,
and I encourage you to read this document and discuss it with your financial
advisor.
Despite some volatility, the six months covered by this report have been
positive for the U.S. markets. In fact, the S&P 500(R) Index, as measured on a
total return basis, rose 8.36% during the period. Of course, past performance
can never be an indicator of future performance, but First Trust believes that
staying invested in quality products through up and down markets and having a
long-term horizon can help investors reach their financial goals.
First Trust continues to offer a variety of products that we believe could fit
the financial plans for many investors seeking long-term investment success.
Your financial advisor can tell you about the other investments First Trust
offers that might fit your financial goals. We encourage you to discuss those
goals with your financial advisor regularly so that he or she can help keep you
on track and help you choose investments that match your goals.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
"AT A GLANCE"
APRIL 30, 2014 (UNAUDITED)
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FUND STATISTICS
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Symbol on NYSE FSD
Common Share Price $18.02
Common Share Net Asset Value ("NAV") $19.96
Premium (Discount) to NAV (9.72)%
Net Assets Applicable to Common Shares $719,520,882
Current Monthly Distribution per Common Share (1) $0.1100
Current Annualized Distribution per Common Share $1.3200
Current Distribution Rate on Closing Common Share Price (2) 7.33%
Current Distribution Rate on NAV (2) 6.61%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
4/13 19.10 19.92
19.16 19.95
19.15 20.04
19.00 20.00
18.78 19.96
5/13 18.19 19.79
17.94 19.52
17.63 19.34
17.34 19.04
6/13 17.56 19.04
16.81 18.97
17.28 19.20
17.43 19.42
7/13 17.50 19.35
17.77 19.23
17.40 19.19
16.95 19.10
17.17 19.02
8/13 17.11 19.02
16.96 18.96
17.01 19.07
17.77 19.29
9/13 17.76 19.20
17.44 19.14
17.45 19.20
17.59 19.43
10/13 17.69 19.56
17.58 19.52
17.47 19.49
17.44 19.53
17.31 19.59
11/13 17.40 19.66
17.09 19.55
17.10 19.60
17.07 19.66
12/13 17.36 19.58
17.11 19.64
17.45 19.78
17.64 19.86
17.79 19.74
1/14 17.54 19.71
17.58 19.64
17.80 19.75
17.77 19.84
2/14 17.88 19.99
17.63 19.85
17.52 19.74
17.51 19.85
3/14 17.61 19.93
17.51 19.89
17.65 19.84
17.88 19.89
17.93 19.92
4/14 18.02 19.96
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PERFORMANCE
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Average Annual Total Return
6 Months Ended 1 Year Ended Inception (9/27/10)
4/30/14 4/30/14 to 4/30/14
FUND PERFORMANCE (3)
NAV 5.59% 8.21% 9.66%
Market Value 6.21% 1.89% 5.22%
INDEX PERFORMANCE
Bank of America Merrill Lynch U.S. High Yield
Master II Constrained Index 4.76% 6.29% 9.65%
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% OF LONG-TERM
INDUSTRY CLASSIFICATION INVESTMENTS
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Services 15.8%
Banking 11.9
Energy 11.3
Basic Industry 10.8
Insurance 8.9
Healthcare 6.4
Financial Services 6.3
Capital Goods 6.1
Automotive 6.0
Telecommunications 5.4
Technology & Electronics 4.0
Media 2.0
Consumer Non-Cyclical 1.9
Utility 1.4
Asset-Backed Securities 1.3
Collateralized Mortgage Obligations 0.5
Real Estate 0.0*
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Total 100.0%
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% OF LONG-TERM
ASSET CLASSIFICATION INVESTMENTS
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Corporate Bonds and Notes 61.1%
Capital Preferred Securities 17.7
Foreign Corporate Bonds and Notes 15.1
Senior Floating-Rate Loan Interests 1.8
Common Stocks 1.5
Asset-Backed Securities 1.3
Foreign Sovereign Bonds and Notes 0.7
Mortgage-Backed Securities 0.5
Warrants 0.3
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Total 100.0%
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% OF LONG
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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BBB- and above 19.4%
BB 39.1
B 32.1
CCC+ and below 8.6
NR 0.8
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Total 100.0%
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% OF TOTAL
COUNTRY EXPOSURE INVESTMENTS
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United States 77.6%
Luxembourg 5.1
Netherlands 3.7
United Kingdom 2.9
Canada 2.6
Cayman Islands 1.7
Jersey 1.1
Ireland 0.9
Liberia 0.7
France 0.7
Germany 0.6
Finland 0.5
India 0.4
Georgia 0.4
Brazil 0.4
Bermuda 0.4
Portugal 0.3
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Total 100.0%
======
* Amount is less than 0.1%.
(1) Most recent distribution paid or declared through 4/30/2014. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 4/30/2014. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) The credit quality and ratings information presented above reflect the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings, or a comparably rated NRSRO. For situations in which
a security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
SEMI-ANNUAL REPORT
APRIL 30, 2014
SUB-ADVISOR
MacKay Shields LLC ("MacKay Shields" or the "Sub-Advisor") is a registered
investment adviser founded in 1938, and is Sub-Advisor to First Trust High
Income Long/Short Fund (the "Fund"). The Fund trades under the ticker symbol FSD
on the New York Stock Exchange. As of April 30, 2014, MacKay Shields had
approximately $85.4 billion in assets under management.
PORTFOLIO MANAGEMENT TEAM
Dan Roberts, PhD - Executive Managing Director, Head of Global Fixed Income
Division and Chief Investment Officer
Louis N. Cohen, CFA - Senior Managing Director, Global Fixed Income Division
Michael Kimble, CFA - Senior Managing Director, Global Fixed Income Division
Taylor Wagenseil - Senior Managing Director, Global Fixed Income Division
COMMENTARY
FIRST TRUST HIGH INCOME LONG/SHORT FUND
The Fund's primary investment objective is to provide current income. As a
secondary objective, the Fund seeks capital appreciation. The Fund is designed
to give investors a portfolio for varying market cycles and economic conditions.
In an expanding economy, the strategy of buying U.S. and foreign (including
emerging markets) high-yield corporate securities that are rated below
investment-grade is designed to generate monthly income and capital appreciation
(total return over the long term). However, if the market takes a downturn, the
"short" strategy of having sold borrowed securities that the Global Fixed Income
Team ("Investment Team") of MacKay Shields believes could decline in price, may
help lessen the impact of a significant net asset value decline.
MARKET RECAP
This report covers the First Trust High Income Long/Short Fund (the "Fund") for
the six-month period ending April 30, 2014.
Over the recent half-year period, risk assets benefitted from the relatively
stable macroeconomic environment and continued to deliver impressive results.
U.S. equities, as measured by the S&P 500(R) Index, were the best performers,
returning 8.36%. Although not as robust, U.S. high yield and international
equities also posted noteworthy returns. The Bank of America Merrill Lynch U.S.
High Yield Master II Constrained Index gained 4.76% and the MSCI EAFE was up
4.67%. U.S. investment-grade corporate bonds rose 3.80%, according to Barclays.
Alternatively, the 10-year Treasury returned only 0.88%, as published by BofA
Merrill Lynch, while its yield increased 11 basis points.
Reflecting back at the start of the period in late 2013, much of the market's
attention was focused on the Federal Reserve (the "Fed"). In December, the Fed
gained confidence to announce a reduction in the pace of asset purchases
beginning in January 2014 given the slow but steady improvements in the labor
market and diminished downside risks posed by U.S. fiscal policy. In conjunction
with this announcement, the Fed strengthened its forward guidance on short-term
rates and reiterated that it remains "data dependent" with future changes
contingent upon the evolution of incoming macroeconomic data. At the start of
the year, the new Fed Chair, Janet Yellen, replaced the former Fed Chair Ben
Bernanke and we soon witnessed the first reaction to statements from the new
head of the central bank. Short and intermediate U.S. Treasury rates bounced off
their low yields in response to a particular exchange between Ms. Yellen and
reporters during her first post-Federal Open Market Committee policy meeting in
March. It was during that press conference that a reporter asked if Ms. Yellen
could define the "considerable period" between the end of the asset tapering and
the first Fed Funds rate hike, to which Yellen's response was "something on the
order of six months, or that type of thing." The new Fed Chair went on to
clarify that conditions in the labor market and inflation gauges would factor
into the decision. The markets interpreted her statements as a shift in forward
guidance, with speculation that the first rate hike could occur as early as
April 2015. As a result, the stock markets retreated and U.S. Treasury rates
quickly backed-up. Although knee-jerk reactions have become the norm for a
market easily influenced by shifts in sentiment, we believe her comments were
taken out of context. Although we felt that Ms. Yellen did not need to quantify
the "considerable period" language, we felt her rhetoric was not a commitment to
higher rates in 2015. Rather, we believe the Fed's stance on data dependency has
not changed. Later in the month, Ms. Yellen softened her tone when she indicated
that the central bank's stimulus would likely be required for some time.
Looking to what we consider to be the three primary centers of risk - the U.S.,
Europe and China - we continue to believe that "left-tail" risks (defined as the
risk an investment will move more than two standard deviations from the median)
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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in these regions have subsided. The U.S. economy's growth trajectory continued
to show signs of improvements, although slowed in the recent months; much of
this was attributed to temporary exogenous factors. We believe the longer-term
trend for moderate-to-improving growth will resume over the coming quarters.
Turning to Europe, there have been encouraging signs of a stronger recovery over
the past couple of months, but deflationary risks and a strong Euro have raised
concerns. European Central Bank ("ECB") President, Mario Draghi, has signaled
that the central bank is ready to act by further easing monetary policy through
lower rates and quantitative easing. Avoiding a deflationary threat is a
priority for the ECB. In China, the world's second largest economy, growth
slowed, slipping below the government's 7.5% target. The government has been
looking to reign in excess credit, primarily in residential real estate
development, but also in the shadow banking market. Ultimately, we see a floor
to the slowdown given China's relatively closed financial system (combined with
the government's aggressive pro-growth reform policies). A number of emerging
economies are sensitive to economic activity in China, but we believe that
linkage is probably weaker than is often perceived. In fact, our view is that
the capital markets do not fully appreciate that a number of emerging market
balance sheets are much stronger than they were in the late 1990s. In aggregate,
overall debt levels are materially lower, foreign exchange reserves are higher,
and most sovereign debt is denominated in local currency. Stated simply, we
believe many of these countries are much less susceptible to capital outflows
than was the case in prior crises.
During the period, we also saw geopolitical risk escalate in Ukraine and Russia
where political instability and war games created uncomfortable tensions between
the East and West. Russia has succeeded in isolating itself from the
international community, and sanctions on President Putin's inner circle are
reportedly starting to have an impact on the business community. Although the
U.S. capital markets discounted the likelihood that the situation would
escalate, we believe it is very difficult to ascertain the outcome of a
politically-motivated conflict.
PERFORMANCE SUMMARY
The Fund gained 6.21% on a share price basis and 5.59% on a net asset value
("NAV") basis1 during this six-month period, outperforming the benchmark, the
Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index2,
which gained 4.76%. The top-performing industries in the high-yield market
during the period included banking, insurance and utilities. The industries that
did not perform as well included autos, consumer cyclicals and financials. New
issue supply has been very strong with companies continuing to come to the
market for financing needs. The relative stability of the U.S. market and low
yields have provided an attractive backdrop for issuers, in our opinion.
We continue to maintain a portfolio beta slightly above the market, which
benefitted the Fund during the period. The principal sectors we favor continue
to include financials, gaming, homebuilders, building materials, and coal and
steel companies. Based on overall contribution to the Fund's performance, the
top performing names included U.S. and European financials, AIG, Deutsche Post
Finance and Lloyds Bank. The laggards during the period included coal producer
Alpha Natural Resources, automaker GM, and Ukraine Railways. With respect to the
short positions, the Fund continued to sell short U.S. Treasury bonds and
interest rate futures. Both positions are used to reduce the portfolio's
exposure to interest rate risk, while at the same time purchasing additional
high-yield securities that would otherwise be unavailable on an unlevered basis.
The short position in Treasury bonds and futures slightly detracted from
performance. This was more than offset, however, as the additional high-yield
long positions rallied in the positive high yield market environment. It is
important to note that leverage can magnify both the portfolio's gains as well
as its losses.
OUTLOOK
We expect that a modest acceleration of U.S. economic activity will eventually,
and gradually, propel rates higher. This has been our base case outlook since
2009. If the economy demonstrates stronger growth than we currently anticipate,
we would expect some flattening of the yield curve. Thus, we expect the
high-yield market to generate coupon-like returns over the next twelve months as
spread compression is, to some extent, offset by this modest increase in
interest rates. Accordingly, we intend, at least for the time being, to maintain
a credit risk profile approximately in line with that of the market, while
maintaining a lower exposure to changes in interest rates.
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1 Total return is based on the combination of reinvested dividends, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
2 The Bank of America Merrill Lynch U.S. High Yield Master II Constrained
Index tracks the performance of U.S. dollar denominated below investment
grade corporate debt publicly issued in the U.S. domestic market but caps
issuer exposure at 2%. Indexes are unmanaged and an investor cannot invest
directly in an index.
Page 4
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------- -------- ---------- -------------
CORPORATE BONDS AND NOTES - 75.1%
AUTOMOTIVE - 4.2%
$ 334,000 Chrysler Group LLC/Chrysler Group Co-Issuer, Inc................. 8.00% 06/15/19 $ 367,400
4,367,000 Chrysler Group LLC/Chrysler Group Co-Issuer, Inc. (a)............ 8.25% 06/15/21 4,929,251
2,376,000 Ford Motor Co. (a)............................................... 9.22% 09/15/21 3,116,053
553,000 Ford Motor Co. (a)............................................... 8.90% 01/15/32 765,786
2,000,000 Ford Motor Co. (a)............................................... 7.75% 06/15/43 2,553,164
2,480,000 Ford Motor Co. (a)............................................... 9.98% 02/15/47 3,755,094
1,400,000 Goodyear Tire & Rubber (The) Co.................................. 6.50% 03/01/21 1,522,500
5,396,000 Goodyear Tire & Rubber (The) Co. (a)............................. 7.00% 05/15/22 5,976,070
21,432 Motors Liquidation Co. GUC Trust (Transferable) (b).............. N/A N/A 590,452
4,872,000 Navistar International Corp. (a)................................. 8.25% 11/01/21 4,975,530
1,272,000 Tomkins LLC/Tomkins, Inc......................................... 9.00% 10/01/18 1,370,580
-------------
29,921,880
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BANKING - 1.5%
740,000 Ally Financial, Inc. (a)......................................... 8.00% 11/01/31 912,050
2,285,000 Ally Financial, Inc. (a)......................................... 8.00% 11/01/31 2,821,975
5,610,000 Bank of America Corp............................................. 7.63% 06/01/19 6,930,633
-------------
10,664,658
-------------
BASIC INDUSTRY - 8.9%
4,500,000 AK Steel Corp. (a)............................................... 8.38% 04/01/22 4,702,500
3,095,000 Aleris International, Inc. (a)................................... 7.63% 02/15/18 3,176,244
2,160,000 Aleris International, Inc. (a)................................... 7.88% 11/01/20 2,187,000
3,450,000 Alpha Natural Resources, Inc. (a)................................ 6.00% 06/01/19 2,639,250
1,255,000 Arch Coal, Inc................................................... 7.00% 06/15/19 972,625
1,428,000 Arch Coal, Inc................................................... 7.25% 10/01/20 1,092,420
1,125,000 Arch Coal, Inc................................................... 7.25% 06/15/21 846,563
4,405,000 Associated Materials LLC/AMH New Finance, Inc. (a)............... 9.13% 11/01/17 4,647,275
1,500,000 Axalta Coating Systems US Holdings, Inc./Axalta Coating Systems
Dutch Holding B B.V. (c)...................................... 7.38% 05/01/21 1,653,750
4,000,000 Cemex Finance LLC (c)............................................ 6.00% 04/01/24 4,015,000
6,500,000 Hexion U.S. Finance Corp./Hexion Nova Scotia Finance ULC (a)..... 8.88% 02/01/18 6,800,625
8,655,000 Huntsman International LLC (a)................................... 8.63% 03/15/21 9,693,600
1,950,000 Momentive Performance Materials, Inc. (a)........................ 10.00% 10/15/20 2,108,437
2,800,000 Polypore International, Inc...................................... 7.50% 11/15/17 2,959,460
5,150,000 Texas Industries, Inc. (a)....................................... 9.25% 08/15/20 5,922,500
4,000,000 United States Steel Corp. (a).................................... 7.38% 04/01/20 4,500,000
1,878,000 USG Corp. (c).................................................... 8.38% 10/15/18 2,009,460
4,000,000 USG Corp. (c).................................................... 5.88% 11/01/21 4,255,000
-------------
64,181,709
-------------
CAPITAL GOODS - 5.6%
2,000,000 Ducommun, Inc. (a)............................................... 9.75% 07/15/18 2,240,000
5,000,000 Manitowoc Co., Inc. (a).......................................... 8.50% 11/01/20 5,637,500
2,871,000 Mcron Finance Sub LLC/ Mcron Finance Corp. (c)................... 8.38% 05/15/19 3,179,632
2,945,000 Milacron LLC/Mcron Finance Corp. (c)............................. 7.75% 02/15/21 3,239,500
2,565,000 Mueller Water Products, Inc. (a)................................. 7.38% 06/01/17 2,616,300
7,500,000 Reynolds Group Issuer, Inc. (a).................................. 8.50% 05/15/18 7,846,875
See Notes to Financial Statements Page 5
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------- -------- ---------- -------------
CORPORATE BONDS AND NOTES (Continued)
CAPITAL GOODS (Continued)
$ 2,085,000 Reynolds Group Issuer, Inc. (a).................................. 9.88% 08/15/19 $ 2,324,775
4,050,000 Terex Corp. (a).................................................. 6.00% 05/15/21 4,353,750
4,000,000 Transdigm, Inc. (a).............................................. 7.75% 12/15/18 4,280,000
4,650,000 Triumph Group, Inc. (a).......................................... 8.63% 07/15/18 4,929,000
-------------
40,647,332
-------------
CONSUMER NON-CYCLICAL - 0.3%
2,240,000 Smithfield Foods, Inc. (a)....................................... 6.63% 08/15/22 2,455,600
-------------
ENERGY - 10.9%
1,150,000 Atlas Pipeline Partners L.P./Atlas Pipeline Finance Corp......... 4.75% 11/15/21 1,098,250
2,535,000 Atlas Pipeline Partners L.P./Atlas Pipeline Finance Corp......... 5.88% 08/01/23 2,515,988
1,280,000 Basic Energy Services, Inc....................................... 7.75% 02/15/19 1,376,000
3,540,000 Basic Energy Services, Inc. (a).................................. 7.75% 10/15/22 3,898,425
3,974,000 Berry Petroleum Co. (a).......................................... 6.75% 11/01/20 4,217,407
600,000 Chesapeake Energy Corp. (a)...................................... 7.25% 12/15/18 700,500
1,970,000 Chesapeake Energy Corp. (a)...................................... 6.63% 08/15/20 2,223,638
6,600,000 Chesapeake Energy Corp. (a)...................................... 5.38% 06/15/21 6,946,500
600,000 Chesapeake Energy Corp........................................... 4.88% 04/15/22 601,500
4,135,000 EP Energy LLC/EP Energy Finance, Inc. (a)........................ 9.38% 05/01/20 4,786,262
3,000,000 Ferrellgas L.P./Ferrellgas Finance Corp. (a)..................... 6.50% 05/01/21 3,165,000
800,000 Frontier Oil Corp. (a)........................................... 6.88% 11/15/18 850,000
1,000,000 Hornbeck Offshore Services, Inc.................................. 5.88% 04/01/20 1,045,000
3,960,000 Hornbeck Offshore Services, Inc. (a)............................. 5.00% 03/01/21 3,861,000
5,510,000 Kinder Morgan, Inc. (c).......................................... 5.00% 02/15/21 5,537,848
2,636,000 Linn Energy LLC/Linn Energy Finance Corp. (c).................... 7.25% 11/01/19 2,738,145
4,240,000 Linn Energy LLC/Linn Energy Finance Corp......................... 8.63% 04/15/20 4,595,100
3,535,000 PHI, Inc. (c).................................................... 5.25% 03/15/19 3,596,863
5,900,000 Plains Exploration & Production Co. (a).......................... 6.50% 11/15/20 6,541,625
3,998,000 Samson Investment Co. (c)........................................ 10.75% 02/15/20 4,237,880
3,695,000 Swift Energy Co.................................................. 8.88% 01/15/20 3,898,225
3,425,000 Targa Resources Partners L.P./Targa Resources Partners Finance
Corp. (a)..................................................... 7.88% 10/15/18 3,656,187
5,800,000 Whiting Petroleum Corp. (a)...................................... 5.75% 03/15/21 6,235,000
-------------
78,322,343
-------------
FINANCIAL SERVICES - 5.3%
8,000,000 CIT Group, Inc. (a).............................................. 4.25% 08/15/17 8,400,000
4,845,000 CIT Group, Inc. (a).............................................. 3.88% 02/19/19 4,911,619
6,155,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp. (a) (c)... 6.00% 08/01/20 6,524,300
1,190,000 Icahn Enterprises L.P./Icahn Enterprises Finance Corp. (c)....... 5.88% 02/01/22 1,210,825
8,000,000 SLM Corp. (a).................................................... 8.00% 03/25/20 9,270,000
2,395,000 Springleaf Finance Corp. (a)..................................... 6.00% 06/01/20 2,436,912
4,555,000 Springleaf Finance Corp. (a)..................................... 7.75% 10/01/21 5,061,744
-------------
37,815,400
-------------
Page 6 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------- -------- ---------- -------------
CORPORATE BONDS AND NOTES (Continued)
HEALTHCARE - 7.0%
$ 5,074,000 Alere, Inc....................................................... 7.25% 07/01/18 $ 5,594,085
665,000 Alere, Inc....................................................... 6.50% 06/15/20 701,575
2,725,000 CHS/Community Health Systems, Inc. (c)........................... 5.13% 08/01/21 2,793,125
5,360,000 CHS/Community Health Systems, Inc. (c)........................... 6.88% 02/01/22 5,581,100
2,500,000 Davita Healthcare Partners, Inc.................................. 5.75% 08/15/22 2,656,250
5,600,000 HCA Holdings, Inc................................................ 7.75% 05/15/21 6,167,000
17,125,000 HCA, Inc......................................................... 5.00% 03/15/24 17,039,375
3,150,000 Kinetic Concepts, Inc./KCI USA, Inc.............................. 10.50% 11/01/18 3,614,625
4,185,000 MPH Acquisition Holdings LLC (c)................................. 6.63% 04/01/22 4,341,937
1,735,000 Tenet Healthcare Corp. (a)....................................... 8.13% 04/01/22 1,930,188
-------------
50,419,260
-------------
MEDIA - 2.5%
3,895,000 CCO Holdings LLC/CCO Holdings Capital Corp. (a).................. 5.75% 01/15/24 3,938,819
559,000 Clear Channel Communications, Inc. (a)........................... 5.50% 12/15/16 550,615
9,285,000 Clear Channel Communications, Inc. (a)........................... 9.00% 03/01/21 9,911,737
456,000 Clear Channel Worldwide Holdings, Inc............................ 7.63% 03/15/20 490,200
3,058,000 Clear Channel Worldwide Holdings, Inc. (a)....................... 7.63% 03/15/20 3,310,285
135,000 Clear Channel Worldwide Holdings, Inc............................ 6.50% 11/15/22 145,125
-------------
18,346,781
-------------
SERVICES - 16.9%
1,095,000 Ashtead Capital, Inc. (c)........................................ 6.50% 07/15/22 1,193,550
838,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc.............. 8.25% 01/15/19 896,660
4,915,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc.............. 5.50% 04/01/23 4,988,725
6,500,000 Beazer Homes USA, Inc. (a)....................................... 8.13% 06/15/16 7,198,750
849,000 Caesars Entertainment Operating Co., Inc......................... 9.00% 02/15/20 744,998
11,093,000 Caesars Entertainment Operating Co., Inc......................... 9.00% 02/15/20 9,720,241
2,600,000 Caesars Entertainment Resort Properties, LLC (c)................. 8.00% 10/01/20 2,717,000
4,325,226 Continental Airlines 2003-ERJ1 Pass Through Trust................ 7.88% 07/02/18 4,714,496
2,239,145 Continental Airlines 2005-ERJ1 Pass Through Trust................ 9.80% 04/01/21 2,575,017
1,527,402 Delta Air Lines 2009-1 Series B Pass Through Trust............... 9.75% 12/17/16 1,745,057
8,000,000 Hertz (The) Corp................................................. 7.50% 10/15/18 8,510,000
4,125,000 Iron Mountain, Inc. (a).......................................... 8.38% 08/15/21 4,362,187
3,500,000 Isle of Capri Casinos, Inc. (a).................................. 7.75% 03/15/19 3,762,500
913,000 K Hovnanian Enterprises, Inc. (c)................................ 7.00% 01/15/19 936,396
4,160,000 K Hovnanian Enterprises, Inc. (c)................................ 7.25% 10/15/20 4,524,000
3,479,000 KB Home.......................................................... 7.50% 09/15/22 3,826,900
9,175,000 MGM Resorts International........................................ 6.75% 10/01/20 10,162,230
2,380,000 Mohegan Tribal Gaming Authority.................................. 9.75% 09/01/21 2,629,900
2,315,550 Northwest Airlines 2001-1 Class B Pass Through Trust............. 7.69% 04/01/17 2,547,105
4,127,000 Pinnacle Entertainment, Inc...................................... 7.75% 04/01/22 4,498,430
1,780,000 Pulte Group, Inc. (a)............................................ 7.63% 10/15/17 2,073,700
4,570,000 Pulte Group, Inc. (a)............................................ 7.88% 06/15/32 5,084,125
3,319,000 Shea Homes L.P./Shea Homes Funding Corp.......................... 8.63% 05/15/19 3,659,198
5,500,000 Standard Pacific Corp. (a)....................................... 8.38% 05/15/18 6,517,500
2,243,906 UAL 2009-2B Pass Through Trust (c)............................... 12.00% 01/15/16 2,535,613
375,000 United Rentals North America, Inc................................ 7.38% 05/15/20 417,188
5,619,000 United Rentals North America, Inc. (a)........................... 8.38% 09/15/20 6,258,161
See Notes to Financial Statements Page 7
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------- -------- ---------- -------------
CORPORATE BONDS AND NOTES (Continued)
SERVICES (Continued)
$ 367,000 United Rentals North America, Inc................................ 7.63% 04/15/22 $ 414,710
3,097,000 United Rentals North America, Inc................................ 6.13% 06/15/23 3,344,760
6,453,460 US Airways 2000-3C Pass Through Trust............................ 8.39% 03/01/22 7,034,271
2,000,000 US Airways Group, Inc............................................ 6.13% 06/01/18 2,110,000
-------------
121,703,368
-------------
TECHNOLOGY & ELECTRONICS - 5.0%
4,199,000 CommScope, Inc. (c).............................................. 8.25% 01/15/19 4,566,413
9,050,000 First Data Corp. (c)............................................. 8.88% 08/15/20 10,079,437
4,175,000 First Data Corp.................................................. 10.63% 06/15/21 4,754,281
2,950,000 Freescale Semiconductor, Inc. (c)................................ 5.00% 05/15/21 2,994,250
6,000,000 NCR Corp. (c).................................................... 6.38% 12/15/23 6,450,000
6,460,000 Sungard Data Systems, Inc........................................ 6.63% 11/01/19 6,799,150
-------------
35,643,531
-------------
TELECOMMUNICATIONS - 5.3%
2,500,000 Frontier Communications Corp. (a)................................ 9.00% 08/15/31 2,600,000
2,411,000 Hughes Satellite Systems Corp. (a)............................... 7.63% 06/15/21 2,730,457
3,500,000 MetroPCS Wireless, Inc. (a)...................................... 7.88% 09/01/18 3,710,000
7,660,000 Sprint Capital Corp. (a)......................................... 8.75% 03/15/32 8,607,925
2,600,000 Sprint Communications, Inc. (a).................................. 9.13% 03/01/17 3,090,750
6,000,000 Sprint Communications, Inc. (a).................................. 9.25% 04/15/22 7,335,000
1,240,000 Sprint Communications, Inc. (a).................................. 6.00% 11/15/22 1,255,500
1,700,000 T-Mobile USA, Inc. (a)........................................... 6.54% 04/28/20 1,833,875
2,750,000 T-Mobile USA, Inc. (a)........................................... 6.13% 01/15/22 2,901,250
2,428,000 ViaSat, Inc...................................................... 6.88% 06/15/20 2,613,135
1,500,000 Windstream Corp.................................................. 6.38% 08/01/23 1,466,250
-------------
38,144,142
-------------
UTILITY - 1.7%
5,986,000 Calpine Corp. (c)................................................ 7.88% 07/31/20 6,592,083
5,000,000 NRG Energy, Inc. (a)............................................. 8.25% 09/01/20 5,543,750
-------------
12,135,833
-------------
TOTAL CORPORATE BONDS AND NOTES........................................................ 540,401,837
(Cost $509,431,343) -------------
PAR AMOUNT
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (U.S. DOLLARS)
------------- ----------------------------------------------------------------- -------- ---------- -------------
CAPITAL PREFERRED SECURITIES - 22.1%
BANKING - 9.6%
6,500,000 ABN AMRO Bank N.V. (EUR) (d)..................................... 4.31% (e) 9,198,113
2,975,000 Ageas Hybrid Financing S.A. (EUR) (d)............................ 5.13% (e) 4,230,542
1,400,000 Barclays Bank PLC (EUR) (d)...................................... 4.75% (e) 1,813,561
5,500,000 Citigroup, Inc. (USD) (d)........................................ 6.30% (e) 5,502,338
6,750,000 Deutsche Postbank Funding Trust IV (EUR) (d)..................... 5.98% (e) 10,207,408
Page 8 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PAR AMOUNT
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION RATE MATURITY (U.S. DOLLARS)
------------- ----------------------------------------------------------------- -------- ---------- -------------
CAPITAL PREFERRED SECURITIES (Continued)
BANKING (Continued)
3,250,000 Dresdner Funding Trust I (USD) (c)............................... 8.15% 06/30/31 $ 3,786,250
5,325,000 HBOS Capital Funding L.P. (GBP) (d).............................. 6.46% (e) 9,599,801
3,890,000 ICICI Bank Ltd. (USD) (d)........................................ 6.38% 04/30/22 3,938,625
3,250,000 Mellon Capital III (GBP) (d)..................................... 6.37% 09/05/66 5,752,855
2,100,000 Mizuho Capital Investment USD 2, Ltd. (USD) (a) (c) (d).......... 14.95% (e) 2,167,935
3,000,000 National Westminster Bank PLC (GBP) (d).......................... 5.98% (e) 4,938,544
2,250,000 UT2 Funding PLC (EUR)............................................ 5.32% 06/30/16 3,301,800
4,095,000 Wells Fargo & Co. (USD) (d)...................................... 5.90% (e) 4,212,928
-------------
68,650,700
-------------
CAPITAL GOODS - 0.1%
700,000 Textron Financial Corp. (USD) (c) (d)............................ 6.00% 02/15/67 624,750
-------------
FINANCIAL SERVICES - 2.2%
10,500,000 GE Capital Trust IV (EUR) (d).................................... 4.63% 09/15/66 15,241,723
410,000 General Electric Capital Corp. (EUR) (d)......................... 5.50% 09/15/67 611,871
-------------
15,853,594
-------------
INSURANCE - 10.2%
2,450,000 American International Group, Inc. (EUR) (d)..................... 8.00% 05/22/38 4,053,309
3,050,000 American International Group, Inc. (GBP) (d)..................... 8.63% 05/22/38 6,105,099
1,800,000 American International Group, Inc. (EUR) (d)..................... 4.88% 03/15/67 2,577,449
10,950,000 American International Group, Inc. (GBP) (d)..................... 5.75% 03/15/67 19,061,006
5,000,000 Chubb Corp. (USD) (a) (d)........................................ 6.38% 03/29/67 5,575,000
3,500,000 CNP Assurances (EUR) (d)......................................... 5.25% (e) 4,370,144
11,000,000 Glen Meadow Pass Through Trust (USD) (c) (d)..................... 6.51% 02/12/67 11,000,000
5,000,000 ING Groep N.V. (GBP) (d)......................................... 5.14% (e) 8,441,955
6,500,000 Liberty Mutual Group, Inc. (USD) (c) (d)......................... 7.00% 03/15/37 6,955,000
3,500,000 Lincoln National Corp. (USD) (a) (d)............................. 7.00% 05/17/66 3,649,450
1,800,000 Lincoln National Corp. (USD) (a) (d)............................. 6.05% 04/20/67 1,818,000
-------------
73,606,412
-------------
TOTAL CAPITAL PREFERRED SECURITIES..................................................... 158,735,456
(Cost $132,190,244) -------------
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
------------- ----------------------------------------------------------------- -------- ---------- -------------
FOREIGN CORPORATE BONDS AND NOTES - 19.8%
AUTOMOTIVE - 0.6%
4,120,000 Schaeffler Finance B.V. (USD) (c)................................ 4.75% 05/15/21 4,248,750
-------------
BANKING - 3.3%
3,500,000 Banco do Brasil S.A. (USD) (c)................................... 5.88% 01/19/23 3,570,000
2,200,000 Barclays Bank PLC (GBP).......................................... 10.00% 05/21/21 4,922,707
See Notes to Financial Statements Page 9
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
------------- ----------------------------------------------------------------- -------- ---------- -------------
FOREIGN CORPORATE BONDS AND NOTES (Continued)
BANKING (Continued)
2,000,000 Belfius Funding N.V. (GBP) (f)................................... 1.23% 02/09/17 $ 3,174,175
4,350,000 Industrial Senior Trust (USD) (c)................................ 5.50% 11/01/22 4,214,063
3,000,000 Royal Bank of Scotland N.V. (EUR) (f)........................... 4.70% 06/10/19 4,400,943
3,700,000 Sberbank of Russia via SB Capital S.A. (USD)..................... 5.13% 10/29/22 3,200,500
-------------
23,482,388
-------------
BASIC INDUSTRY - 4.6%
3,868,000 Aperam (USD) (c)................................................. 7.38% 04/01/16 3,998,545
2,648,000 Arcelormittal (USD) (a).......................................... 6.75% 02/25/22 2,945,900
3,592,000 Arcelormittal (USD) (a).......................................... 7.50% 10/15/39 3,780,580
185,000 Arcelormittal (USD).............................................. 7.25% 03/01/41 188,931
6,450,000 Novelis, Inc. (USD) (a).......................................... 8.75% 12/15/20 7,224,000
3,700,000 Severstal OAO Via Steel Capital S.A. (USD) (c)................... 5.90% 10/17/22 3,362,375
4,200,000 Stora Enso Oyj (USD) (c)......................................... 7.25% 04/15/36 4,221,000
6,785,000 Vedanta Resources PLC (USD) (c).................................. 8.25% 06/07/21 7,221,785
-------------
32,943,116
-------------
CAPITAL GOODS - 1.8%
3,000,000 Albea Beauty Holdings S.A. (USD) (c)............................. 8.38% 11/01/19 3,285,000
3,000,000 Ardagh Packaging Finance (EUR)................................... 9.25% 10/15/20 4,635,474
2,480,000 Bombardier, Inc. (USD) (c)....................................... 6.00% 10/15/22 2,526,500
2,775,000 Bombardier, Inc. (USD) (c)....................................... 6.13% 01/15/23 2,851,313
-------------
13,298,287
-------------
CONSUMER NON-CYCLICAL - 2.1%
6,000,000 JBS Finance II Ltd. (USD) (c).................................... 8.25% 01/29/18 6,480,000
5,900,000 Minerva Luxembourg S.A. (USD) (c)................................ 7.75% 01/31/23 6,084,375
3,000,000 Virgolino de Oliveira Finance Ltd. (USD) (c)..................... 11.75% 02/09/22 2,212,500
-------------
14,776,875
-------------
ENERGY - 1.8%
1,500,000 CGG S.A. (USD)................................................... 6.50% 06/01/21 1,518,750
7,056,000 CHC Helicopter S.A. (USD)........................................ 9.25% 10/15/20 7,620,480
1,700,000 Precision Drilling Corp. (USD)................................... 6.63% 11/15/20 1,836,000
1,750,000 Precision Drilling Corp. (USD)................................... 6.50% 12/15/21 1,903,125
-------------
12,878,355
-------------
HEALTHCARE - 1.0%
6,550,000 Valeant Pharmaceuticals International, Inc. (USD) (c)............ 7.50% 07/15/21 7,336,000
-------------
INSURANCE - 0.8%
1,650,000 Aviva PLC (EUR) (d).............................................. 6.88% 05/22/38 2,681,136
3,500,000 Oil Insurance Ltd. (USD) (c) (f)................................. 3.22% (e) 3,327,698
-------------
6,008,834
-------------
Page 10 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (U.S. DOLLARS)
------------- ----------------------------------------------------------------- -------- ---------- -------------
FOREIGN CORPORATE BONDS AND NOTES (Continued)
SERVICES - 2.3%
5,250,000 Hapag-Lloyd AG (USD) (c)......................................... 9.75% 10/15/17 $ 5,670,000
5,755,000 Royal Caribbean Cruises Ltd. (USD) (a)........................... 7.50% 10/15/27 6,503,150
5,930,000 Ukraine Railways Via Shortline PLC (USD) (c)..................... 9.50% 05/21/18 4,497,122
-------------
16,670,272
-------------
TELECOMMUNICATIONS - 1.5%
5,859,000 Intelsat Luxembourg S.A. (USD)................................... 7.75% 06/01/21 6,129,979
1,055,000 Intelsat Luxembourg S.A. (USD)................................... 8.13% 06/01/23 1,111,706
2,408,000 Unify Germany Holdings B.V. (EUR)................................ 10.75% 11/15/15 3,440,955
-------------
10,682,640
-------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES................................................ 142,325,517
(Cost $134,962,694) -------------
PRINCIPAL STATED
VALUE DESCRIPTION RATE (g) MATURITY (h) VALUE
------------- ----------------------------------------------------------------- -------- ---------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - 2.1%
AUTOMOTIVE - 0.8%
$ 4,450,264 Allison Transmission, Inc. Term Loan B3.......................... 3.75% 08/23/19 4,448,039
1,743,750 Navistar, Inc. Term Loan B....................................... 5.75% 08/17/17 1,769,907
-------------
6,217,946
-------------
ENERGY - 0.8%
5,850,218 Meg Energy Term Loan............................................. 3.75% 03/31/20 5,847,293
-------------
REAL ESTATE - 0.1%
392,690 Realogy Synthetic Letter of Credit............................... 4.45% 10/10/16 391,708
-------------
SERVICES - 0.4%
3,000,000 US Airway Group Term Loan........................................ 3.50% 05/23/19 2,971,260
-------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS.............................................. 15,428,207
(Cost $15,402,375) -------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------- -------- ---------- -------------
ASSET-BACKED SECURITIES - 1.6%
3,055,292 Ace Securities Corp. Home Equity Loan Trust Series 2007-HE2,
Class A2A (f)................................................ 0.27% 12/25/36 1,711,538
1,843,245 Carrington Mortgage Loan Trust Series 2006-NC4,
Class A5 (f)................................................. 0.21% 10/25/36 1,674,590
1,105,812 HSI Asset Securitization Corp. Trust Series 2007-NC1,
Class A1 (f)................................................. 0.25% 04/25/37 993,419
2,060,160 Keycorp Student Loan Trust Series 2000-A,
Class A2 (f)................................................. 0.55% 05/25/29 1,933,428
See Notes to Financial Statements Page 11
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------- -------- ---------- -------------
ASSET-BACKED SECURITIES (Continued)
$ 724,566 Morgan Stanley ABS Capital I, Inc. Trust Series 2006-HE6,
Class A2B (f)................................................ 0.25% 09/25/36 $ 395,824
9,422,784 Securitized Asset Backed Receivables LLC Trust Series 2006-FR4,
Class A2A (f)................................................ 0.23% 08/25/36 3,874,875
997,323 Soundview Home Loan Trust Series 2006-EQ2,
Class A2 (f)................................................. 0.26% 01/25/37 636,320
-------------
TOTAL ASSET-BACKED SECURITIES.......................................................... 11,219,994
(Cost $13,630,996) -------------
MORTGAGE-BACKED SECURITIES - 0.7%
Collateralized Mortgage Obligations - 0.7%
1,134,117 Morgan Stanley Mortgage Loan Trust Series 2007-6XS,
Class 2A1S (f)............................................... 0.26% 02/25/47 1,051,552
1,647,608 Specialty Underwriting & Residential Finance Trust Series
2006-BC4, Class A2B (f)...................................... 0.26% 09/25/37 799,301
3,179,346 Wells Fargo Mortgage Backed Securities Trust Series 2006-AR7
Trust, Class 2A4 (f)......................................... 2.61% 05/25/36 2,976,790
-------------
TOTAL MORTGAGE-BACKED SECURITIES....................................................... 4,827,643
(Cost $5,134,285) -------------
PRINCIPAL
VALUE
(LOCAL STATED STATED
CURRENCY) DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------- -------- ---------- -------------
FOREIGN SOVEREIGN BONDS AND NOTES - 0.9%
Energy - 0.5%
3,750,000 Georgian Oil and Gas Corp. JSC (USD) (c)......................... 6.88% 05/16/17 3,918,750
-------------
Financial Services - 0.4%
1,750,000 Portugal Obrigacoes do Tesouro OT (EUR) (c)...................... 4.95% 10/25/23 2,703,119
-------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES................................................ 6,621,869
(Cost $5,760,359) -------------
SHARES DESCRIPTION VALUE
------------- --------------------------------------------------------------------------------------- -------------
COMMON STOCKS - 1.9%
Automotive - 1.4%
448,000 Ford Motor Co. ........................................................................ 7,235,200
84,412 General Motors Co. .................................................................... 2,910,526
-------------
10,145,726
-------------
Banking - 0.5%
75,700 Citigroup, Inc. ....................................................................... 3,626,787
-------------
TOTAL COMMON STOCKS.................................................................... 13,772,513
(Cost $13,968,453) -------------
Page 12 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------- --------------------------------------------------------------------------------------- -------------
WARRANTS - 0.4%
AUTOMOTIVE - 0.4%
81,728 General Motors Co., expiring 07/10/16 (i).............................................. $ 2,021,133
46,655 General Motors Co., expiring 07/10/19 (i).............................................. 797,334
-------------
TOTAL WARRANTS ........................................................................ 2,818,467
(Cost $3,294,518) -------------
SHORT-TERM INVESTMENTS - 0.2%
1,641,546 Dreyfus Government Cash Management - Institutional Shares.............................. 1,641,546
-------------
TOTAL SHORT-TERM INVESTMENTS........................................................... 1,641,546
(Cost $1,641,546) -------------
TOTAL INVESTMENTS - 124.8%............................................................. 897,793,049
(Cost $835,416,813) (j)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- ----------------------------------------------------------------- -------- ---------- -------------
U.S. GOVERNMENT BONDS SOLD SHORT - (20.3%)
$(119,200,000) United States Treasury Note...................................... 0.88% 02/28/17 (119,437,446)
(27,500,000) United States Treasury Note...................................... 2.00% 02/15/22 (26,756,648)
-------------
TOTAL U.S. GOVERNMENT BONDS SOLD SHORT................................................. (146,194,094)
(Proceeds $147,297,957) -------------
CORPORATE BONDS SOLD SHORT - (0.8%)
Consumer Cyclical - (0.8%)
(5,350,000) Acco Brands Corp................................................. 6.75% 04/30/20 (5,590,750)
-------------
TOTAL CORPORATE BONDS SOLD SHORT....................................................... (5,590,750)
(Proceeds $5,438,750) -------------
TOTAL INVESTMENTS SOLD SHORT - (21.1%)................................................. (151,784,844)
(Proceeds $152,736,707)
BORROWINGS - (5.0%).................................................................... (35,907,818)
NET OTHER ASSETS AND LIABILITIES - 1.3%................................................ 9,420,495
-------------
NET ASSETS - 100.0%.................................................................... $ 719,520,882
=============
-----------------------------
(a) This security or a portion of this security is segregated as collateral
for investments sold short.
(b) The Fund previously held non-transferable trust units that were originally
issued to facilitate distribution of General Motors common stock and
warrants pursuant to the General Motors Bankruptcy Plan of Reorganization.
The non-transferable trust units existed only for the purpose of receiving
residual cash, if any, from the General Motors Bankruptcy. These units
were received in exchange for the previously owned General Motors 8.375%
Corporate Notes that were scheduled to mature on July 15, 2033. On June
12, 2012, the holders of these units received new transferable General
Motors Unsecured Claim (GUC) Trust Units, which were created to hold and
administer the common stock and warrants of General Motors Company to be
contributed to the GUC Trust under the General Motors Bankruptcy Plan of
Reorganization.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by MacKay Shields LLC, the Fund's sub-advisor.
Although market instability can result in periods of increased overall
See Notes to Financial Statements Page 13
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
market illiquidity, liquidity for each security is determined based on
security specific factors and assumptions, which require subjective
judgment. At April 30, 2014, securities noted as such amounted to
$203,765,936, or 28.32% of net assets.
(d) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at April 30, 2014. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(e) Perpetual maturity.
(f) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2014.
(g) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests pay interest at rates which are periodically predetermined by
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the
prime rate offered by one or more United States banks or (iii) the
certificate of deposit rate. Certain Senior Loans are subject to a LIBOR
floor that establishes a minimum LIBOR rate. The interest rate shown
reflects the rate in effect at April 30, 2014. When a range of rates is
disclosed, the Fund holds more than one contract within the same tranche
at varying rates.
(h) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(i) Non-income producing security.
(j) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2014, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $72,547,593 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $10,171,357.
Currency Abbreviations:
EUR Euro
GBP British Pound Sterling
USD United States Dollar
Page 14 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2014 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
INVESTMENTS 4/30/2014 PRICES INPUTS INPUTS
-------------------------------------------- ---------------- -------------- ---------------- --------------
Corporate Bonds and Notes:
Automotive............................. $ 29,921,880 $ 590,452 $ 29,331,428 $ --
Other Industry Categories *............ 510,479,957 -- 510,479,957 --
Capital Preferred Securities*............... 158,735,456 -- 158,735,456 --
Foreign Corporate Bonds and Notes*.......... 142,325,517 -- 142,325,517 --
Senior Floating-Rate Loan Interests*........ 15,428,207 -- 15,428,207 --
Asset-Backed Securities..................... 11,219,994 -- 11,219,994 --
Mortgage-Backed Securities.................. 4,827,643 -- 4,827,643 --
Foreign Sovereign Bonds and Notes*.......... 6,621,869 -- 6,621,869 --
Common Stocks*.............................. 13,772,513 13,772,513 -- --
Warrants*................................... 2,818,467 2,818,467 -- --
Short-Term Investments...................... 1,641,546 1,641,546 -- --
---------------- -------------- ---------------- --------------
Total Investments........................... $ 897,793,049 $ 18,822,978 $ 878,970,071 $ --
================ ============== ================ ==============
Other Financial Instruments:
Forward Foreign Currency Contracts**........ 107,194 -- 107,194 --
---------------- -------------- ---------------- --------------
Total....................................... $ 897,900,243 $ 18,822,978 $ 879,077,265 $ --
================ ============== ================ ==============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2014 PRICES INPUTS INPUTS
---------------- -------------- ---------------- --------------
U.S. Government Bonds Sold Short............ $ (146,194,094) $ -- $ (146,194,094) $ --
Corporate Bonds Sold Short.................. (5,590,750) -- (5,590,750) --
Forward Foreign Currency Contracts**........ (3,711,275) -- (3,711,275) --
Futures Contracts........................... (11,454) (11,454) -- --
---------------- -------------- ---------------- --------------
Total....................................... $ (155,507,573) $ (11,454) $ (155,496,119) $ --
================ ============== ================ ==============
* See the Portfolio of Investments for industry breakout.
** See the Schedule of Forward Foreign Currency Contracts for contract and
currency detail.
See Notes to Financial Statements Page 15
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2014 (UNAUDITED)
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between levels at April 30, 2014.
OPEN FUTURES CONTRACTS AT APRIL 30, 2014 (see Note 2F - Futures Contracts in the
Notes to Financial Statements):
UNREALIZED
NUMBER OF EXPIRATION NOTIONAL APPRECIATION/
SHORT FUTURES CONTRACTS CONTRACTS MONTH VALUE (DEPRECIATION)
-------------------------------------------- ---------------- -------------- ---------------- --------------
U.S. Treasury 2-Year Notes 180 June-2014 $ 39,566,046 $ (11,454)
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS: (see Note 2D - Forward Foreign
Currency Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED+ SOLD+ APRIL 30, 2014 APRIL 30, 2014 (DEPRECIATION)
---------- ------------ --------------- --------------- -------------- -------------- -------------
05/07/14 JPM EUR 55,854,000 USD 77,424,395 $ 77,487,697 $ 77,424,395 $ 63,302
05/07/14 JPM GBP 36,546,000 USD 61,656,757 61,700,649 61,656,757 43,892
07/17/14 JPM USD 75,349,997 EUR 54,369,000 75,349,997 75,415,675 (65,678)
05/07/14 JPM USD 75,924,576 EUR 55,854,000 75,924,576 77,487,697 (1,563,121)
07/17/14 JPM USD 62,543,452 GBP 37,094,000 62,543,452 62,590,279 (46,827)
05/07/14 JPM USD 59,665,000 GBP 36,546,000 59,665,000 61,700,649 (2,035,649)
-------------
Net Unrealized Appreciation (Depreciation)................................................ $ (3,604,081)
=============
+ 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
APRIL 30, 2014 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $835,416,813)........................................................................... $ 897,793,049
Foreign currency (Cost $192,830)................................................................... 193,641
Unrealized appreciation on forward foreign currency contracts...................................... 107,194
Restricted cash.................................................................................... 55,800
Receivables:
Interest...................................................................................... 15,580,956
Dividends..................................................................................... 56,000
Prepaid expenses................................................................................... 32,276
--------------
Total Assets.................................................................................. 913,818,916
--------------
LIABILITIES:
Investments sold short, at value (proceeds $152,736,707)........................................... 151,784,844
Borrowings......................................................................................... 35,907,818
Unrealized depreciation on forward foreign currency contracts...................................... 3,711,275
Payables:
Due to custodian.............................................................................. 1,288,832
Investment advisory fees...................................................................... 589,375
Investment securities purchased............................................................... 573,740
Interest on investments sold short............................................................ 290,660
Administrative fees........................................................................... 46,901
Audit and tax fees............................................................................ 31,860
Legal fees.................................................................................... 21,699
Variation margin.............................................................................. 16,875
Printing fees................................................................................. 13,360
Custodian fees................................................................................ 10,638
Trustees' fees and expenses................................................................... 4,762
Transfer agent fees........................................................................... 3,517
Financial reporting fees...................................................................... 771
Other liabilities.................................................................................. 1,107
--------------
Total Liabilities............................................................................. 194,298,034
--------------
NET ASSETS......................................................................................... $ 719,520,882
==============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $ 684,571,906
Par value.......................................................................................... 360,561
Accumulated net investment income (loss)........................................................... 2,462,787
Accumulated net realized gain (loss) on investments, forward foreign currency contracts,
foreign currency transactions, futures and investments sold short............................... (27,663,909)
Net unrealized appreciation (depreciation) on investments, forward foreign currency contracts,
foreign currency translation, futures and investments sold short................................ 59,789,537
--------------
NET ASSETS......................................................................................... $ 719,520,882
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... $ 19.96
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)........ 36,056,159
==============
See Notes to Financial Statements Page 17
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2014 (UNAUDITED)
INVESTMENT INCOME:
Interest........................................................................................... $ 28,998,451
Dividends.......................................................................................... 138,081
Other.............................................................................................. 448,679
--------------
Total investment income....................................................................... 29,585,211
--------------
EXPENSES:
Investment advisory fees........................................................................... 3,528,093
Interest expense on investments sold short......................................................... 834,351
Margin interest expense............................................................................ 704,238
Short sale fees.................................................................................... 389,332
Administrative fees................................................................................ 292,951
Printing fees...................................................................................... 75,412
Custodian fees..................................................................................... 54,381
Audit and tax fees................................................................................. 28,365
Legal fees......................................................................................... 21,158
Trustees' fees and expenses........................................................................ 17,050
Transfer agent fees................................................................................ 13,637
Financial reporting fees........................................................................... 4,625
Other.............................................................................................. 36,043
--------------
Total expenses................................................................................ 5,999,636
--------------
NET INVESTMENT INCOME (LOSS)....................................................................... 23,585,575
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................... 4,190,163
Forward foreign currency contracts............................................................ (3,222,324)
Foreign currency transactions................................................................. 16,005
Futures....................................................................................... (215,830)
--------------
Net realized gain (loss)........................................................................... 768,014
--------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................... 12,126,844
Forward foreign currency contracts............................................................ (1,324,169)
Foreign currency translation.................................................................. (1,621)
Futures....................................................................................... 180,715
Short positions............................................................................... 373,803
--------------
Net change in unrealized appreciation (depreciation)............................................... 11,355,572
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ 12,123,586
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 35,709,161
==============
Page 18 See Notes to Financial Statements
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2014 ENDED
(UNAUDITED) 10/31/2013
-------------- --------------
OPERATIONS:
Net investment income (loss)..................................................... $ 23,585,575 $ 48,494,849
Net realized gain (loss)......................................................... 768,014 (12,110,327)
Net change in unrealized appreciation (depreciation)............................. 11,355,572 35,330,690
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................. 35,709,161 71,715,212
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................ (23,995,374) (47,827,919)
Return of capital................................................................ -- (2,794,928)
-------------- --------------
Total distributions to shareholders.............................................. (23,995,374) (50,622,847)
-------------- --------------
Total increase (decrease) in net assets.......................................... 11,713,787 21,092,365
NET ASSETS:
Beginning of period.............................................................. 707,807,095 686,714,730
End of period.................................................................... $ 719,520,882 $ 707,807,095
============== ==============
Accumulated net investment income (loss) at end of period........................ $ 2,462,787 $ 2,872,586
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................. 36,056,159 36,056,159
-------------- --------------
Common Shares at end of period................................................... 36,056,159 36,056,159
============== ==============
See Notes to Financial Statements Page 19
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2014 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.................. $ 35,709,161
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used in operating activities:
Purchases of investments.................................................... (194,410,251)
Borrowed investments sold short............................................. 5,438,750
Sales, maturities and paydowns of investments............................... 179,235,722
Net amortization/accretion of premiums/discounts on investments............. (243,847)
Net realized gain/loss on investments....................................... (4,190,163)
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts....................................................... 1,324,169
Net change in unrealized appreciation/depreciation on investments
sold short............................................................... (373,803)
Net change in unrealized appreciation/depreciation on investments........... (12,126,844)
CHANGES IN ASSETS AND LIABILITIES:
Increase in restricted cash receivable...................................... (10,800)
Decrease in interest receivable............................................. 523,462
Increase in dividends receivable............................................ (10,443)
Increase in prepaid expenses................................................ (12,462)
Decrease in interest payable on investments sold short...................... (4,551)
Decrease in investment advisory fees payable................................ (1,876)
Decrease in audit and tax fees payable...................................... (25,340)
Decrease in legal fees payable.............................................. (7,375)
Decrease in printing fees payable........................................... (25,423)
Decrease in administrative fees payable..................................... (6,201)
Increase in custodian fees payable.......................................... 1,204,945
Increase in transfer agent fees payable..................................... 1,786
Increase in Trustees' fees and expenses payable............................. 1,900
Increase in variation margin fees payable................................... 11,250
Increase in other liabilities payable....................................... 979
--------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................ $ 12,002,745
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............. (23,995,374)
Net proceeds from borrowing................................................. 11,866,315
--------------
CASH USED IN FINANCING ACTIVITIES................................................ (12,129,059)
--------------
Decrease in cash (a)............................................................. (126,314)
Cash at beginning of period...................................................... 319,955
--------------
CASH AT END OF PERIOD............................................................ $ 193,641
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................ $ 1,543,140
==============
-----------------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $31,049.
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
SIX MONTHS
ENDED YEAR YEAR YEAR PERIOD
4/30/2014 ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2013 10/31/2012 10/31/2011 10/31/2010 (a)
------------ ------------ ------------ ------------ --------------
Net asset value, beginning of period........... $ 19.63 $ 19.05 $ 17.82 $ 19.57 19.10 (b)
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................... 0.66 1.35 1.41 1.48 0.08
Net realized and unrealized gain (loss)........ 0.34 0.64 1.42 (1.72) 0.42
---------- ---------- ---------- ---------- ----------
Total from investment operations............... 1.00 1.99 2.83 (0.24) 0.50
---------- ---------- ---------- ---------- ----------
Common Shares offering costs charged to
paid-in capital............................. -- -- -- -- (0.03)
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.......................... (0.67) (1.33) (1.44) (1.47) --
Net realized gain.............................. -- -- (0.16) -- --
Return of capital.............................. -- (0.08) -- -- --
---------- ---------- ---------- ---------- ----------
Total from distributions to Common
Shareholders................................ (0.67) (1.41) (1.60) (1.47) --
---------- ---------- ---------- ---------- ----------
Capital charge resulting from issuance of
Common Shares related to over allotment .... -- -- -- (0.04) --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period................. $ 19.96 $ 19.63 $ 19.05 $ 17.82 $ 19.57
========== ========== ========== ========== ==========
Market value, end of period.................... $ 18.02 $ 17.62 $ 18.78 $ 16.63 $ 20.01
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (c) ..... 5.59% 11.32% 17.09% (1.27)% 2.46% (d)
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (c)......... 6.21% 1.36% 23.69% (9.89)% 0.05%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........... $ 719,521 $ 707,807 $ 686,715 $ 642,414 $ 662,604
Ratio of net expenses to average net assets ... 1.70% (d) 1.72% 1.88% 2.09% 1.46% (d)
Ratio of net expenses to average net assets ...
excluding interest expense.................. 1.26% (d) 1.49% 1.32% 1.29% 1.33% (d)
Ratio of net investment income (loss) to
average net assets.......................... 6.69% (d) 6.93% 7.83% 7.78% 4.98% (d)
Portfolio turnover rate........................ 11% 28% 24% 18% 0%
-----------------------------
(a) Initial seed date was August 20, 2010. The Fund commenced operations on
September 27, 2010.
(b) Beginning net asset value is net of sales load of $0.90 per share from the
initial offering.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) Annualized.
See Notes to Financial Statements Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
1. ORGANIZATION
First Trust High Income Long/Short Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on June 18, 2010, and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund trades under the ticker symbol FSD on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to provide current income. The Fund's
secondary objective is capital appreciation. The Fund seeks to achieve its
investment objectives by investing, under normal market conditions, a majority
of its assets in a diversified portfolio of U.S. and foreign (including emerging
markets) high-yield corporate fixed-income securities of varying maturities that
are rated below-investment grade at the time of purchase. For purposes of this
strategy, "corporate fixed-income securities" include corporate bonds,
debentures, notes, commercial paper and other similar types of corporate debt
instruments, including instruments issued by corporations with direct or
indirect government ownership, as well as asset-backed securities, preferred
shares, senior floating-rate loan participations, commitments and assignments
("Senior Loans")(1), payment-in-kind securities, zero-coupon bonds, bank
certificates of deposit, fixed time deposits, bankers' acceptances and
derivative instruments that provide the same or similar economic impact as a
physical investment in the above securities. Below-investment grade fixed-income
securities are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal. As part of its investment strategy, the Fund intends to
maintain both long and short positions in securities under normal market
conditions. The Fund will take long positions in securities that MacKay Shields
LLC ("MacKay" or the "Sub-Advisor") believes offer the potential for attractive
returns and that it considers in the aggregate to have the potential to
outperform the Fund's benchmark, the Bank of America Merrill Lynch U.S. High
Yield Master II Constrained Index (the "Index"). The Fund will take short
positions in securities that the Sub-Advisor believes in the aggregate will
underperform the Index. The Fund's long positions, either directly or through
derivatives, may total up to 130% of the Fund's Managed Assets. The Fund's short
positions, either directly or through derivatives, may total up to 30% of the
Fund's Managed Assets. "Managed Assets" means the average daily gross asset
value of the Fund (which includes the principal amount of any borrowings), minus
the sum of the Fund's liabilities. There can be no assurance that the Fund will
achieve its investment objectives. The Fund may not be appropriate for all
investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees and in accordance with provisions of the
1940 Act. Market quotations and prices used to value the Fund's investments are
primarily obtained from third party pricing services. The Fund's investments
will be valued as follows:
Corporate bonds, notes, U.S. government securities, mortgage-backed
securities, asset-backed securities and other debt securities are valued
on the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Fund's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
Common stocks and other equity securities listed on any national or
foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and
the London Stock Exchange Alternative Investment Market ("AIM")) are
valued at the last sale price on the exchange on which they are
principally traded or, for NASDAQ and AIM securities, the official closing
price. Securities traded on more than one securities exchange are valued
at the last sale price or official closing price, as applicable, at the
close of the securities exchange representing the principal market for
such securities.
Securities traded in an over-the-counter market are valued at the mean of
their most recent bid and asked price, if available, and otherwise at
their closing bid price.
The Senior Loans held in the Fund are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while
having grown substantially since its inception, generally has fewer trades
and less liquidity than the secondary market for other types of
securities. Some Senior Loans have few or no trades, or trade
infrequently, and information regarding a specific Senior Loan may not be
widely available or may be incomplete. Accordingly, determinations of the
market value of Senior Loans may be based on infrequent and dated
information. Because there is less reliable, objective data available,
elements of judgment may play a greater role in valuation of Senior Loans
than for other types of securities. Typically, Senior Loans are valued
using information provided by a third party pricing service. The third
party pricing service primarily uses over-the-counter pricing from dealer
runs and broker quotes from indicative sheets to value the Senior Loans.
Exchange-traded futures contracts 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 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 valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by an independent pricing service.
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretion of discounts.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Board of Trustees or its delegate
at fair value. These securities generally include, but are not limited to,
restricted securities (securities which may not be publicly sold without
registration under the Securities Act of 1933, as amended) for which a pricing
service is unable to provide a market price; securities whose trading has been
formally suspended; a security whose market price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
"fair value." As a general principle, the current "fair value" of a security
would appear to be the amount which the owner might reasonably expect to receive
for the security upon its current sale. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from current market
quotations or official closing prices on the applicable exchange. A variety of
factors may be considered in determining the fair value of such securities,
including, but not limited to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates)
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means ..
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2014, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method.
C. UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain loan commitments, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund did not have unfunded delayed draw loan
commitments as of April 30, 2014.
D. FORWARD FOREIGN CURRENCY CONTRACTS:
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements to
exchange one currency for another at a future date and at a specified price. The
Fund uses forward foreign currency contracts to facilitate transactions in
foreign securities and to manage the Fund's foreign currency exposure. These
contracts are valued daily, and the Fund's net equity therein, representing
unrealized gain or loss on the contracts as measured by the difference between
the forward foreign exchange rates at the dates of entry into the contracts and
the forward rates at the reporting date, is included in "Unrealized
appreciation/(depreciation) on forward foreign currency contracts" on the
Statement of Assets and Liabilities. When the forward contract is closed, the
Fund records a realized gain or loss equal to the difference between the
proceeds from (or the cost of) the closing transaction and the Fund's basis in
the contract. This realized gain or loss is included in "Net realized gain
(loss) on forward foreign currency contracts" on the Statement of Operations.
Risks arise from the possible inability of counterparties to meet the terms of
their contracts and from movement in currency and securities values and interest
rates. Due to the risks, the Fund could incur losses in excess of the net
unrealized value shown on the Schedule of Forward Foreign Currency Contracts.
During the six months ended April 30, 2014, the amount of notional values of
forward foreign currency contracts opened and closed were $983,448,331 and
$(704,134,787), respectively.
E. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received. The portion of foreign
currency gains and losses related to fluctuation in exchange rates between the
initial purchase settle date and subsequent sale trade date is included in "Net
realized gain (loss) on investments" on the Statement of Operations.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
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.
During the six months ended April 30, 2014, the amount of notional values of
futures contracts opened and closed were $79,202,608 and $(79,120,781),
respectively.
G. SHORT SALES:
Short sales are utilized for investment and risk management purposes and are
transactions in which securities or other instruments (such as options,
forwards, futures or other derivative contracts) are sold that are not currently
owned in the Fund's portfolio. When a short sale is engaged in, the security
sold short must be borrowed and delivered to the counterparty. Short selling
allows the Fund to profit from a decline in a market price to the extent such
decline exceeds the transaction costs and the costs of borrowing the securities.
The Fund will pay a fee or premium to borrow the securities and is obligated to
repay the lenders of the securities. Any dividends or interest that accrues on
the securities during the period of the loan are due to the lenders. A gain,
limited to the price at which the security was sold short, or a loss, unlimited
in size, will be recognized upon the termination of the short sale. Any such
gain or loss may be offset, completely or in part, by the change in the value of
the long portion of the Fund's portfolio. The Fund is subject to the risk it may
be unable to reacquire a security to terminate a short position except at a
price substantially in excess of the last quoted price. Also, there is the risk
that the counterparty to a short sale may fail to honor its contractual terms,
causing a loss to the Fund.
The Fund has established an account with Pershing, LLC ("Pershing") for the
purpose of purchasing securities on margin. At April 30, 2014, the Fund owed
Pershing $35,907,818 for securities purchased on margin (reflected as
"Borrowings" in the Statement of Assets and Liabilities). The Fund pays interest
on any margin balance, which is calculated as the daily margin account balance
times the broker's margin interest rate. Interest is charged on payable debit
margin balances at a rate equal to the Federal Funds rate plus 75 basis points
and charged on payable credit margin balances at a rate equal to the Federal
Funds rate less 40 basis points. At April 30, 2014, the Fund had a debit margin
balance with an interest rate of 0.83%. For the six months ended April 30, 2014,
margin interest expense was $704,238, as shown on the Statement of Operations.
For the six months ended April 30, 2014, the average margin balance and interest
rate were $171,255,750 and 0.83%, respectively.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Level dividend distributions are declared and paid monthly to Common
Shareholders after the payment of interest and/or dividends in connection with
leverage. The level dividend rate may be modified by the Board of Trustees from
time to time. If, for any monthly distribution, net investment company taxable
income, if any (which term includes net short-term capital gain), is less than
the amount of the distribution, the difference will generally be a tax-free
return of capital distributed from the Fund's assets. Distributions of any net
long-term capital gains earned by the Fund are distributed at least annually.
Distributions will automatically be reinvested into additional Common Shares
pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are
elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future. The character of
distributions for tax reporting purposes will depend on the Fund's investment
experience during the remainder of its fiscal year.
The tax character of distributions paid during the fiscal year ended October 31,
2013 was as follows:
Distributions paid from:
Ordinary income....................................... $ 47,827,919
Capital gain.......................................... --
Return of capital..................................... 2,794,928
As of October 31, 2013, the distributable earnings and net assets on a tax basis
were as
follows:
Undistributed ordinary income......................... $ --
Undistributed capital gains........................... --
------------
Total undistributed earnings.......................... --
Accumulated capital and other losses.................. (28,624,092)
Net unrealized appreciation (depreciation)............ 51,498,720
------------
Total accumulated earnings (losses)................... 22,874,628
Other................................................. --
Paid-in capital....................................... 684,932,467
------------
Net assets............................................ $707,807,095
============
I. INCOME AND OTHER TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward
eight years and treated as short-term losses. As a transition rule, the Act
requires that post-enactment net capital losses be used before pre-enactment net
capital losses. At October 31, 2013, the Fund had no pre-enactment net capital
losses for federal income tax purposes. At October 31, 2013 the Fund had
post-enactment net capital losses for federal income tax purposes of $28,624,092
to be carried forward indefinitely.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2010, 2011,
2012 and 2013 remain open to federal and state audit. As of April 30, 2014,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
J. EXPENSES:
The Fund will pay all expenses directly related to its operations.
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.
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
The Lead Independent Trustee and the Chairmen of the Audit Committee, Nominating
and Governance Committee and Valuation Committee are paid additional annual fees
to serve in such capacities, with such compensation allocated pro rata among
each fund in the First Trust Fund Complex based on net assets. Trustees are
reimbursed for travel and out-of-pocket expenses in connection with all
meetings. The Lead Independent Trustee and Committee Chairmen rotate every three
years. The officers and "Interested" Trustee receive no compensation from the
Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the six months ended April 30, 2014, were $103,905,692 and
$94,482,953, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the types of derivatives in the Fund by location as
presented on the Statement of Assets and Liabilities at April 30, 2014.
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------------- --------------------------------------------
STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
RISK EXPOSURE LIABILITIES LOCATION FAIR VALUE LIABILITIES LOCATION FAIR VALUE
---------------------- ------------------------------ ------------ ------------------------------ ------------
Interest Rate Risk Variation margin receivable $ -- Variation margin payable $ 16,875
Currency Risk Unrealized appreciation on Unrealized depreciation on
forward foreign currency forward foreign currency
contracts 107,194 contracts 3,711,275
The following table presents the types of derivatives in the Fund by location as
presented on the Statement of Operations at April 30, 2014.
STATEMENT OF OPERATIONS LOCATION INTEREST RATE RISK CURRENCY RISK
---------------------------------------- -------------------- --------------------
Net realized gain (loss) on futures $ (215,830) $ --
Net realized gain (loss) on forward foreign
currency contracts -- (3,222,324)
Net change in unrealized appreciation
(depreciation) on futures 108,715 --
Net change in unrealized gain (loss) on
forward foreign currency contracts -- (1,324,169)
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
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 May 20, 2014, the Fund declared a dividend of $0.1100 per share to Common
Shareholders of record on June 4, 2014, payable June 16, 2014.
On June 19, 2014, the Fund declared a dividend of $0.1100 per share to Common
Shareholders of record on July 3, 2014, payable July 15, 2014.
Page 28
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund, First Trust High Income Long/Short
Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income
Fund and First Trust Intermediate Duration Preferred & Income Fund was held on
April 23, 2014 (the "Annual Meeting"). At the Annual Meeting, Robert F. Keith
was elected by the Common Shareholders of the First Trust High Income Long/Short
Fund as a Class I Trustee for a three-year term expiring at the Fund's annual
meeting of shareholders in 2017. The number of votes cast in favor of Mr. Keith
was 30,496,068, the number of votes against was 482,618 and the number of
abstentions was 5,077,473. James A. Bowen, Richard E. Erickson, Thomas R. Kadlec
and Niel B. Nielson are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
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.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST HIGH INCOME LONG/SHORT FUND (FSD)
APRIL 30, 2014 (UNAUDITED)
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 31
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
MacKay Shields LLC
1345 Avenue of the Americas
43rd floor
New York, NY 10105
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the
portfolios managers identified in response to paragraph (a)(1) of this Item in
the Registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required by
this paragraph, based on their evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust High Income Long/Short Fund
----------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2014
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2014
------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 20, 2014
------------------
* Print the name and title of each signing officer under his or her signature.