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Arbitrage Funds

Filed: 6 Aug 19, 12:05pm

 

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

811-09815

 

THE ARBITRAGE FUNDS

(Exact name of registrant as specified in charter)

 

41 Madison Avenue, 42nd Floor, New York, NY

 

10010

(Address of principal executive offices)

 

(Zip code)

 

John S. Orrico

Water Island Capital, LLC

41 Madison Avenue

42nd Floor

New York, NY 10010

(Name and address of agent for service)

 

Registrant’s telephone number, including area code:

800-295-4485

 

 

Date of fiscal year end:

May 31

 

 

Date of reporting period:

May 31, 2019

 

 


 

Item 1.   Reports to Stockholders.

 


Annual Report

May 31, 2019

The Arbitrage Fund

The Arbitrage Event-Driven Fund

The Water Island Credit Opportunities Fund

The Water Island Long/Short Fund

Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of The Arbitrage Fund's shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from The Arbitrage Funds or from your financial intermediary, such as a broker — dealer or bank. Instead, the reports will be made available on a website (https://artbitragefunds.com/restricted/content/downloads.html) and you will be notified by mail each time a report is posted and provided with a website link to access the report.

If you have already elected to receive your shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from The Arbitrage Funds electronically by sending a request in writing to: Arbitrage Funds, PO Box 219842, Kansas City MO 64121-9842 or by calling 1-800-295-4485.

You may also elect to receive all future reports in paper free of charge. You can inform The Arbitrage Funds [or your financial intermediary] that you wish to continue receiving paper copies of your shareholder reports by sending a request in writing to: Arbitrage Funds, PO Box 219842, Kansas City MO 64121-9842 or by calling 1-800-295-4485. Your election to receive reports in paper will apply to all Arbitrage Funds you hold directly in an account with The Arbitrage Funds. You must provide separate instructions to each of your financial intermediaries.



TABLE OF CONTENTS

Shareholder Letter

  

1

  

The Arbitrage Fund

 

Manager Commentary

  

3

  

Portfolio Information

  

5

  

Portfolio of Investments

  

7

  

The Arbitrage Event-Driven Fund

 

Manager Commentary

  

19

  

Portfolio Information

  

21

  

Portfolio of Investments

  

23

  

The Water Island Credit Opportunities Fund

 

Manager Commentary

  

38

  

Portfolio Information

  

40

  

Portfolio of Investments

  

42

  

The Water Island Long/Short Fund

 

Manager Commentary

  

50

  

Portfolio Information

  

52

  

Portfolio of Investments

  

54

  

Statements of Assets and Liabilities

  

64

  

Statements of Operations

  

68

  

Statements of Changes in Net Assets

  

72

  

Financial Highlights

 

The Arbitrage Fund - Class R

  

76

  

The Arbitrage Fund - Class I

  

77

  

The Arbitrage Fund - Class C

  

78

  

The Arbitrage Fund - Class A

  

79

  

The Arbitrage Event-Driven Fund - Class R

  

80

  

The Arbitrage Event-Driven Fund - Class I

  

81

  

The Arbitrage Event-Driven Fund - Class C

  

82

  

The Arbitrage Event-Driven Fund - Class A

  

83

  

The Water Island Credit Opportunities Fund - Class R

  

84

  

The Water Island Credit Opportunities Fund - Class I

  

85

  

The Water Island Credit Opportunities Fund - Class C

  

86

  

The Water Island Credit Opportunities Fund - Class A

  

87

  

The Water Island Long/Short Fund - Class R

  

88

  

The Water Island Long/Short Fund - Class I

  

89

  

The Water Island Long/Short Fund - Class C

  

90

  

The Water Island Long/Short Fund - Class A

  

91

  

Notes to Financial Statements

  

92

  

Report of Independent Registered Public Accounting Firm

  

119

  

Disclosure of Fund Expenses

  

121

  

Additional Information

  

124

  

Trustees' Approval of Advisory Agreement

  

125

  

Trustees & Officers

  

130

  


The Arbitrage Funds  Shareholder Letter

May 31, 2019 (Unaudited)

Dear Fellow Shareholders,

Over the past year and a half, investors have witnessed markets vacillate between optimism and uncertainty, with record highs interspersed with dramatic corrections. After a volatile start to 2018, markets largely marched higher for most of the year – until, that is, Q4. At the time, investors seemed to have finally capitulated to slowing global growth indicators, international trade disputes, and rising interest rates, bringing the S&P 500 less than 1% from officially entering bear territory (and producing the index's worst December performance since the Great Depression). In late December, however, the Federal Reserve ("Fed") stepped back from its hawkish stance on raising interest rates. Markets responded positively and returned impressive gains across asset classes during the first four months of 2019, only to stumble in May over fears that the Trump administration's trade war would extend from China to Mexico. While we do not discount the importance of such macro matters, our goal as event-driven investors remains – as always – to generate returns not from the direction of broader credit and equity markets, but from the outcomes of idiosyncratic corporate events. As such, our focus is less on seesawing markets, and more on the universe of corporate catalysts at our disposal. On this front, we continue to be optimistic about our opportunity set.

The spectrum of corporate catalysts spans a range of timelines, from short (four months or less) to long (a year or more), and a range of strengths, from "hard" catalysts (i.e., more definitive) to "soft" catalysts (i.e., less definitive). In our universe, some of the hardest, shortest duration corporate catalysts – which tend to be associated with the highest probabilities of a successful completion and the lowest potential volatility – are definitive, publicly announced mergers and acquisitions ("M&A"). This is the opportunity set in which our merger arbitrage team exclusively participates, and we remain highly constructive on the strategy. Merger arbitrage spreads are buoyed by short-term interest rates, and while the future direction of rates may now be less certain than a year ago – when investors largely expected further hikes – we nonetheless believe current levels are still supportive of a healthy deal spread environment. Deal volume is strong, with the total value of announced deals for the year-to-date period in 2019 being the second greatest since the Financial Crisis (behind only the year-ago period). Furthermore, additional M&A activity is likely to be spurred by private equity buyers, who by some estimates have nearly $2.5 trillion in dry powder waiting to be deployed. Lastly, the ongoing prospect of increased volatility in the markets can present favorable entry points in many M&A transactions. As such, we believe the three primary drivers of merger arbitrage returns – interest rates, deal flow, and volatility – are positioned to create a supportive environment for the strategy. Yet while we are optimistic, we are also cautious. Our primary concern continues to be the regulatory approval process, the timelines of which have begun to extend relative to historical norms. In the U.S., the Federal Trade Commission (FTC) appears emboldened, with the current regime seemingly more willing to take on transactions that previously would have been given a green light without objection. In the U.K., in preparation for a world in which the country is no longer a European Union (EU) member, regulators have stepped up their own reviews of M&A transactions, thus extending timelines even further. Amidst the ongoing trade war between the U.S. and China, the approval process at SAMR (State Administration for Market Regulation) remains a focus, with the potential for any given deal to be used as a pawn in the trade negotiation process. In this atmosphere of unpredictability, properly sizing positions relative to downside risk becomes ever more important and the option to exchange potential return for additional protection through hedges must be considered.

Annual Report | May 31, 2019
1



The Arbitrage Funds  Shareholder Letter (continued)

May 31, 2019 (Unaudited)

At the softer end of the catalyst spectrum, our special situations team continues to see opportunity in speculative M&A, asset sales, re-ratings, and spin-offs. The number of announced spin-offs for 2019 is already above average, with the total value of announced spins for the year-to-date period having reached a record for the post Financial Crisis period. A primary motivation behind these transactions is companies are seeking to drive shareholder value by achieving simplified corporate structures. With each spin-off situation, we are presented with investment opportunities both pre-event and post-event. Post-event we may evaluate long and short investments in the newly independent companies, which can manifest as short-term alpha contributors or as longer-term investment opportunities as the new management teams execute on their standalone plans. While equity market valuations have rebounded since the lows of Q4 2018, we continue to see the market undervalue spin-offs and other re-rating opportunities relative to what we have historically seen.

Going forward, investors must determine whether the markets can be sustained by central bank support or whether slowing global growth becomes a larger concern. Despite the unpredictability of macro factors and equity markets regaining recent highs, we believe there is ample opportunity for further alpha generation. Corporations are likely to continue to seek to unlock shareholder value by engaging in M&A, asset sales, and spin-offs – and regardless of the specific investment set, we will continue to pursue our goal of generating returns for our clients that are sourced from the outcomes of these idiosyncratic corporate events. At the same time, we are aware that the historic bull markets in credit and equities are growing increasingly long in the tooth and that we are likely approaching some sort of correction that would mark the end of the current market cycle. Thus, we intend to remain disciplined in our approach as we strive to minimize volatility and correlation while we seek to execute on our investment goals in the year ahead.

Sincerely,
The Investment Team
Water Island Capital

The statements and opinions expressed are those of the author as of the date of this report. All information is historical and not indicative of future results and subject to change. This information is not a recommendation to buy or sell any security.

Glossary

Alpha: A measure of excess return relative to a benchmark.

Deal Flow: The volume of announced mergers and acquisitions activity.

Re-Rating: A scenario in which the market changes its view of a company sufficiently to make valuation ratios (such as price-earnings ratio) substantially higher or lower.

Risk-On: A period of positive investment sentiment, or during which investors perceive risk as low, and thus tend to engage in higher-risk investments.

S&P 500: An index of U.S. equities designed to reflect the risk/return characteristics of the domestic large cap universe that is one of the most commonly used benchmarks for the overall U.S. stock market.

www.arbitragefunds.com | 1-800-295-4485
2



The Arbitrage Fund  Manager Commentary

May 31, 2019 (Unaudited)

Arbitrage Fund | Tickers: ARBNX, ARBFX, ARBCX, ARGAX

The Fund's Goal and Main Investments

The Fund seeks to achieve capital growth by engaging in merger arbitrage. Merger arbitrage is a sub-set of a broader event-driven investment strategy, which seeks to profit from investing in securities that are involved in corporate events such as mergers and acquisitions. Typically merger arbitrage is a low volatility strategy pursued by absolute-return-minded investors. At Water Island Capital, our goal is to capture a return stream with a low correlation to the overall markets.

Investment Strategy

The strategy's focus is to capture returns from corporate events, generate market neutral capital growth, preserve capital, generate consistent and positive returns, and achieve low correlation and low volatility. The Fund generally engages in active and frequent trading of portfolio securities to achieve its principal investment objective. In attempting to achieve its investment strategy, the Fund plans to invest at least 80% of its net assets in equity securities of companies (both U.S. and foreign) that are involved in publicly announced mergers, takeovers, tender offers, leveraged buyouts, spin-offs, liquidations, and other corporate reorganizations. The Fund's investment adviser uses investment strategies designed to minimize market exposure, including short selling along with purchasing and selling options. The most common merger arbitrage activity, and the approach generally used by the Fund, involves purchasing the shares of an announced acquisition target company at a discount to their expected value upon the acquisition's completion. That difference, or "spread," is the primary driver of returns for this investment strategy. There is no limit to the number of stocks the Fund can hold; however, the Fund typically invests in 40 to 80 deals at any given time. Each deal will have one, or perhaps two, equity positions (a long and short position in a stock-for-stock deal) and, in many cases, associated derivative positions for hedging purposes.

Fiscal Year Highlights

Arbitrage (ARBNX) returned 4.13% for the fiscal year ending May 31, 2019. The Fund generated positive returns in all regions of the world, though performance was driven primarily by deals in the Americas region. The top performing sectors in the Fund were communication services and consumer discretionary. Conversely, the materials sector detracted slightly from returns over the period.

The two top contributors for the period were interrelated, in that both were competitive bidding situations that involved Twenty-First Century Fox and Comcast. In December 2016, Fox, the U.S. television and film company, first announced its intent to purchase the 61% of U.K. broadcaster Sky that it didn't already own. While this transaction was still undergoing regulatory review, Fox entered into an agreement to sell its entertainment assets to Disney, the U.S. media and entertainment company, for $52 billion. This eventually led to two separate bidding wars involving Comcast, the U.S. telecommunications conglomerate. First, Comcast made a rival offer for Sky in February 2018, and then it challenged Disney with its own bid for Fox in June 2018. When Disney raised its offer for Fox to $71 billion, Comcast abandoned its pursuit of Fox in order to focus on Sky – ultimately winning an auction process for the asset with a superior offer that represented a 60% premium over Fox's initial offer. Both transactions successfully closed during the fiscal year, with the Fox/Disney deal representing the Fund's greatest contributor for the year and Sky/Comcast the second-greatest contributor.

Annual Report | May 31, 2019
3



The Arbitrage Fund  Manager Commentary (continued)

May 31, 2019 (Unaudited)

Conversely, the largest detractor for the period was Qualcomm's attempted acquisition of NXP Semiconductor. In October 2016, Qualcomm – a U.S. telecommunications equipment provider – entered into a definitive agreement to acquire NXP Semiconductors – a Dutch provider of mixed-signal semiconductor solutions – for $53 billion. As of Q1 2018, the deal had received regulatory approvals from all required jurisdictions with the exception of one: China. Approval from the Chinese authorities appeared imminent when, in Q2 2018, the transaction was caught in the crossfire of the ongoing trade dispute between the U.S. and China, with China initially refusing to approve any transactions involving U.S. companies. Investors subsequently fled for the exits, leading to a sharp decline in NXP's share price and driving the deal spread wider. The deal was ultimately withdrawn when, after Chinese regulators had yet to approve the deal, the parties declined to extend the merger deadline, leading to a loss for the Fund.

The Fund's second-largest detractor of the period was NVIDIA's planned acquisition of Mellanox Technologies. In November 2018, reports emerged that Mellanox – an Israel-based developer of networking semiconductors – was seeking a buyer for the company. After rumors of several willing bidders, NVIDIA – a U.S.-based manufacturer of computer graphics processing units and chips – signed an agreement to acquire Mellanox for $6.9 billion in cash. The spread widened in Q2 2019 on fears that the still ongoing U.S./China trade war may also prevent this deal from securing regulatory approval in China, leading to losses in the Fund. We have sized our position in a manner that we believe is in line with the risk inherent in the transaction and we continue to monitor the situation closely.

Glossary

Tender Offer: A public, open offer by a prospective acquirer to shareholders of a publicly traded corporation to purchase their stock at a specified price over a specified time, subject to a minimum and maximum number of shares acquired.

Leveraged Buyout: The acquisition of a company using a significant amount of borrowed money to meet the purchase price.

www.arbitragefunds.com | 1-800-295-4485
4



The Arbitrage Fund  Portfolio Information

May 31, 2019 (Unaudited)

Performance (annualized returns as of May 31, 2019)

  One
Year
 Five
Year
 Ten
Year
 Since
Inception*
 

Arbitrage Fund, Class R

  

3.89

%

  

2.31

%

  

2.30

%

  

3.96

%

 

Arbitrage Fund, Class I

  

4.13

%

  

2.54

%

  

2.55

%

  

3.01

%

 

Arbitrage Fund, Class C**

  

3.11

%

  

1.54

%

  

N/A

   

1.11

%

 

Arbitrage Fund, Class A***

  

3.94

%

  

2.30

%

  

N/A

   

2.11

%

 

S&P 500® Index

  

3.78

%

  

9.66

%

  

13.95

%

  

5.48

%

 
ICE BofA Merrill Lynch U.S. 3-Month Treasury
Bill Index
  

2.26

%

  

0.83

%

  

0.47

%

  

1.61

%

 

Current performance may be higher or lower than performance quoted above. Any performance data quoted represents past performance and the investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. Returns shown above include the reinvestment of all dividends and capital gains. Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from the amount reported in the Financial Highlights. You can obtain performance data current to the most recent month end by calling 1-800-295-4485 or going to www.arbitragefunds.com.

* Class R inception: 9/18/00; Class I inception: 10/17/03; Class C inception: 6/1/12; Class A inception: 6/1/13. Since Inception Returns for securities indices are for the inception date of Class R shares.

** Class C shares are subject to a 1.00% contingent deferred sales charge on all purchases redeemed in 12 months of purchase.

*** Class A shares are subject to a maximum front-end sales load of 2.50% on purchases up to $250,000. The shares are also subject to a deferred sales charge of up to 1.00% on purchases of $250,000 or more purchased without a front-end sales charge and redeemed within 18 months of purchase.

The Total Annual Fund Operating Expenses for Class R, Class I, Class C and Class A are 1.94%, 1.69%, 2.69% and 1.94%, respectively. These expense ratios are as stated in the current prospectus and may differ from the expense ratios disclosed in the financial highlights in this report.

The S&P 500® Index is an unmanaged index consisting of 500 stocks.

The ICE Bank of America (BofA) Merrill Lynch U.S. 3-Month Treasury Bill Index tracks the performance of the U.S. dollar denominated U.S. Treasury Bills publicly issued in the U.S. domestic market with a remaining term to final maturity of less than 3 months.

An investor may not invest directly in an index.

Annual Report | May 31, 2019
5



The Arbitrage Fund  Portfolio Information (continued)

May 31, 2019 (Unaudited)

Growth of $10,000 Investment

The chart represents historical performance of a hypothetical investment of $10,000 in the Class R shares of the Fund. Past performance does not guarantee future results. This chart does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

  

Sector Weighting

The following chart shows the sector weightings of The Arbitrage Fund's investments (including short sales and excluding derivatives) as of the report date.

www.arbitragefunds.com | 1-800-295-4485
6



The Arbitrage Fund  Portfolio of Investments

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - 80.87%

 

Aerospace & Defense - 6.50%

 

L3 Technologies, Inc.

  

469,100

  

$

113,550,346

  

Apparel - 0.10%

 

Perry Ellis International, Inc.(a)(b)

  

828,485

   

1,781,243

  

Auto Parts & Equipment - 1.46%

 

WABCO Holdings, Inc.(a)(c)

  

194,922

   

25,517,239

  

Banks - 4.22%

 

SunTrust Banks, Inc.(c)

  

837,139

   

50,236,712

  

TCF Financial Corp.(c)

  

1,231,886

   

23,479,747

  
   

73,716,459

  

Biotechnology - 5.16%

 

Aratana Therapeutics, Inc.(a)

  

1,311,574

   

6,072,588

  

Celgene Corp.(a)

  

627,279

   

58,832,497

  

Nightstar Therapeutics Plc, ADR(a)

  

458,949

   

11,698,610

  

Pacific Biosciences of California, Inc.(a)(c)

  

2,012,969

   

13,486,892

  
   

90,090,587

  

Chemicals - 2.30%

 

Versum Materials, Inc.(c)(d)

  

783,812

   

40,248,746

  

Commercial Services - 3.81%

 

Nord Anglia Education, Inc.(a)(b)

  

200,078

   

960,374

  

Rent-A-Center, Inc.(a)(d)

  

501,623

   

11,968,725

  

Tarsus Group Plc

  

421,667

   

2,308,290

  

Total System Services, Inc.

  

36,221

   

4,474,380

  

Worldpay, Inc., Class A(a)(c)

  

385,627

   

46,907,668

  
   

66,619,437

  

Computers & Computer Services - 2.43%

 

Cray, Inc.(a)(c)

  

287,351

   

10,060,158

  

Electronics For Imaging, Inc.(a)(c)

  

429,387

   

15,737,034

  

KeyW Holding Corp. (The)(a)

  

1,479,139

   

16,640,314

  
   

42,437,506

  

Diversified Financial Services - 0.14%

 

Gluskin Sheff + Associates, Inc.

  

232,488

   

2,447,695

  

Electronics - 0.45%

 

Control4 Corp.(a)(c)

  

332,385

   

7,864,229

  

Entertainment - 1.68%

 

International Speedway Corp., Class A(c)

  

396,331

   

17,739,776

  

Parques Reunidos Servicios Centrales SAU(e)

  

750,370

   

11,652,033

  
   

29,391,809

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
7



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - 80.87% (Continued)

 

Environmental Control - 3.21%

 

Advanced Disposal Services, Inc.(a)(c)

  

1,746,901

  

$

56,145,398

  

Food - 0.72%

 

Smart & Final Stores, Inc.(a)

  

963,573

   

6,272,860

  

Wessanen

  

489,576

   

6,213,123

  
   

12,485,983

  

Gas - 2.49%

 

AmeriGas Partners LP(c)

  

1,280,376

   

43,443,158

  

Healthcare - Services - 0.31%

 

WellCare Health Plans, Inc.(a)(d)

  

19,724

   

5,447,572

  

Household Products - 0.26%

 

Oriflame Holding AG(a)

  

196,700

   

4,617,673

  

Insurance - 0.25%

 

TOWER Ltd.(a)

  

8,500,704

   

4,393,315

  

Internet - 2.68%

 

Liberty Expedia Holdings, Inc., Class A(a)(c)

  

1,026,404

   

42,318,637

  

SafeCharge International Group Ltd.

  

828,891

   

4,537,516

  
   

46,856,153

  

Investment Company Security - 1.89%

 

Oaktree Capital Group LLC(c)

  

682,834

   

33,001,367

  

Media - 7.63%

 

Fox Corp., Class A(a)(d)

  

293,087

   

10,325,455

  

Tribune Media Co., Class A(c)

  

2,655,808

   

122,963,910

  
   

133,289,365

  

Metal Fabricate & Hardware - 1.41%

 

Global Brass & Copper Holdings, Inc.

  

564,349

   

24,622,547

  

Mining - 0.27%

 

Atlantic Gold Corp.(a)

  

2,240,586

   

4,790,836

  

Oil & Gas - 4.94%

 

Anadarko Petroleum Corp.(c)(d)

  

1,226,881

   

86,335,616

  

Oil & Gas Services - 0.09%

 

Spectrum ASA

  

230,512

   

1,625,123

  

Packaging & Containers - 2.93%

 

Multi-Color Corp.

  

298,528

   

14,848,783

  
RPC Group Plc  

3,649,768

   

36,415,408

  
   

51,264,191

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
8



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - 80.87% (Continued)

 

Pharmaceuticals - 1.54%

 

BTG Plc(a)

  

2,553,554

  

$

26,908,129

  

Pipelines - 1.81%

 

Andeavor Logistics LP

  

441,303

   

15,392,648

  

Buckeye Partners LP

  

397,738

   

16,211,801

  
   

31,604,449

  

Real Estate - 1.03%

 

HFF, Inc., Class A(c)

  

416,668

   

17,991,724

  

Real Estate Investment Trusts - 1.44%

 

Chesapeake Lodging Trust(c)

  

158,218

   

4,551,932

  

Tier REIT, Inc.

  

762,015

   

20,513,444

  
   

25,065,376

  

Semiconductors - 2.65%

 

Aquantia Corp.(a)(c)

  

607,011

   

7,976,125

  

Intermolecular, Inc.(a)(c)

  

919,936

   

1,076,325

  

Mellanox Technologies Ltd.(a)(c)(d)

  

339,254

   

37,243,304

  
   

46,295,754

  

Software - 12.75%

 

Amber Road, Inc.(a)

  

741,621

   

9,626,241

  

First Data Corp., Class A(a)(c)

  

3,076,909

   

78,215,027

  

MINDBODY, Inc., Class A(a)(b)

  

843,793

   

30,798,444

  

Onemarket Ltd.(a)

  

111,800

   

61,657

  

Red Hat, Inc.(a)(c)(d)

  

564,450

   

104,028,135

  
   

222,729,504

  

Telecommunications - 2.32%

 

DNA Oyj

  

356,450

   

8,338,477

  

Inmarsat Plc

  

2,282,900

   

15,764,182

  

KCOM Group Plc

  

3,417,642

   

4,191,130

  

Quantenna Communications, Inc.(a)(c)

  

215,844

   

5,236,375

  

Zayo Group Holdings, Inc.(a)

  

213,025

   

6,965,918

  
   

40,496,082

  
TOTAL COMMON STOCKS
(Cost $1,399,546,510)
  

1,413,074,611

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
9



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

  

Shares

 

Value

 

RIGHTS - 0.06%

 

A Schulman, Inc. CVR(b)

  

173,468

  

$

161,759

  

Corium International, Inc. CVR(b)

  

920,694

   

174,011

  

Cubist Pharmaceuticals, Inc. CPR, Expires 07/01/2019(b)

  

119,343

   

0

  

Media General, Inc. CVR(b)

  

613,589

   

0

  

NewStar Financial, Inc. CVR(b)

  

1,514,945

   

789,741

  
TOTAL RIGHTS
(Cost $634,040)
  

1,125,511

  

 

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 1.89%

 

Media - 0.81%

 

Tribune Media Co.

 

07/15/2022

  

5.875

%

 

$

13,900,000

  

$

14,052,205

  

Software - 1.08%

 

First Data Corp.(c)(e)

 
  

01/15/2024

  

5.000

%

  

9,350,000

   

9,548,453

  
  

01/15/2024

  

5.750

%

  

9,135,000

   

9,347,389

  
           

18,895,842

  
TOTAL CORPORATE BONDS
(Cost $33,188,880)
  

32,948,047

  

 

  

Shares

 

Value

 

MUTUAL FUNDS - 0.88%

 

Arbitrage Event Driven Fund (The), Class I(f)

  

1,611,740

  

$

15,375,997

  
TOTAL MUTUAL FUNDS
(Cost $15,340,129)
  

15,375,997

  

 

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(a) - 0.28%

 

Call Options Purchased - 0.05%

 

BB&T Corp.

 
  

06/2019

 

$

50.00

  

$

2,300,100

   

492

  

$

6,150

  
  

09/2019

  

57.50

   

19,092,700

   

4,084

   

49,008

  

Centene Corp.

 
  

06/2019

  

57.50

   

999,075

   

173

   

51,900

  
  

06/2019

  

60.00

   

4,458,300

   

772

   

156,330

  
Chemical
Financial
Corp.
 

06/2019

  

55.00

   

7,280,478

   

1,923

   

4,808

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
10



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(a) - 0.28% (Continued)

 

Call Options Purchased - 0.05% (Continued)

 
Fidelity National
Information
Services, Inc.
 

07/2019

 

$

135.00

  

$

32,613,330

   

2,711

  

$

128,772

  
Occidental
Petroleum
Corp.
 

08/2019

  

55.00

   

17,917,200

   

3,600

   

405,000

  
WellCare Health
Plans, Inc.
 
  

06/2019

  

290.00

   

2,347,615

   

85

   

31,450

  
  

06/2019

  

300.00

   

3,756,184

   

136

   

23,800

  
  

06/2019

  

310.00

   

5,717,133

   

207

   

11,903

  
TOTAL CALL OPTIONS PURCHASED
(Cost $1,499,169)
  

869,121

  

Put Options Purchased - 0.23%

 
Anadarko
Petroleum
Corp.
 

08/2019

  

65.00

   

77,195,890

   

10,970

   

1,645,500

  

Fox Corp.

 

07/2019

  

37.00

   

10,325,913

   

2,931

   

696,112

  

Luxoft Holding, Inc.

 

07/2019

  

45.00

   

18,445,428

   

3,204

   

104,130

  
Mellanox
Technologies,
Ltd.
 
  

12/2019

  

90.00

   

9,539,882

   

869

   

234,630

  
  

12/2019

  

100.00

   

8,112,742

   

739

   

306,685

  
  

12/2019

  

105.00

   

8,046,874

   

733

   

355,505

  

Red Hat, Inc.

 
  

09/2019

  

160.00

   

9,989,060

   

542

   

63,685

  
  

09/2019

  

165.00

   

2,469,620

   

134

   

16,080

  
  

01/2020

  

170.00

   

1,677,130

   

91

   

21,385

  

Rent-A-Center Inc.

 

06/2019

  

23.00

   

11,968,176

   

5,016

   

363,660

  
Versum
Materials, Inc.
 

06/2019

  

40.00

   

2,192,645

   

427

   

1,068

  
WellCare Health
Plans, Inc.
 

09/2019

  

250.00

   

7,733,320

   

280

   

197,400

  
TOTAL PUT OPTIONS PURCHASED
(Cost $3,628,457)
  

4,005,840

  
TOTAL PURCHASED OPTIONS
(Cost $5,127,626)
  

4,874,961

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
11



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

  

Yield

 

Shares

 

Value

 

SHORT-TERM INVESTMENTS - 15.32%

 

Money Market Funds

 
Morgan Stanley Institutional Liquidity
Fund - Government Portfolio,
Institutional Class
  

2.326

%(g)

  

133,864,122

  

$

133,864,122

  
State Street Institutional U.S. Government
Money Market Fund, Premier Class
  

2.338

%(g)

  

133,864,122

   

133,864,122

  
       

267,728,244

  
TOTAL SHORT-TERM INVESTMENTS
(Cost $267,728,244)
  

267,728,244

  
Total Investments - 99.30%
(Cost $1,721,565,429)
  

1,735,127,371

  

Other Assets in Excess of Liabilities - 0.70%(h)

  

12,153,851

  

NET ASSETS - 100.00%

 

$

1,747,281,222

  

Portfolio Footnotes

(a)  Non-income-producing security.

(b)  Security fair valued using significant unobservable inputs and classified as a Level 3 security. As of May 31, 2019, the total fair market value of these securities was $34,665,572, representing 1.98% of net assets.

(c)  Security, or a portion of security, is being held as collateral for short sales, written option contracts or forward foreign currency exchange contracts. At May 31, 2019, the aggregate fair market value of those securities was $706,038,695 representing 40.41% of net assets.

(d)  Underlying security for a written/purchased call/put option.

(e)  Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of May 31, 2019, these securities had a total value of $30,547,875 or 1.75% of net assets.

(f)  Affiliated investment.

(g)  Rate shown is the 7-day effective yield as of May 31, 2019.

(h)  Includes cash held as collateral for short sales and written option contracts.

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (29.04%)

 

Aerospace & Defense - (6.53%)

 

Harris Corp.

  

(609,483

)

 

$

(114,089,123

)

 

Banks - (4.26%)

 

BB&T Corp.

  

(1,084,101

)

  

(50,681,722

)

 

Chemical Financial Corp.

  

(625,979

)

  

(23,699,565

)

 
   

(74,381,287

)

 

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
12



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - (29.04%) (Continued)

 

Commercial Services - (0.26%)

 

Global Payments, Inc.

  

(29,344

)

 

$

(4,520,150

)

 

Computers & Computer Services - (0.57%)

 

Luxoft Holding, Inc., Class A

  

(172,244

)

  

(9,916,087

)

 

Diversified Financial Services - (0.96%)

 

Brookfield Asset Management, Inc., Class A

  

(367,912

)

  

(16,868,765

)

 

Gas - (1.89%)

 

UGI Corp.

  

(638,584

)

  

(32,957,320

)

 

Healthcare - Services - (0.22%)

 

Centene Corp.

  

(66,667

)

  

(3,850,019

)

 

Internet - (2.43%)

 

Expedia Group, Inc.

  

(369,301

)

  

(42,469,615

)

 

Oil & Gas - (1.02%)

 

Occidental Petroleum Corp.

  

(359,966

)

  

(17,915,508

)

 

Oil & Gas Services - (0.09%)

 

TGS NOPEC Geophysical Co. ASA

  

(64,555

)

  

(1,617,618

)

 

Pharmaceuticals - (1.98%)

 

Bristol-Myers Squibb Co.

  

(627,279

)

  

(28,459,648

)

 

Elanco Animal Health, Inc.

  

(194,244

)

  

(6,075,953

)

 
   

(34,535,601

)

 

Real Estate - (0.45%)

 

Jones Lang LaSalle, Inc.

  

(62,646

)

  

(7,796,295

)

 

Real Estate Investment Trusts - (1.33%)

 

Cousins Properties, Inc.

  

(2,267,483

)

  

(20,520,721

)

 

Park Hotels & Resorts, Inc.

  

(99,316

)

  

(2,743,108

)

 
   

(23,263,829

)

 

Software - (7.05%)

 

Fidelity National Information Services, Inc.

  

(358,133

)

  

(43,083,400

)

 

Fiserv, Inc.

  

(932,504

)

  

(80,064,793

)

 
   

(123,148,193

)

 
TOTAL COMMON STOCKS
(Proceeds $498,624,440)
  

(507,329,410

)

 

LIMITED PARTNERSHIPS - (0.87%)

 

Pipelines - (0.87%)

 
MPLX LP  

(500,682

)

  

(15,310,857

)

 
TOTAL LIMITED PARTNERSHIPS
(Proceeds $15,610,023)
  

(15,310,857

)

 

See Notes to Financial Statements.

Annual Report | May 31, 2019
13



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

  

Shares

 

Value

 

EXCHANGE-TRADED FUNDS - (0.67%)

 

Equity Fund - (0.67%)

 

Invesco QQQ Trust Series 1

  

(67,077

)

 

$

(11,668,044

)

 
TOTAL EXCHANGE-TRADED FUNDS
(Proceeds $11,304,683)
  

(11,668,044

)

 

RIGHTS - (0.01%)

 

Biotechnology - (0.01%)

 

Celgene Corp. CVR

  

(80,988

)

  

(194,371

)

 
TOTAL RIGHTS
(Proceeds $171,691)
  

(194,371

)

 
TOTAL SECURITIES SOLD SHORT
(Proceeds $525,710,837)
 

$

(534,502,682

)

 

 

WRITTEN OPTIONS

 Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

Written Call Options

 

Red Hat, Inc.

 
  

06/2019

 

$

180.00

  

$

(3,686,000

)

  

(200

)

 

$

(98,000

)

 
  

06/2019

  

185.00

   

(3,686,000

)

  

(200

)

  

(13,000

)

 
TOTAL WRITTEN CALL OPTIONS
(Premiums received $123,308)
  

(111,000

)

 

Written Put Options

 
WellCare Health
Plans, Inc.
 

09/2019

  

220.00

   

(7,733,320

)

  

(280

)

  

(75,600

)

 
TOTAL WRITTEN PUT OPTIONS
(Premiums received $88,893)
  

(75,600

)

 
TOTAL WRITTEN OPTIONS
(Premiums received $212,201)
 

$

(186,600

)

 

OUTSTANDING FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Appreciation
 

AUD

2,700

  

USD

1,864

  

Goldman Sachs & Co.

 

06/14/2019

 

$

11

  

USD

75,366

  

AUD

106,500

  

Goldman Sachs & Co.

 

06/14/2019

  

1,461

  

USD

46,190,957

  

CAD

61,544,800

  

Goldman Sachs & Co.

 

06/14/2019

  

643,789

  

CHF

8,107,300

  

USD

8,078,210

  

Goldman Sachs & Co.

 

06/14/2019

  

26,678

  

USD

8,134,050

  

CHF

8,107,300

  

Goldman Sachs & Co.

 

06/14/2019

  

29,162

  

USD

100,582,689

  

EUR

88,611,000

  

Goldman Sachs & Co.

 

06/14/2019

  

1,508,666

  

USD

80,774,289

  

GBP

61,093,700

  

Goldman Sachs & Co.

 

06/14/2019

  

3,497,513

  

NZD

298,900

  

USD

194,553

  

Goldman Sachs & Co.

 

06/14/2019

  

1,026

  

USD

5,346,503

  

NZD

7,863,300

  

Goldman Sachs & Co.

 

06/14/2019

  

201,306

  

USD

11,657,137

  

SEK

107,736,500

  

Goldman Sachs & Co.

 

06/14/2019

  

291,606

  

 

$

6,201,218

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
14



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Depreciation
 

AUD

17,100

  

USD

12,132

  

Goldman Sachs & Co.

 

06/14/2019

 

$

(267

)

 

USD

1,517

  

AUD

2,200

  

Goldman Sachs & Co.

 

06/14/2019

  

(9

)

 

CAD

51,804,900

  

USD

38,563,849

  

Goldman Sachs & Co.

 

06/14/2019

  

(224,841

)

 

EUR

66,151,700

  

USD

74,649,993

  

Goldman Sachs & Co.

 

06/14/2019

  

(687,222

)

 

USD

1,082,521

  

EUR

969,500

  

Goldman Sachs & Co.

 

06/14/2019

  

(1,457

)

 

GBP

5,594,000

  

USD

7,183,076

  

Goldman Sachs & Co.

 

06/14/2019

  

(107,284

)

 

NZD

891,300

  

USD

599,808

  

Goldman Sachs & Co.

 

06/14/2019

  

(16,603

)

 

SEK

107,736,500

  

USD

11,388,476

  

Goldman Sachs & Co.

 

06/14/2019

  

(22,943

)

 

USD

4,421,250

  

SEK

42,194,500

  

Goldman Sachs & Co.

 

06/14/2019

  

(30,009

)

 

 

$

(1,090,635

)

 

The following is a summary of investments classified by country exposure:

Country

 

% of Net Assets(a)

 

United Kingdom

  

5.69

%

 

Israel

  

2.13

%

 

Spain

  

0.67

%

 

Finland

  

0.48

%

 

Canada

  

0.41

%

 

Netherlands

  

0.36

%

 

Switzerland

  

0.26

%

 

New Zealand

  

0.25

%

 

Ireland

  

0.13

%

 

Norway

  

0.09

%

 

Hong Kong

  

0.05

%

 

Australia

  

0.00

%(b)

 

United States

  

88.78

%

 

Other Assets in Excess of Liabilities

  

0.70

%

 
   

100.00

%

 

(a)  These percentages represent long positions only and are not net of short positions.

(b)  Less than 0.005% of net assets.

Abbreviations:

ADR - American Depositary Receipt

AG - Aktiengesellschaft is a German term that refers to a corporation that is limited by shares, i.e., owned by shareholders.

ASA - Allmennaksjeselskap is the Norwegian term for public limited company.

AUD - Australian dollar

CAD - Canadian dollar

CHF - Swiss franc

CPR - Conditional Prepayment Rate

CVR - Contingent Value Rights

EUR - Euro

GBP - British pound

See Notes to Financial Statements.

Annual Report | May 31, 2019
15



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

LLC - Limited Liability Company

LP - Limited Partnership

Ltd. - Limited

NZD - New Zealand dollar

Oyj - Osakeyhtio is the Finnish equivalent of a public limited company.

Plc - Public Limited Company

REIT - Real Estate Investment Trust

SAU - Sociedad Anónima Unipersonal is a Spanish term for a single shareholder company.

SEK - Swedish krona

USD - United States Dollar

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
16



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

The following table summarizes The Arbitrage Fund's investments and derivative financial instruments categorized in the disclosure hierarchy as of May 31, 2019:

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

Common Stocks

 

Aerospace & Defense

 

$

113,550,346

  

$

  

$

  

$

113,550,346

  

Apparel

  

   

���

   

1,781,243

   

1,781,243

  

Auto Parts & Equipment

  

25,517,239

   

   

   

25,517,239

  

Banks

  

73,716,459

   

   

   

73,716,459

  

Biotechnology

  

90,090,587

   

   

   

90,090,587

  

Chemicals

  

40,248,746

   

   

   

40,248,746

  

Commercial Services

  

65,659,063

   

   

960,374

   

66,619,437

  
Computers & Computer
Services
  

42,437,506

   

   

   

42,437,506

  

Diversified Financial Services

  

2,447,695

   

   

   

2,447,695

  

Electronics

  

7,864,229

   

   

   

7,864,229

  

Entertainment

  

29,391,809

   

   

   

29,391,809

  

Environmental Control

  

56,145,398

   

   

   

56,145,398

  

Food

  

12,485,983

   

   

   

12,485,983

  

Gas

  

43,443,158

   

   

   

43,443,158

  

Healthcare - Services

  

5,447,572

   

   

   

5,447,572

  

Household Products

  

4,617,673

   

   

   

4,617,673

  

Insurance

  

4,393,315

   

   

   

4,393,315

  

Internet

  

46,856,153

   

   

   

46,856,153

  

Investment Company Security

  

33,001,367

   

   

   

33,001,367

  

Media

  

133,289,365

   

   

   

133,289,365

  

Metal Fabricate & Hardware

  

24,622,547

   

   

   

24,622,547

  

Mining

  

4,790,836

   

   

   

4,790,836

  

Oil & Gas

  

86,335,616

   

   

   

86,335,616

  

Oil & Gas Services

  

1,625,123

   

   

   

1,625,123

  

Packaging & Containers

  

51,264,191

   

   

   

51,264,191

  

Pharmaceuticals

  

26,908,129

   

   

   

26,908,129

  

Pipelines

  

31,604,449

   

   

   

31,604,449

  

Real Estate

  

17,991,724

   

   

   

17,991,724

  

Real Estate Investment Trusts

  

25,065,376

   

   

   

25,065,376

  

Semiconductors

  

46,295,754

   

   

   

46,295,754

  

Software

  

191,931,060

   

   

30,798,444

   

222,729,504

  

Telecommunications

  

40,496,082

   

   

   

40,496,082

  

Rights

  

   

   

1,125,511

   

1,125,511

  

Corporate Bonds**

  

   

32,948,047

   

   

32,948,047

  

Mutual Funds

  

15,375,997

   

   

   

15,375,997

  

Purchased Options

  

4,874,961

   

   

   

4,874,961

  

Short-Term Investments

  

267,728,244

   

   

   

267,728,244

  

TOTAL

 

$

1,667,513,752

  

$

32,948,047

  

$

34,665,572

  

$

1,735,127,371

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
17



The Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2019

Other Financial Instruments***

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 
Forward Foreign Currency
Exchange Contracts
 

$

  

$

6,201,218

  

$

  

$

6,201,218

  

Liabilities

 

Common Stocks**

  

(507,329,410

)

  

   

   

(507,329,410

)

 

Limited Partnerships

  

(15,310,857

)

  

   

   

(15,310,857

)

 

Exchange-Traded Funds

  

(11,668,044

)

  

   

   

(11,668,044

)

 

Rights

  

   

(194,371

)

  

   

(194,371

)

 

Written Options

  

(186,600

)

  

   

   

(186,600

)

 
Forward Foreign Currency
Exchange Contracts
  

   

(1,090,635

)

  

   

(1,090,635

)

 

TOTAL

 

$

(534,494,911

)

 

$

4,916,212

  

$

  

$

(529,578,699

)

 

*  Refer to footnote 2 where leveling hierarchy is defined.

**  Refer to Portfolio of Investments for sector information.

***  Other financial instruments are instruments such as written options, securities sold short, equity swaps and forward foreign currency exchange contracts.

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund's assets and liabilities during the period ended May 31, 2019:

Investments
in Securities
 Balance as of
May 31, 2018
 Realized
Gain
(Loss)
 Change in
Unrealized
Appreciation
(Depreciation)
 

Purchases

 Sales
Proceeds
 Transfers
into
Level 3
 Transfers
out of
Level 3
 Balance as of
May 31, 2019
 Net change in
Unrealized
Appreciation
(Depreciation)
included in the
Statement of
Operations
attributable to
Level 3
investments
held at
May 31, 2019
 
Common
Stocks
 

$

98,838,726

  

$

7,727,966

  

$

164,672

  

$

54,403,438

  

$

(127,594,741

)

 

$

  

$

  

$

33,540,061

  

$

(821,656

)

 

Rights

  

1,020,012

   

   

217,220

   

497,049

   

(608,770

)

  

   

   

1,125,511

   

217,220

  

Total

 

$

99,858,738

  

$

7,727,966

  

$

381,892

  

$

54,900,487

  

$

(128,203,511

)

 

$

  

$

  

$

34,665,572

  

$

(604,436

)

 

The following table summarizes the quantitative inputs used for investments categorized as Level 3 of the fair value hierarchy as of May 31, 2019:

Investments in
Securities
 Fair Value at
May 31, 2019
 Valuation
Technique
 Unobservable
Input
 Range of
Values
 Weighted
Average
 

Common Stocks

 

$

33,540,061

 

Deal Value

 

Final

 $2.15-$36.50
determination
on Dissent
 $33.77 
Rights
 
 
 

$

1,125,511
 
 
 Discounted,
probability
adjusted value
 Discount Rate,
Probability
 
 0-10%, 0%-90%
 
 
 $   0.53
 
 
 

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
18



The Arbitrage Event-Driven Fund  Manager Commentary

May 31, 2019 (Unaudited)

Arbitrage Event-Driven Fund | Tickers: AEDNX, AEDFX, AEFCX, AGEAX

The Fund's Goal and Main Investments

The Fund seeks to provide capital growth by investing in credit and equity securities involved in specific corporate events, with a focus on low volatility and low correlation relative to the broader capital markets.

Investment Strategy

The Fund's investment process follows a disciplined, fundamental approach that values risk mitigation while identifying compelling risk/reward opportunities available to us as we screen catalyst-driven corporate events, such as mergers and acquisitions, restructurings, refinancings, recapitalizations, spin-offs, litigation, regulatory changes, and bankruptcy. We analyze these events through three core approaches: merger arbitrage, equity special situations, and credit opportunities. We seek to generate investment returns that have low volatility and low correlation compared to the broader capital markets. We do not manage against any particular benchmark and believe that capital preservation in difficult markets is as important as generating positive returns within our low correlated, low volatility event-driven investment strategy. This process and approach have been an integral part of the culture at Water Island Capital since the firm's inception.

Fiscal Year Highlights

Arbitrage Event-Driven (AEDNX) returned 1.77% for the fiscal year ending May 31, 2019. The merger arbitrage and credit opportunities sub-strategy sleeves of the Fund contributed to returns, while the equity special situations sleeve was a detractor for the period. Returns were driven primarily by the Americas region, while the European region detracted slightly from performance. The Fund's top-performing sectors were communication services and consumer discretionary. Conversely, the consumer staples and information technology sectors detracted from returns during the period.

The Fund's top performing deal of the period was a competitive bidding situation for Anadarko Petroleum. In April 2019, Chevron – a U.S.-based integrated oil and gas company – publicly announced it had agreed to acquire Anadarko, a U.S.-based upstream energy company, for $32.5 billion in cash and stock. Prior to the announcement of the deal, Anadarko had also been conducting negotiations with another bidder – Occidental Petroleum – though the company deemed Chevron's bid to be the superior offer. Two weeks after the deal with Chevron was announced, Occidental publicly announced an unsolicited revised offer that valued Anadarko at $38 billion in cash and stock, topping Chevron's bid. Anadarko subsequently agreed to return to the negotiating table. Anadarko ultimately declared Occidental to have the superior offer, at which point Chevron abandoned its pursuit of the company. Occidental's acquisition is currently pending, and we anticipate a successful conclusion before the end of 2019.

The Fund's second-best performing position was the bidding war for Sky – a U.K. pay-television service operator – between Twenty-First Century Fox and Comcast. In December 2016, Twenty-First Century Fox – a U.S. television and film company – entered into a definitive agreement to acquire the 61% of Sky it didn't already own for $23 billion. During Q1 2018, U.S. telecommunications conglomerate Comcast entered with a topping bid that valued Sky at $42 billion. In addition (to make matters more complicated), Fox itself became the subject of a bidding war between Disney and Comcast. While Comcast ultimately abandoned its pursuit of Fox, it remained focused on Sky. In September, the failure to resolve the competing bids forced a rather uncommon mandatory

Annual Report | May 31, 2019
19



The Arbitrage Event-Driven Fund  Manager Commentary (continued)

May 31, 2019 (Unaudited)

auction process under U.K. Takeover Code. Comcast emerged victorious, with a winning bid that was 60% greater than Fox's original offer in December 2016, leading to a profit for the Fund.

Conversely, the largest detractor for the period was Qualcomm's attempted acquisition of NXP Semiconductor. In October 2016, Qualcomm – a U.S. telecommunications equipment provider – entered into a definitive agreement to acquire NXP Semiconductors – a Dutch provider of mixed-signal semiconductor solutions – for $53 billion. As of Q1 2018, the deal had received regulatory approvals from all required jurisdictions with the exception of one: China. Approval from the Chinese authorities appeared imminent when, in Q2 2018, the transaction was caught in the crossfire of the ongoing trade dispute between the U.S. and China, with China initially refusing to approve any transactions involving U.S. companies. Investors subsequently fled for the exits, leading to a sharp decline in NXP's share price and driving the deal spread wider. The deal was ultimately withdrawn when, after Chinese regulators had yet to approve the deal, the parties declined to extend the merger deadline, leading to a loss for the Fund.

The Fund's second-largest detractor for the period was our special situations investment in CorePoint Lodging, a real-estate investment trust spun-off from La Quinta that now owns the hotel assets of its former parent. In May 2018, La Quinta announced its first earnings report, which disappointed investors with soft margin guidance and a lowered expectation of cash balances due to a change in expected tax reimbursement proceeds from its former parent (now owned by Wyndham Hotels & Resorts). We believe the business is fundamentally undervalued but recognize a turnaround will take time as management looks to restore confidence in the business and outlook. As a result of the long duration turnaround aspects to this investment, we have liquidated the position and allocated the capital to shorter duration opportunities.

Glossary

Recapitalization: A type of corporate reorganization involving substantial change in a company's capital structure, typically when a large portion of equity is replaced with debt or vice versa.

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20



The Arbitrage Event-Driven Fund  Portfolio Information

May 31, 2019 (Unaudited)

Performance (annualized returns as of May 31, 2019)

  One
Year
 Five
Year
 Since
Inception*
 

Arbitrage Event-Driven Fund, Class R

  

1.60%

   

-0.36

%

  

1.36

%

 

Arbitrage Event-Driven Fund, Class I

  

1.77

%

  

-0.13

%

  

1.60

%

 

Arbitrage Event-Driven Fund, Class C**

  

0.80

%

  

-1.11

%

  

0.23

%

 

Arbitrage Event-Driven Fund, Class A***

  

1.56

%

  

-0.38

%

  

0.63

%

 

Bloomberg Barclays U.S. Aggregate Bond Index

  

6.40

%

  

2.70

%

  

2.98

%

 

ICE BofA Merrill Lynch U.S. 3-Month Treasury Bill Index

  

2.26

%

  

0.83

%

  

0.52

%

 

Current performance may be higher or lower than performance quoted above. Any performance data quoted represents past performance, and the investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. Returns shown above include the reinvestment of all dividends and capital gains. Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from the amount reported in the Financial Highlights. Contractual fee waivers are currently in effect. Without such fee waivers, performance numbers would be reduced. You can obtain performance data current to the most recent month end by calling 1-800-295-4485 or going to www.arbitragefunds.com.

* Class R and Class I inception: 10/1/10; Class C inception: 6/1/12; Class A inception: 6/1/13. Since Inception Returns for securities indices are for the inception date of Class R and Class I shares.

** Class C shares are subject to a 1.00% contingent deferred sales charge on all purchases redeemed in 12 months of purchase.

*** Class A shares are subject to a maximum front-end sales load of 3.25% of the offering price and are also subject to a 1.00% contingent deferred sales load on purchases at or above $500,000 made prior to June 30, 2018 and on purchases at or above $250,000 made after June 30, 2018 (determined on a first-in, first-out basis), purchased without a front-end sales charge and redeemed within 18 months of purchase.

The Total Annual Fund Operating Expenses for Class R, Class I, Class C and Class A are 2.63%, 2.38%, 3.38% and 2.63%, respectively. The Adviser has agreed to waive fees (not including the effects of interest, dividends on short positions, brokerage commissions, acquired fund fees and expenses, taxes, or other extraordinary expenses) in excess of 1.69%, 1.44%, 2.44% and 1.69% for Class R, Class I, Class C and Class A, respectively, until at least September 30, 2019. These expense ratios are as stated in the current prospectus and may differ from the expense ratios disclosed in the financial highlights in this report.

The Bloomberg Barclays U.S. Aggregate Bond Index is a market value-weighted index of investment-grade fixed-rated debt issues, including government, corporate, asset-backed and mortgage-backed securities with a maturity of one year or more.

The ICE Bank of America (BofA) Merrill Lynch U.S. 3-Month Treasury Bill Index tracks the performance of the U.S. dollar denominated U.S. Treasury Bills publicly issued in the U.S. domestic market with a remaining term to final maturity of less than 3 months.

An investor may not invest directly in an index.

Annual Report | May 31, 2019
21



The Arbitrage Event-Driven Fund  Portfolio Information (continued)

May 31, 2019 (Unaudited)

Growth of $10,000 Investment

The chart represents historical performance of a hypothetical investment of $10,000 in the Class R shares of the Fund since inception. Past performance does not guarantee future results. This chart does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

  

Sector Weighting

The following chart shows the sector weightings of The Arbitrage Event-Driven Fund's investments (including short sales and excluding derivatives) as of the report date.

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22



The Arbitrage Event-Driven Fund  Portfolio of Investments

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - 75.17%

 

Aerospace & Defense - 5.59%

 

L3 Technologies, Inc.

  

28,781

  

$

6,966,729

  

Auto Parts & Equipment - 1.47%

 

WABCO Holdings, Inc.(a)(b)

  

13,987

   

1,831,038

  

Biotechnology - 8.33%

 

Celgene Corp.(a)(b)

  

89,750

   

8,417,653

  

Pacific Biosciences of California, Inc.(a)(b)

  

294,736

   

1,974,731

  
   

10,392,384

  

Chemicals - 2.80%

 

Air Products & Chemicals, Inc.(b)

  

2,224

   

452,784

  

Celanese Corp., Class A

  

353

   

33,510

  

Eastman Chemical Co.

  

456

   

29,604

  

Huntsman Corp.

  

1,611

   

27,983

  

LyondellBasell Industries N.V., Class A

  

819

   

60,811

  

Versum Materials, Inc.(b)(c)

  

56,244

   

2,888,129

  
   

3,492,821

  

Commercial Services - 2.68%

 

Herc Holdings, Inc.(a)(c)

  

16,322

   

555,438

  

LiveRamp Holdings, Inc.(a)(c)

  

12,189

   

626,271

  

Rent-A-Center, Inc.(a)(c)

  

34,950

   

833,907

  

Total System Services, Inc.

  

5,195

   

641,738

  

Worldpay, Inc., Class A(a)

  

5,582

   

678,994

  
   

3,336,348

  

Computers & Computer Services - 3.27%

 

Cray, Inc.(a)

  

41,114

   

1,439,401

  

Electronics For Imaging, Inc.(a)(b)

  

49,311

   

1,807,248

  

Perspecta, Inc.(b)(c)

  

38,562

   

837,181

  
   

4,083,830

  

Construction Materials - 2.46%

 

Johnson Controls International Plc(c)

  

79,740

   

3,071,585

  

Electronics - 0.45%

 

Control4 Corp.(a)(b)

  

23,966

   

567,036

  

Entertainment - 1.69%

 

International Speedway Corp., Class A

  

28,365

   

1,269,617

  

Parques Reunidos Servicios Centrales SAU(d)

  

54,309

   

843,331

  
   

2,112,948

  

Food - 0.37%

 

Smart & Final Stores, Inc.(a)

  

70,491

   

458,896

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
23



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - 75.17% (Continued)

 

Gas - 2.50%

 

AmeriGas Partners LP(b)

  

92,016

  

$

3,122,103

  

Healthcare - Services - 0.63%

 

WellCare Health Plans, Inc.(a)(c)

  

2,835

   

782,999

  

Household Products - 0.53%

 

Oriflame Holding AG

  

28,143

   

660,677

  

Internet - 0.29%

 

Alibaba Group Holding Ltd., Sponsored ADR(a)

  

2,408

   

359,418

  

Lodging - 0.57%

 

Wyndham Hotels & Resorts, Inc.(b)(c)

  

13,217

   

704,995

  

Media - 3.36%

 

Fox Corp., Class A(a)(c)

  

21,437

   

755,226

  

Tribune Media Co., Class A(b)

  

70,161

   

3,248,454

  

Kabel Deutschland Holding AG

  

1,578

   

188,626

  
   

4,192,306

  

Metal Fabricate & Hardware - 2.87%

 

Global Brass & Copper Holdings, Inc.

  

81,937

   

3,574,911

  

Miscellaneous Manufacturing - 0.16%

 

Trinity Industries, Inc.(b)

  

10,475

   

201,958

  

Oil & Gas - 7.01%

 

Anadarko Petroleum Corp.(b)(c)

  

124,198

   

8,739,813

  

Packaging & Containers - 0.99%

 
RPC Group Plc  

123,713

   

1,234,341

  

Pharmaceuticals - 0.15%

 

Paratek Pharmaceuticals, Inc.(a)(b)(e)

  

52,781

   

191,595

  

Pipelines - 1.87%

 

Buckeye Partners LP(b)

  

57,168

   

2,330,168

  

Real Estate - 0.74%

 

HFF, Inc., Class A(b)

  

21,485

   

927,722

  

Real Estate Investment Trusts - 2.88%

 

Chesapeake Lodging Trust(b)

  

22,899

   

658,804

  

Tier REIT, Inc.

  

109,028

   

2,935,034

  
   

3,593,838

  

Retail - 0.54%

 

Lowe's Cos., Inc.

  

7,216

   

673,109

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
24



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - 75.17% (Continued)

 

Semiconductors - 3.55%

 

Mellanox Technologies Ltd.(a)(b)(c)

  

40,287

  

$

4,422,707

  

Software - 14.34%

 

Amber Road, Inc.(a)

  

53,301

   

691,847

  

Avaya Holdings Corp.(a)(c)

  

34,678

   

436,249

  

First Data Corp., Class A(a)(b)

  

276,425

   

7,026,723

  

Fiserv, Inc.(a)(b)

  

1,624

   

139,437

  

MINDBODY, Inc., Class A(a)(f)

  

48,463

   

1,768,900

  

Red Hat, Inc.(a)(b)(c)

  

42,464

   

7,826,115

  
   

17,889,271

  

Telecommunications - 2.83%

 

DNA Oyj

  

19,854

   

464,447

  

Inmarsat Plc

  

163,655

   

1,130,092

  

LogMeIn, Inc.(b)(c)

  

17,775

   

1,276,778

  

Quantenna Communications, Inc.(a)

  

27,291

   

662,080

  
   

3,533,397

  

Transportation - 0.25%

 

Norfolk Southern Corp.(b)

  

1,600

   

312,224

  
TOTAL COMMON STOCKS
(Cost $93,749,977)
  

93,761,167

  

RIGHTS - 0.00%

 

Cubist Pharmaceuticals, Inc. CPR, Expires 07/01/2019(a)(f)

  

34,500

   

  
TOTAL RIGHTS
(Cost $0)
  

  

 

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 22.06%

 

Chemicals - 3.26%

 
Momentive Performance
Materials, Inc.
 

10/24/2021

  

3.880

%

 

$

3,606,000

  

$

4,063,962

  

Commercial Services - 3.88%

 
Nielsen Co. Luxembourg SARL
(The)(d)
 

10/01/2021

  

5.500

%

  

2,326,000

   

2,320,185

  

Rent-A-Center, Inc.

 

11/15/2020

  

6.625

%

  

2,529,000

   

2,516,355

  
         

4,836,540

  

Diversified Financial Services - 0.25%

 

Vantiv LLC / Vantiv Issuer Corp.(b)(d)

 

11/15/2025

  

4.375

%

  

297,000

   

306,338

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
25



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 22.06% (Continued)

 

Household Products - 0.74%

 
Avon International Operations,
Inc.(d)
 

08/15/2022

  

7.875

%

 

$

892,000

  

$

926,565

  

Internet - 1.75%

 
Zayo Group LLC / Zayo Capital,
Inc.(b)
 

04/01/2023

  

6.000

%

  

1,339,000

   

1,373,841

  
Zayo Group LLC / Zayo Capital,
Inc.(d)
 

01/15/2027

  

5.750

%

  

791,000

   

812,752

  
         

2,186,593

  

Lodging - 1.91%

 
Jack Ohio Finance LLC/Jack Ohio
Finance 1 Corp.(b)(d)
 

11/15/2021

  

6.750

%

  

2,329,000

   

2,383,615

  

Machinery - Construction & Mining - 0.69%

 

Vertiv Group Corp.(d)

 

10/15/2024

  

9.250

%

  

872,000

   

858,920

  

Media - 2.56%

 

Tribune Media Co.(b)

 

07/15/2022

  

5.875

%

  

3,163,000

   

3,197,635

  

Oil & Gas - 2.16%

 

QEP Resources, Inc.(b)

 

03/01/2021

  

6.875

%

  

2,650,000

   

2,689,750

  

Packaging & Containers - 2.49%

 

Multi-Color Corp.(d)

 
  

12/01/2022

  

6.125

%

  

2,175,000

   

2,234,812

  
  

11/01/2025

  

4.875

%

  

841,000

   

874,640

  
         

3,109,452

  

Retail - 1.10%

 

GameStop Corp.(d)

 

03/15/2021

  

6.750

%

  

1,365,000

   

1,368,413

  

Software - 1.27%

 

First Data Corp.(b)(d)

 
  

01/15/2024

  

5.000

%

  

695,000

   

709,752

  
  

01/15/2024

  

5.750

%

  

857,000

   

876,925

  
         

1,586,677

  

Telecommunications - 0.00%

 

Avaya, Inc.(d)(f)(g)

 

04/01/2019

  

7.000

%

  

6,579,000

   

  

Avaya, Inc.(d)(f)(g)

 

03/01/2021

  

10.500

%

  

1,583,000

   

  
         

  
TOTAL CORPORATE BONDS
(Cost $27,545,162)
  

27,514,460

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
26



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CONVERTIBLE CORPORATE BONDS - 2.18%

 

Aerospace & Defense - 2.18%

 

Arconic, Inc.(b)

 

10/15/2019

  

1.625

%

 

$

2,736,000

  

$

2,722,320

  
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost $2,754,701)
  

2,722,320

  
      

Shares

 

Value

 

WARRANTS - 0.01%

 

Telecommunications - 0.01%

 
Avaya Holdings Corp., Exercise
Price $25.55, Expires 12/15/2022(a)(g)
      

5,548

  

$

8,322

  
TOTAL WARRANTS
(Cost $0)
  

8,322

  

 

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(a) - 0.61%

 

Call Options Purchased - 0.12%

 

BB&T Corp.

 
  

06/2019

 

$

50.00

  

$

336,600

   

72

  

$

900

  
  

09/2019

  

57.50

   

1,444,575

   

309

   

3,708

  

Centene Corp.

 
  

06/2019

  

57.50

   

144,375

   

25

   

7,500

  
  

06/2019

  

60.00

   

629,475

   

109

   

22,072

  
Chemical Financial
Corp.
 

06/2019

  

55.00

   

787,488

   

208

   

520

  

DXC Technology Co.

 

09/2019

  

55.00

   

637,036

   

134

   

14,070

  
Fidelity National
Information
Services, Inc.
 

07/2019

  

135.00

   

469,170

   

39

   

1,853

  

Multi-Color Corp.

 

07/2019

  

50.00

   

59,688

   

12

   

90

  
Occidental Petroleum
Corp.
 

08/2019

  

55.00

   

1,811,628

   

364

   

40,950

  

QEP Resources, Inc.

 

07/2019

  

9.00

   

111,942

   

162

   

1,215

  

Rent-A-Center, Inc.

 

06/2019

  

20.00

   

291,092

   

122

   

47,580

  
WellCare Health
Plans, Inc.
 
  

06/2019

  

290.00

   

331,428

   

12

   

4,440

  
  

06/2019

  

300.00

   

524,761

   

19

   

3,325

  
  

06/2019

  

310.00

   

828,570

   

30

   

1,725

  
TOTAL CALL OPTIONS PURCHASED
(Cost $214,617)
  

149,948

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
27



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(a) - 0.61% (Continued)

 

Put Options Purchased - 0.49%

 
Anadarko Petroleum
Corp.
 

08/2019

 

$

65.00

  

$

8,549,955

   

1,215

  

$

182,250

  

Avaya Holdings Corp.

 
  

07/2019

  

10.00

   

45,288

   

36

   

1,260

  
  

08/2019

  

10.00

   

178,636

   

142

   

8,094

  
  

08/2019

  

12.50

   

347,208

   

276

   

40,710

  

Fox Corp.

 

07/2019

  

37.00

   

753,922

   

214

   

50,825

  

Herc Holdings, Inc.

 
  

06/2019

  

30.00

   

142,926

   

42

   

1,785

  
  

06/2019

  

35.00

   

108,896

   

32

   

7,040

  
Johnson Controls
International Plc
 

06/2019

  

45.00

   

462,240

   

120

   

78,720

  
LiveRamp
Holdings, Inc.
 

08/2019

  

50.00

   

575,456

   

112

   

36,400

  

LogMeIn, Inc.

 

06/2019

  

75.00

   

639,287

   

89

   

35,155

  

Luxoft Holding, Inc.

 

07/2019

  

45.00

   

2,711,547

   

471

   

15,307

  
Mellanox
Technologies, Ltd.
 
  

12/2019

  

90.00

   

1,394,206

   

127

   

34,290

  
  

12/2019

  

105.00

   

1,152,690

   

105

   

50,925

  

Perspecta, Inc.

 

06/2019

  

20.00

   

403,806

   

186

   

6,975

  

Red Hat, Inc.

 
  

09/2019

  

165.00

   

368,600

   

20

   

2,400

  
  

01/2020

  

170.00

   

165,870

   

9

   

2,115

  

Rent-A-Center Inc.

 

06/2019

  

23.00

   

858,960

   

360

   

26,100

  
Versum Materials,
Inc.
 

06/2019

  

40.00

   

323,505

   

63

   

158

  
WellCare Health
Plans, Inc.
 

09/2019

  

250.00

   

1,104,760

   

40

   

28,200

  
Wyndham Hotels &
Resorts, Inc.
 

06/2019

  

50.00

   

352,044

   

66

   

2,310

  
Zayo Group
Holdings, Inc.
 

06/2019

  

25.00

   

284,490

   

87

   

218

  
TOTAL PUT OPTIONS PURCHASED
(Cost $565,920)
  

611,237

  
TOTAL PURCHASED OPTIONS
(Cost $780,537)
  

761,185

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
28



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

  

Yield

 

Shares

 

Value

 

SHORT-TERM INVESTMENTS - 4.44%

 

Money Market Funds

 
Morgan Stanley Institutional Liquidity
Fund - Government Portfolio,
Institutional Class
  

2.326

%(h)

  

2,751,827

  

$

2,751,827

  
State Street Institutional U.S. Government
Money Market Fund, Premier Class
  

2.338

%(h)

  

2,751,827

   

2,751,827

  
State Street Institutional U.S. Government
Money Market Fund, Premier Class(i)
  

2.338

%(h)

  

29,924

   

29,924

  
       

5,533,578

  
TOTAL SHORT-TERM INVESTMENTS
(Cost $5,533,578)
  

5,533,578

  
Total Investments - 104.47%
(Cost $130,363,955)
  

130,301,032

  

Liabilities in Excess of Other Assets - (4.47)%(j)

  

(5,574,590

)

 

NET ASSETS - 100.00%

 

$

124,726,442

  

Portfolio Footnotes

(a)  Non-income-producing security.

(b)  Security, or a portion of security, is being held as collateral for short sales, swap contracts, written option contracts or forward foreign currency exchange contracts. At May 31, 2019, the aggregate fair market value of those securities was $61,950,455, representing 49.67% of net assets.

(c)  Underlying security for a written/purchased call/put option.

(d)  Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of May 31, 2019, these securities had a total value of $14,516,248 or 11.64% of net assets.

(e)  All or a portion of this security is out on loan.

(f)  Security fair valued using significant unobservable inputs and classified as a Level 3 security. As of May 31, 2019, the total fair market value of these securities was $1,768,900, representing 1.42% of net assets.

(g)  Security in default on interest payments.

(h)  Rate shown is the 7-day effective yield as of May 31, 2019.

(i)  Represents an investment of securities lending cash collateral.

(j)  Includes cash held as collateral for short sales and written option contracts.

See Notes to Financial Statements.

Annual Report | May 31, 2019
29



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (26.50%)

 

Aerospace & Defense - (5.61%)

 

Harris Corp.

  

(37,395

)

 

$

(6,999,970

)

 

Chemicals - (0.78%)

 

Dow, Inc.

  

(3,426

)

  

(160,200

)

 

Linde Plc

  

(4,524

)

  

(816,808

)

 
   

(977,008

)

 

Commercial Services - (1.17%)

 

Booz Allen Hamilton Holding Corp., Class A

  

(2,458

)

  

(155,272

)

 

Global Payments, Inc.

  

(4,208

)

  

(648,200

)

 

Nielsen Holdings Plc

  

(5,502

)

  

(125,061

)

 

Rent-A-Center, Inc.

  

(9,896

)

  

(236,119

)

 

United Rentals, Inc.

  

(2,624

)

  

(288,902

)

 
   

(1,453,554

)

 

Computers & Computer Services - (1.11%)

 

CACI International, Inc., Class A

  

(764

)

  

(155,489

)

 

Leidos Holdings, Inc.

  

(2,088

)

  

(157,289

)

 

Luxoft Holding, Inc., Class A

  

(18,559

)

  

(1,068,442

)

 
   

(1,381,220

)

 

Gas - (1.90%)

 

UGI Corp.

  

(45,893

)

  

(2,368,538

)

 

Healthcare - Services - (0.44%)

 

Centene Corp.

  

(9,583

)

  

(553,418

)

 

Lodging - (0.31%)

 

Choice Hotels International, Inc.

  

(1,527

)

  

(125,657

)

 

Hilton Worldwide Holdings, Inc.

  

(1,586

)

  

(141,852

)

 

Marriott International, Inc., Class A

  

(925

)

  

(115,477

)

 
   

(382,986

)

 

Oil & Gas - (1.54%)

 

Occidental Petroleum Corp.

  

(36,440

)

  

(1,813,619

)

 

QEP Resources, Inc.

  

(15,706

)

  

(108,528

)

 
   

(1,922,147

)

 

Packaging & Containers - (0.12%)

 

Multi-Color Corp.

  

(2,966

)

  

(147,529

)

 

Pharmaceuticals - (3.27%)

 

Bristol-Myers Squibb Co.

  

(89,750

)

  

(4,071,957

)

 

Real Estate - (0.32%)

 

Jones Lang LaSalle, Inc.

  

(3,239

)

  

(403,094

)

 

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
30



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (26.50%) (Continued)

 

Real Estate Investment Trusts - (2.67%)

 

Cousins Properties, Inc.

  

(324,428

)

 

$

(2,936,074

)

 

Park Hotels & Resorts, Inc.

  

(14,373

)

  

(396,982

)

 
   

(3,333,056

)

 

Retail - (0.32%)

 

GameStop Corp., Class A

  

(8,600

)

  

(65,188

)

 

Home Depot, Inc. (The)

  

(1,786

)

  

(339,072

)

 
   

(404,260

)

 

Software - (6.38%)

 

Fidelity National Information Services, Inc.

  

(5,184

)

  

(623,635

)

 

First Data Corp., Class A

  

(5,357

)

  

(136,175

)

 

Fiserv, Inc.

  

(83,779

)

  

(7,193,265

)

 
   

(7,953,075

)

 

Telecommunications - (0.15%)

 

Zayo Group Holdings, Inc.

  

(5,720

)

  

(187,044

)

 

Transportation - (0.29%)

 

CSX Corp.

  

(4,773

)

  

(355,445

)

 

Trucking & Leasing - (0.12%)

 

GATX Corp.

  

(1,963

)

  

(137,057

)

 

Greenbrier Cos., Inc. (The)

  

(665

)

  

(18,094

)

 
   

(155,151

)

 
TOTAL COMMON STOCKS
(Proceeds $33,348,924)
  

(33,049,452

)

 

EXCHANGE-TRADED FUNDS - (1.70%)

 

Equity Funds - (1.70%)

 

Invesco QQQ Trust Series 1

  

(8,318

)

  

(1,446,916

)

 

Technology Select Sector SPDR® Fund

  

(9,356

)

  

(672,603

)

 
   

(2,119,519

)

 
TOTAL EXCHANGE-TRADED FUNDS
(Proceeds $2,084,485)
  

(2,119,519

)

 

MUTUAL FUNDS - (0.33%)

 

Altaba, Inc.

  

(6,862

)

  

(406,231

)

 
TOTAL MUTUAL FUNDS
(Proceeds $510,696)
  

(406,231

)

 

See Notes to Financial Statements.

Annual Report | May 31, 2019
31



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

RIGHTS - (0.02%)

 

Biotechnology - (0.02%)

 

Celgene Corp. CVR

  

(11,836

)

 

$

(28,407

)

 
TOTAL RIGHTS
(Proceeds $25,092)
  

(28,407

)

 
TOTAL SECURITIES SOLD SHORT
(Proceeds $35,969,196)
 

$

(35,603,608

)

 

 

WRITTEN OPTIONS

 Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

Written Call Options

 

Avaya Holdings Corp.

 

08/2019

 

$

17.50

  

$

(178,636

)

  

(142

)

 

$

(5,680

)

 

DXC Technology Co.

 

09/2019

  

65.00

   

(637,036

)

  

(134

)

  

(2,680

)

 
Johnson Controls
International Plc
 

06/2019

  

45.00

   

(462,240

)

  

(120

)

  

(720

)

 
TOTAL WRITTEN CALL OPTIONS
(Premiums received $12,879)
  

(9,080

)

 

Written Put Options

 

Rent-A-Center, Inc.

 
  

06/2019

  

15.00

   

(26,246

)

  

(11

)

  

(27

)

 
  

06/2019

  

16.00

   

(26,246

)

  

(11

)

  

(28

)

 
  

06/2019

  

17.00

   

(56,485

)

  

(11

)

  

(55

)

 
WellCare Health
Plans, Inc.
 

09/2019

  

220.00

   

(1,104,760

)

  

(40

)

  

(10,800

)

 
TOTAL WRITTEN PUT OPTIONS
(Premiums received $12,067)
  

(10,910

)

 
TOTAL WRITTEN OPTIONS
(Premiums received $24,946)
 

$

(19,990

)

 

EQUITY SWAP CONTRACTS

Swap
Counterparty/
Payment
Frequency
 Reference
Obligation
 Rate
Paid/
Received
by the
Fund
 Termination
Date
 Upfront
Payments
Paid
 Upfront
Payments
Received
 Market
Value
 Notional
Amount
 Unrealized
Appreciation
 
Morgan
Stanley &
Co./
Monthly
 
 
 
 Air Liquide
SA
 
 
 
 
 
 Paid
1 Month-
EUR
LIBOR
plus
50 bps
(0.089%)
 





10/14/2019
 

$

  

$

  

$

  

$

(319,336

)

 

$

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
32



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

OUTSTANDING FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Appreciation
 

USD

2,694,674

  

CAD

3,587,900

  

Goldman Sachs & Co.

 

06/14/2019

 

$

39,394

  

EUR

249,400

  

USD

278,680

  

Goldman Sachs & Co.

 

06/14/2019

  

168

  

USD

8,860,897

  

EUR

7,798,600

  

Goldman Sachs & Co.

 

06/14/2019

  

141,452

  

USD

1,856,125

  

GBP

1,397,400

  

Goldman Sachs & Co.

 

06/14/2019

  

88,569

  

USD

652,836

  

SEK

6,029,900

  

Goldman Sachs & Co.

 

06/14/2019

  

16,719

  

 

$

286,302

  
Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Depreciation
 

CAD

3,587,900

  

USD

2,681,491

  

Goldman Sachs & Co.

 

06/14/2019

 

$

(26,211

)

 

EUR

6,204,500

  

USD

7,001,026

  

Goldman Sachs & Co.

 

06/14/2019

  

(63,909

)

 

GBP

416,400

  

USD

546,260

  

Goldman Sachs & Co.

 

06/14/2019

  

(19,561

)

 

SEK

6,029,900

  

USD

637,401

  

Goldman Sachs & Co.

 

06/14/2019

  

(1,284

)

 

USD

634,523

  

SEK

6,055,600

  

Goldman Sachs & Co.

 

06/14/2019

  

(4,305

)

 

 

$

(115,270

)

 

The following is a summary of investments classified by country exposure:

Country

 

% of Net Assets(a)

 

Israel

  

3.55

%

 

United Kingdom

  

1.90

%

 

Luxembourg

  

1.86

%

 

Spain

  

0.67

%

 

Switzerland

  

0.53

%

 

Finland

  

0.37

%

 

China

  

0.29

%

 

Germany

  

0.15

%

 

United States

  

95.15

%

 

Liabilities in Excess of Other Assets

  

(4.47

)%

 
   

100.00

%

 

(a)  These percentages represent long positions only and are not net of short positions.

Abbreviations:

ADR - American Depositary Receipt

AG - Aktiengesellschaft is a German term that refers to a corporation that is limited by shares, i.e., owned by shareholders.

bps - Basis Points. 100 Basis Points is equal to 1 percentage point.

CAD - Canadian dollar

CPR - Conditional Prepayment Rate

CVR - Contingent Value Rights

EUR - Euro

EUR LIBOR - London Interbank Offered Rate denominated in Euro

See Notes to Financial Statements.

Annual Report | May 31, 2019
33



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

GBP - British pound

LLC - Limited Liability Company

LP - Limited Partnership

Ltd. - Limited

N.V. - Naamloze Vennootschap is the Dutch term for a public limited liability corporation.

Oyj - Osakeyhtio is the Finnish equivalent of a public limited company.

Plc - Public Limited Company

REIT - Real Estate Investment Trust

SA - Generally designates corporations in various countries, mostly those employing civil law. This translates literally in all languages mentioned as anonymous company.

SARL - Société Anonyme à Responsabilité Limitée is the French term for limited liability company.

SAU - Sociedad Anónima Unipersonal is a Spanish term for a single shareholder company.

SEK - Swedish krona

SPDR - Standard & Poor's Depositary Receipt

USD - United States Dollar

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
34



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

The following table summarizes The Arbitrage Event-Driven Fund's investments and derivative financial instruments categorized in the disclosure hierarchy as of May 31, 2019:

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

Common Stocks

 

Aerospace & Defense

 

$

6,966,729

  

$

  

$

  

$

6,966,729

  

Auto Parts & Equipment

  

1,831,038

   

   

   

1,831,038

  

Biotechnology

  

10,392,384

   

   

   

10,392,384

  

Chemicals

  

3,492,821

   

   

   

3,492,821

  

Commercial Services

  

3,336,348

   

   

   

3,336,348

  
Computers & Computer
Services
  

4,083,830

   

   

   

4,083,830

  

Construction Materials

  

3,071,585

   

   

   

3,071,585

  

Electronics

  

567,036

   

   

   

567,036

  

Entertainment

  

2,112,948

   

   

   

2,112,948

  

Food

  

458,896

   

   

   

458,896

  

Gas

  

3,122,103

   

   

   

3,122,103

  

Healthcare - Services

  

782,999

   

   

   

782,999

  

Household Products

  

660,677

   

   

   

660,677

  

Internet

  

359,418

   

   

   

359,418

  

Lodging

  

704,995

   

   

   

704,995

  

Media

  

4,192,306

   

   

   

4,192,306

  

Metal Fabricate & Hardware

  

3,574,911

   

   

   

3,574,911

  

Miscellaneous Manufacturing

  

201,958

   

   

   

201,958

  

Oil & Gas

  

8,739,813

   

   

   

8,739,813

  

Packaging & Containers

  

1,234,341

   

   

   

1,234,341

  

Pharmaceuticals

  

191,595

   

   

   

191,595

  

Pipelines

  

2,330,168

   

   

   

2,330,168

  

Real Estate

  

927,722

   

   

   

927,722

  

Real Estate Investment Trusts

  

3,593,838

   

   

   

3,593,838

  

Retail

  

673,109

   

   

   

673,109

  

Semiconductors

  

4,422,707

   

   

   

4,422,707

  

Software

  

16,120,371

   

   

1,768,900

   

17,889,271

  

Telecommunications

  

3,533,397

   

   

   

3,533,397

  

Transportation

  

312,224

   

   

   

312,224

  

Rights

  

   

   

0

**

  

  

Corporate Bonds

 

Chemicals

  

   

4,063,962

   

   

4,063,962

  

Commercial Services

  

   

4,836,540

   

   

4,836,540

  

Diversified Financial Services

  

   

306,338

   

   

306,338

  

Household Products

  

   

926,565

   

   

926,565

  

Internet

  

   

2,186,593

   

   

2,186,593

  

Lodging

  

   

2,383,615

   

   

2,383,615

  
Machinery - Construction &
Mining
  

   

858,920

   

   

858,920

  

Media

  

   

3,197,635

   

   

3,197,635

  

Oil & Gas

  

   

2,689,750

   

   

2,689,750

  

Packaging & Containers

  

   

3,109,452

   

   

3,109,452

  

Retail

  

   

1,368,413

   

   

1,368,413

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
35



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Software

 

$

  

$

1,586,677

  

$

  

$

1,586,677

  

Telecommunications

  

   

   

0

**

  

  

Convertible Corporate Bonds***

  

   

2,722,320

   

   

2,722,320

  

Warrants

  

   

8,322

   

   

8,322

  

Purchased Options

  

761,185

   

   

   

761,185

  

Short-Term Investments

  

5,533,578

   

   

   

5,533,578

  

TOTAL

 

$

98,287,030

  

$

30,245,102

  

$

1,768,900

  

$

130,301,032

  

Other Financial Instruments****

 

Assets

 
Forward Foreign Currency
Exchange Contracts
 

$

  

$

286,302

  

$

  

$

286,302

  

Equity Swap

  

   

   

   

  

Liabilities

 

Common Stocks***

  

(33,049,452

)

  

   

   

(33,049,452

)

 

Exchange-Traded Funds

  

(2,119,519

)

  

   

   

(2,119,519

)

 

Mutual Funds

  

(406,230

)

  

   

   

(406,230

)

 

Rights

  

   

(28,407

)

  

   

(28,407

)

 

Written Options

  

(19,990

)

  

   

   

(19,990

)

 
Forward Foreign Currency
Exchange Contracts
  

   

(115,270

)

  

   

(115,270

)

 

TOTAL

 

$

(35,595,191

)

 

$

142,625

  

$

  

$

(35,452,566

)

 

*  Refer to footnote 2 of the Notes to Financial Statements where leveling hierarchy is defined.

**  Includes securities valued at $0 using unobservable inputs.

***  Refer to Portfolio of Investments for sector information.

****  Other financial instruments are instruments such as written options, securities sold short, equity swaps and forward foreign currency exchange contracts.

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund's assets and liabilities during the period ended May 31, 2019:

Investments
in Securities
 Balance as of
May 31, 2018
 Realized
Gain
(Loss)
 Change in
Unrealized
Appreciation
(Depreciation)
 

Purchases

 Sales
Proceeds
 Transfers
into
Level 3
 Transfers
out of
Level 3
 Balance as of
May 31, 2019
 Net change in
Unrealized
Appreciation
(Depreciation)
included in the
Statement of
Operations
attributable to
Level 3
investments
held at
May 31, 2019
 
Corporate
Bonds
 

$

0

  

$

  

$

  

$

  

$

  

$

  

$

  

$

0

  

$

  
Common
Stock
  

3,934,158

   

569,308

   

58,487

   

1,852,687

   

(4,645,740

)

  

   

   

1,768,900

   

16,994

  

Rights

  

0

   

   

   

   

   

   

   

0

   

  

Total

 

$

3,934,158

  

$

569,308

  

$

58,487

  

$

1,852,687

  

$

(4,645,740

)

 

$

  

$

  

$

1,768,900

  

$

16,994

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
36



The Arbitrage Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2019

The following table summarizes the quantitative inputs used for investments categorized as Level 3 of the fair value hierarchy as of May 31, 2019:

Investments in
Securities
 Fair Value at
May 31, 2019
 Valuation
Technique
 Unobservable
Input
 Range of
Values
 Weighted
Average
 
Common Stocks

 

$

1,768,900

 Deal Value
 
 
 Final
determination
on Dissent
 $36.50
 
 
 $36.50
 
 
 
Rights

 

$



 Discounted,
probability
adjusted value
 Discount Rate,
Probability
 
 10%, 0%
 
 
 0
 
 
 
Corporate
Bonds
 

$

  

Fair Value

 

n/a

 

0

 

0

 

See Notes to Financial Statements.

Annual Report | May 31, 2019
37



The Water Island Credit Opportunities Fund  Manager Commentary

May 31, 2019 (Unaudited)

Water Island Credit Opportunities Fund (formerly known as Arbitrage Credit

Opportunities) | Tickers: ACFIX, ARCFX, ARCCX, AGCAX

The Fund's Goal and Main Investments

The Fund seeks to provide current income and capital growth by focusing on company-specific catalysts and events in order to generate returns that are more correlated to the outcomes and timelines of those events, rather than on overall market direction or changes in interest rates.

Investment Strategy

The Fund employs a fundamentally driven strategy combined with quantitative security analysis. The investment team screens catalyst-driven investments such as mergers, acquisitions, asset sales, spin-offs, refinancings, recapitalizations, corporate reorganizations, litigation, and regulatory changes. From this universe the team selects investments based on factors such as risk/reward profile, potential downside, and security liquidity. The team generates returns by holding outright long and short positions and by utilizing capital structure arbitrage, merger arbitrage, and convertible arbitrage techniques to exploit security mispricing or inefficiencies. This portfolio offers a pure-play credit implementation of Water Island Capital's broader event-driven style.

Fiscal Year Highlights

Water Island Credit Opportunities (ACFIX) returned 2.70% for the fiscal year ending May 31, 2019. The portfolio's returns were driven primarily from the Americas, though Europe-based catalysts detracted from performance. The Fund's top-performing sectors were materials and consumer discretionary. No sectors detracted from returns over the period, although the Fund's broad market hedges – which are designed to mitigate market risk in the portfolio and potentially lower volatility and drawdowns – did detract from returns.

The top contributor in the Fund during the period was our investment in Momentiv Performance bonds. For the past four years, creditors of Momentiv have been in litigation with the company, seeking payment of certain issues including a below-market interest rate on bonds that was set by a bankruptcy court judge in 2015. We initiated a position during 2018 with the thesis that bondholders would receive a catch-up payment for under-paid interest incurred since emergence from Chapter 11. During Q3 2018, an appeals court determined that the initial interest rates set on the bonds did not conform to the market or to generally acceptable rates upon the company's emergence from bankruptcy, leading to gains in the position.

The Fund's second-best performing investment over the period was our position in Aleris bonds. Aleris is a producer of aluminum parts for various industries. In July 2018, Hindalco Industries of India announced the acquisition of Aleris for $2.6 billion. Although we do not expect U.S. regulators to have national security issues with the acquisition, the European Union may have concerns about market concentration. A unique change-of-control clause gives investors a higher call price if the deal is extended, and we believe that the high coupon debt should make this bond a yield-to-call candidate if the deal is ultimately not approved.

The Fund's largest detractor over the period was our convertible bond investment in Qualcomm's attempted acquisition of NXP Semiconductor. During Q2 2018, NXP's merger with Qualcomm became caught directly in the ongoing trade dispute between the U.S. and China, which led to a delay in the regulatory approvals necessary for the deal to complete. While the politics made it difficult to accurately assess the deal's probability of success, we remained invested in these bonds for several reasons: 1) the convertible bonds had roughly half to one-third less volatility than the underlying equity due to their inherent structure; 2) we were at levels where the

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38



The Water Island Credit Opportunities Fund  Manager Commentary (continued)

May 31, 2019 (Unaudited)

upside/downside of the transaction is better than 2:1; and 3) we were able to use the equity as a hedge against the convertible bond thereby creating optionality for the Fund while simultaneously decreasing our downside. Chinese regulators effectively terminated the transaction when they had yet to approve the deal by the merger deadline and Qualcomm and NXP declined to extend. With no near-term catalyst in sight, we exited the position.

The second-largest detractor for the period was the portfolio's credit market hedge overlay. From time to time, in addition to various issuer-specific hedges, we may choose to implement broader market hedges in the portfolio. The intent of these hedges is to reduce directional exposure and market risk while providing the portfolio with lower volatility and drawdowns. While these hedges served their intended purpose, they nonetheless detracted from returns over the year as credit markets rallied on the whole.

The second-largest catalyst-related detractor (and third-largest detractor on the whole) for the period was our investment in Obrascon Huarte Lain bonds. Obrascon is a global construction and engineering company based in Madrid. During April, the company completed the sale of its concession business (highway tolls and airports) to IFM Investors for €2.2 billion. At that time the company had gross recourse debt of €1.5 billion and indicated plans to repay this debt to realign the capital structure and to reduce financing costs. Bondholders did not tender into a 101 mandatory asset sale offer as bonds were trading higher and closer to their call prices. We believed the 2023 bonds were an attractive short-term refinancing opportunity. After initiating our investment in April 2018, the bonds traded from approximately 102 to below par in August and September. Weakness began after the Villar Mir family sold a stake in the company which left them holding less than 50% of the shares for the first time. Also, following a company investor call early in September, we became more convinced that the company would not de-lever its balance sheet to the extent we desired. We have since exited the position.

Glossary

Par: The face value of a bond or stock, or the value at which a bond will be redeemed at maturity.

Recourse Debt: Debt that is backed by collateral from the borrower.

Annual Report | May 31, 2019
39



The Water Island Credit Opportunities Fund  Portfolio Information

May 31, 2019 (Unaudited)

Performance (annualized returns as of May 31, 2019)

  One
Year
 Five
Year
 Since
Inception*
 

The Water Island Credit Opportunities Fund, Class R

  

2.55

%

  

1.66

%

  

2.34

%

 

The Water Island Credit Opportunities Fund, Class I

  

2.70

%

  

1.90

%

  

2.56

%

 

The Water Island Credit Opportunities Fund, Class C**

  

1.79

%

  

0.92

%

  

1.61

%

 

The Water Island Credit Opportunities Fund, Class A***

  

2.55

%

  

1.64

%

  

2.17

%

 

Bloomberg Barclays Capital U.S. Aggregate Bond Index

  

6.40

%

  

2.70

%

  

2.32

%

 

ICE BofA Merrill Lynch U.S. 3-Month Treasury Bill Index

  

2.26

%

  

0.83

%

  

0.64

%

 

Current performance may be higher or lower than performance quoted above. Any performance data quoted represents past performance and the investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. Returns shown above include the reinvestment of all dividends and capital gains. Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from the amount reported in the Financial Highlights. Contractual fee waivers are currently in effect. Without such fee waivers, performance numbers would be reduced. You can obtain performance data current to the most recent month end by calling 1-800-295-4485 or going to www.arbitragefunds.com.

* Class R, Class I and Class C inception: 10/1/12; Class A inception: 6/1/13. The Since Inception Returns for securities indices are for the inception date of Class R, Class I and Class C shares.

** Class C shares are subject to a 1.00% contingent deferred sales charge on all purchases redeemed in 12 months of purchase.

*** Class A shares are subject to a maximum front-end sales load of 3.25% of the offering price and are also subject to a 1.00% contingent deferred sales load on purchases at or above $500,000 made prior to June 30, 2018 and on purchases at or above $250,000 made after June 30, 2018 (determined on a first-in, first-out basis), purchased without a front-end sales charge and redeemed within 18 months of purchase.

The Total Annual Fund Operating Expenses for Class R, Class I, Class C and Class A are 2.24%, 1.99%, 2.99% and 2.24%, respectively. The Adviser has agreed to waive fees (not including the effects of interest, dividends on short positions, brokerage commissions, acquired fund fees and expenses, taxes, or other extraordinary expenses) in excess of 1.23%, 0.98%, 1.98% and 1.23% for Class R, Class I, Class C and Class A, respectively, until at least September 30, 2020. These expense ratios are as stated in the current prospectus and may differ from the expense ratios disclosed in the financial highlights in this report.

The Bloomberg Barclays Capital U.S. Aggregate Bond Index is a market value-weighted index of investment grade fixed-rated debt issues, including government, corporate, asset-backed and mortgage-backed securities with a maturity of one year or more.

The ICE Bank of America (BofA) Merrill Lynch U.S. 3-Month Treasury Bill Index tracks the performance of the U.S. dollar denominated U.S. Treasury Bills publicly issued in the U.S. domestic market with a remaining term to final maturity of less than 3 months.

An investor may not invest directly in an index.

www.arbitragefunds.com | 1-800-295-4485
40



The Water Island Credit Opportunities Fund  Portfolio Information (continued)

May 31, 2019 (Unaudited)

Growth of $10,000 Investment

The chart represents historical performance of a hypothetical investment of $10,000 in the Class R shares of the Fund since inception. Past performance does not guarantee future results. This chart does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

  

Sector Weighting

The following chart shows the sector weightings of The Water Island Credit Opportunities Fund investments (including short sales and excluding derivatives) as of the report date.

Annual Report | May 31, 2019
41



The Water Island Credit Opportunities Fund  Portfolio of Investments

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - 0.38%

 

Software - 0.38%

 

Fidelity National Information Services, Inc.(a)

  

1,338

  

$

160,961

  

Fiserv, Inc.(a)(b)

  

723

   

62,077

  
   

223,038

  
TOTAL COMMON STOCKS
(Cost $205,509)
  

223,038

  

 

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 73.85%

 

Aerospace & Defense - 2.29%

 

Arconic, Inc.(a)

 

08/15/2020

  

6.150

%

 

$

1,298,000

  

$

1,333,695

  

Banks - 1.60%

 

SunTrust Capital III

 

03/15/2028

  

3.261

%

  

1,000,000

   

928,750

  

Chemicals - 9.68%

 
Momentive Performance
Materials, Inc.
 

10/24/2021

  

3.880

%

  

2,820,000

   

3,178,140

  

Versum Materials, Inc.(a)(c)

 

09/30/2024

  

5.500

%

  

2,300,000

   

2,460,310

  
   

5,638,450

  

Commercial Services - 7.87%

 
Nielsen Co. Luxembourg
SARL (The)(c)
 

10/01/2021

  

5.500

%

  

1,844,000

   

1,839,390

  
Prime Security Services
Borrower LLC / Prime
Finance, Inc.(a)(c)
 

05/15/2023

  

9.250

%

  

804,000

   

842,190

  

Rent-A-Center, Inc.

 

11/15/2020

  

6.625

%

  

1,908,000

   

1,898,460

  
   

4,580,040

  

Computers & Computer Services - 1.76%

 

Dell, Inc.

 

06/15/2019

  

5.875

%

  

1,025,000

   

1,026,097

  

Diversified Financial Services - 2.82%

 
Vantiv LLC / Vantiv Issuer
Corp.(a)(c)
 

11/15/2025

  

4.375

%

  

1,594,000

   

1,644,115

  

Entertainment - 1.87%

 
Scientific Games
International, Inc.
 

12/01/2022

  

10.000

%

  

1,039,000

 �� 

1,090,244

  

Food - 4.75%

 
JBS USA LUX SA / JBS
USA Finance, Inc.(c)
 

06/01/2021

  

7.250

%

  

1,500,000

   

1,500,000

  

TreeHouse Foods, Inc.(a)

 

03/15/2022

  

4.875

%

  

1,270,000

   

1,266,825

  
   

2,766,825

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
42



The Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2019

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 73.85% (Continued)

 

Healthcare - Products - 0.41%

 
Kinetic Concepts, Inc. / KCI
USA, Inc.(a)(c)
 

02/15/2021

  

7.875

%

 

$

231,000

  

$

237,641

  

Household Products - 2.23%

 
Avon International
Operations, Inc.(a)(c)
 

08/15/2022

  

7.875

%

  

1,249,000

   

1,297,399

  

Internet - 5.65%

 

EIG Investors Corp.

 

02/01/2024

  

10.875

%

  

750,000

   

785,625

  
Zayo Group LLC / Zayo
Capital, Inc.(a)
 

04/01/2023

  

6.000

%

  

1,500,000

   

1,539,030

  
Zayo Group LLC / Zayo
Capital, Inc.(c)
 

01/15/2027

  

5.750

%

  

941,000

   

966,878

  
   

3,291,533

  

Lodging - 2.85%

 
Jack Ohio Finance LLC / Jack
Ohio Finance 1 Corp.(a)(c)
 

11/15/2021

  

6.750

%

  

1,623,000

   

1,661,059

  

Machinery - Construction & Mining - 1.81%

 

Vertiv Group Corp.(c)

 

10/15/2024

  

9.250

%

  

1,067,000

   

1,050,995

  

Media - 2.63%

 

Tribune Media Co.(a)

 

07/15/2022

  

5.875

%

  

1,514,000

   

1,530,578

  

Mining - 3.41%

 

Aleris International, Inc.(c)

 

07/15/2023

  

10.750

%

  

1,901,000

   

1,986,545

  

Oil & Gas - 3.44%

 

QEP Resources, Inc.(a)

 

03/01/2021

  

6.875

%

  

1,975,000

   

2,004,625

  

Packaging & Containers - 6.78%

 

Multi-Color Corp.(c)

 
  

12/01/2022

  

6.125

%

  

2,518,000

   

2,587,245

  
  

11/01/2025

  

4.875

%

  

1,305,000

   

1,357,200

  
   

3,944,445

  

Retail - 1.92%

 

GameStop Corp.(c)

 

03/15/2021

  

6.750

%

  

1,114,000

   

1,116,785

  

Software - 6.55%

 

First Data Corp.(a)(c)

 
  

01/15/2024

  

5.000

%

  

264,000

   

269,603

  
  

01/15/2024

  

5.750

%

  

1,395,000

   

1,427,434

  

TIBCO Software, Inc.(c)

 

12/01/2021

  

11.375

%

  

2,000,000

   

2,115,000

  
   

3,812,037

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
43



The Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2019

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 73.85% (Continued)

 

Telecommunications - 3.53%

 

Avaya, Inc.(c)(d)(e)

 

04/01/2019

  

7.000

%

 

$

3,809,000

  

$

0

  

Avaya, Inc.(c)(d)(e)

 

03/01/2021

  

10.500

%

  

986,000

   

0

  

Inmarsat Finance Plc(c)

 
  

05/15/2022

  

4.875

%

  

1,000,000

   

1,005,700

  
  

10/01/2024

  

6.500

%

  

1,000,000

   

1,051,250

  
   

2,056,950

  
TOTAL CORPORATE BONDS
(Cost $42,974,539)
  

42,998,808

  

CONVERTIBLE CORPORATE BONDS - 11.42%

 

Aerospace & Defense - 3.71%

 

Arconic, Inc.(a)

 

10/15/2019

  

1.625

%

  

2,172,000

   

2,161,140

  

Pharmaceuticals - 1.14%

 

Paratek Pharmaceuticals, Inc.

 

05/01/2024

  

4.750

%

  

985,000

   

666,106

  

Semiconductors - 6.57%

 

NXP Semiconductors N.V.

 

12/01/2019

  

1.000

%

  

1,500,000

   

1,535,625

  

Rovi Corp.(a)

 

03/01/2020

  

0.500

%

  

1,000,000

   

968,800

  

Synaptics, Inc.(a)

 

06/15/2022

  

0.500

%

  

1,500,000

   

1,318,927

  
   

3,823,352

  
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost $7,044,564)
  

6,650,598

  

 

  

Shares

 

Value

 

WARRANTS - 0.01%

 

Telecommunications - 0.01%

 
Avaya Holdings Corp., Exercise
Price $25.55, Expires 12/15/2022(b)(d)
  

3,017

  

$

4,526

  
TOTAL WARRANTS
(Cost $0)
    

4,526

  

 

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(b) - 0.06%

 

Call Options Purchased - 0.06%

 

Multi-Color Corp.

 

07/2019

 

$

50.00

  

$

134,298

   

27

  

$

202

  

QEP Resources, Inc.

 

07/2019

  

9.00

   

73,246

   

106

   

795

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
44



The Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2019

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(b) - 0.06% (Continued)

 

Call Options Purchased - 0.06% (Continued)

 

Rent-A-Center, Inc.

 

06/2019

 

$

20.00

  

$

200,424

   

84

  

$

32,760

  
TOTAL CALL OPTIONS PURCHASED
(Cost $14,682)
          

33,757

  
TOTAL PURCHASED OPTIONS
(Cost $14,682)
          

33,757

  

 

  

Yield

 

Shares

 

Value

 

SHORT-TERM INVESTMENTS - 15.40%

 

Money Market Funds

 
Morgan Stanley Institutional Liquidity
Fund - Government Portfolio,
Institutional Class
  

2.326

%(f)

  

4,484,478

  

$

4,484,478

  
State Street Institutional U.S.
Government Money Market Fund,
Premier Class
  

2.338

%(f)

  

4,484,478

   

4,484,478

  
       

8,968,956

  
TOTAL SHORT-TERM INVESTMENTS
(Cost $8,968,956)
  

8,968,956

  
Total Investments - 101.12%
(Cost $59,208,250)
  

58,879,683

  

Liabilities in Excess of Other Assets - (1.12)%(g)

  

(650,641

)

 

NET ASSETS - 100.00%

 

$

58,229,042

  

Portfolio Footnotes

(a)  Security, or a portion of security, is being held as collateral for short sales or written option contracts. At May 31, 2019, the aggregate fair market value of those securities was $ 21,709,795 representing 37.28% of net assets.

(b)  Non-income-producing security.

(c)  Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of May 31, 2019, these securities had a total value of $26,416,739 or 45.37% of net assets.

(d)  Security in default on interest payments.

(e)  Security fair valued using significant unobservable inputs and classified as a Level 3 security. As of May 31, 2019, the total fair market value of these securities was $0, representing 0.0% of net assets.

(f)  Rate shown is the 7-day effective yield as of May 31, 2019.

(g)  Includes cash held as collateral for short sales and written option contracts.

See Notes to Financial Statements.

Annual Report | May 31, 2019
45



The Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2019

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (3.44%)

 

Commercial Services - (0.81%)

 

Nielsen Holdings Plc

  

(4,362

)

 

$

(99,148

)

 

Rent-A-Center, Inc.

  

(8,296

)

  

(197,942

)

 

Worldpay, Inc., Class A

  

(1,440

)

  

(175,162

)

 
   

(472,252

)

 

Household Products - (0.10%)

 

Avon Products, Inc.

  

(15,500

)

  

(58,280

)

 

Internet - (0.05%)

 

Endurance International Group Holdings Inc.

  

(6,000

)

  

(26,700

)

 

Media - (0.24%)

 

Tribune Media Co., Class A

  

(3,000

)

  

(138,900

)

 

Oil & Gas - (0.14%)

 

QEP Resources, Inc.

  

(11,706

)

  

(80,888

)

 

Packaging & Containers - (0.46%)

 

Multi-Color Corp.

  

(5,440

)

  

(270,586

)

 

Pharmaceuticals - (0.14%)

 

Paratek Pharmaceuticals, Inc.

  

(21,700

)

  

(78,771

)

 

Retail - (0.07%)

 

GameStop Corp., Class A

  

(5,202

)

  

(39,431

)

 

Semiconductors - (0.96%)

 

NXP Semiconductors N.V.

  

(5,100

)

  

(449,616

)

 

Synaptics, Inc.

  

(4,200

)

  

(111,090

)

 
   

(560,706

)

 

Software - (0.10%)

 

First Data Corp., Class A

  

(2,385

)

  

(60,627

)

 

Telecommunications - (0.37%)

 

Zayo Group Holdings, Inc.

  

(6,607

)

  

(216,049

)

 
TOTAL COMMON STOCKS
(Proceeds $2,225,028)
  

(2,003,190

)

 

EXCHANGE-TRADED FUNDS - (3.95%)

 

Debt Fund - (3.95%)

 

SPDR Bloomberg Barclays High Yield Bond ETF

  

(21,667

)

  

(2,299,915

)

 
TOTAL EXCHANGE-TRADED FUNDS
(Proceeds $2,320,891)
  

(2,299,915

)

 
TOTAL SECURITIES SOLD SHORT
(Proceeds $4,545,919)
   

$

(4,303,105

)

 

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
46



The Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2019

WRITTEN OPTIONS

 Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

Written Put Options

 

Rent-A-Center, Inc.

 
  

06/2019

 

$

15.00

  

$

(19,088

)

  

(8

)

 

$

(20

)

 
  

06/2019

  

16.00

   

(19,088

)

  

(8

)

  

(20

)

 
  

06/2019

  

17.00

   

(19,088

)

  

(8

)

  

(40

)

 
TOTAL WRITTEN PUT OPTIONS
(Premiums received $1,260)
  

(80

)

 
TOTAL WRITTEN OPTIONS
(Premiums received $1,260)
 

$

(80

)

 

The following is a summary of investments classified by country exposure:

Country

 

% of Net Assets(a)

 

United Kingdom

  

3.53

%

 

Luxembourg

  

3.16

%

 

Netherlands

  

2.64

%

 

United States

  

91.79

%

 

Liabilities in Excess of Other Assets

  

(1.12

)%

 
   

100.00

%

 

(a)  These percentages represent long positions only and are not net of short positions.

Abbreviations:

ETF - Exchange-Traded Fund

LLC - Limited Liability Company

N.V. - Naamloze Vennootschap is the Dutch term for a public limited liability corporation.

Plc - Public Limited Company

SA - Generally designates corporations in various countries, mostly those employing civil law. This translates literally in all languages mentioned as anonymous company.

SARL - Société Anonyme à Responsabilité Limitée is the French term for limited liability company.

SPDR - Standard & Poor's Depositary Receipt

See Notes to Financial Statements.

Annual Report | May 31, 2019
47



The Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2019

The following table summarizes The Water Island Credit Opportunities Fund's investments and derivative financial instruments categorized in the disclosure hierarchy as of May 31, 2019:

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

Common Stocks**

 

$

223,038

  

$

  

$

  

$

223,038

  

Corporate Bonds

 

Aerospace & Defense

  

   

1,333,695

   

   

1,333,695

  

Banks

  

   

928,750

   

   

928,750

  

Chemicals

  

   

5,638,450

   

   

5,638,450

  

Commercial Services

  

   

4,580,040

   

   

4,580,040

  

Computers & Computer Services

  

   

1,026,097

   

   

1,026,097

  

Diversified Financial Services

  

   

1,644,115

   

   

1,644,115

  

Entertainment

  

   

1,090,244

   

   

1,090,244

  

Food

  

   

2,766,825

   

   

2,766,825

  

Healthcare - Products

  

   

237,641

   

   

237,641

  

Household Products

  

   

1,297,399

   

   

1,297,399

  

Internet

  

   

3,291,533

   

   

3,291,533

  

Lodging

  

   

1,661,059

   

   

1,661,059

  

Machinery - Construction & Mining

  

   

1,050,995

   

   

1,050,995

  

Media

  

   

1,530,578

   

   

1,530,578

  

Mining

  

   

1,986,545

   

   

1,986,545

  

Oil & Gas

  

   

2,004,625

   

   

2,004,625

  

Packaging & Containers

  

   

3,944,445

   

   

3,944,445

  

Retail

  

   

1,116,785

   

   

1,116,785

  

Software

  

   

3,812,037

   

   

3,812,037

  

Telecommunications

  

   

2,056,950

   

0

***

  

2,056,950

  

Convertible Corporate Bonds**

  

   

6,650,598

   

   

6,650,598

  

Warrants**

  

   

4,526

   

   

4,526

  

Purchased Options

  

33,757

   

   

   

33,757

  

Short-Term Investments

  

8,968,956

   

   

   

8,968,956

  

TOTAL

 

$

9,225,751

  

$

49,653,932

  

$

0

  

$

58,879,683

  

Other Financial Instruments****

 

Liabilities

 

Common Stocks**

  

(2,003,190

)

  

   

   

(2,003,190

)

 

Exchange-Traded Funds

  

(2,299,915

)

  

   

   

(2,299,915

)

 

Written Options

  

(80

)

  

   

   

(80

)

 

TOTAL

 

$

(4,303,185

)

 

$

  

$

  

$

(4,303,185

)

 

*  Refer to footnote 2 of the Notes to Financial Statements where leveling hierarchy is defined.

**  Refer to Portfolio of Investments for sector information.

***  Includes securities valued at $0 using unobservable inputs.

****  Other financial instruments are instruments such as written options and securities sold short.

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
48



The Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2019

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund's assets and liabilities during the period ended May 31, 2019:

Investments
in Securities
 Balance as of
May 31, 2018
 Change in
Unrealized
Depreciation
 

Purchases

 Sales
Proceeds
 Amortization
Premium/
Discount
 Transfers
into
Level 3
 Transfers
out of
Level 3
 Balance as of
May 31, 2019
 Net change in
Unrealized
Depreciation
included in the
Statement of
Operations
attributable to
Level 3
investments
held at
May 31, 2019
 
Corporate
Bonds
 

$

0

  

$

  

$

  

$

  

$

  

$

  

$

  

$

0

  

$

  

Total

 

$

0

  

$

  

$

  

$

  

$

  

$

  

$

  

$

0

  

$

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
49



The Water Island Long/Short Fund  Manager Commentary

May 31, 2019 (Unaudited)

Water Island Long/Short Fund (formerly known as Arbitrage Tactical Equity) |

Tickers: ATQIX, ATQFX, ATQCX, ATQAX

The Fund's Goal and Main Investments

The Fund seeks to achieve capital appreciation over a full market cycle with lower volatility than the broad equity market.

Investment Strategy

The Fund is a catalyst-driven long-short equity portfolio that seeks to profit from investments in securities of companies where recent events or potential future catalysts may drive the security prices higher or lower. Examples of such events and catalysts, referred to as "event-driven investment opportunities," include, but are not limited to, announcements or potential announcements of restructurings (bankruptcies, spin-offs, and asset sales), mergers and acquisitions, management change, institution of shareholder-friendly practices, regulatory changes, litigation, earnings results and outlook, and changes in industry or sector fundamentals. The investment team seeks to identify these event-driven investment opportunities and purchase or sell short such securities when the team believes the market is under or over appreciating the potential value creation opportunity from such event or catalyst.

Fiscal Year Highlights

Water Island Long/Short (ATQIX) returned -0.38% for the fiscal year ending May 31, 2019. The portfolio's returns were driven largely from the Americas, with the European region detracting from performance. Information technology and industrials were the top contributors on a sector basis. Conversely, consumer staples and real estate were the worst performing sectors.

The Fund's largest contributor to returns over the period was our investment in Avaya. Avaya is a name we know well, having followed its re-emergence from bankruptcy in December 2017 and participated in the re-rating of its re-organized equity through our debt holdings. With the Q4 2018 equity market volatility, Avaya's heavy distressed credit/hedge fund ownership caused the shares to significantly underperform. We used this year-end weakness to re-establish a long position in the stock as its free cash flow yield was wider than most any legacy information technology hardware peer. We were rewarded as the shares re-rated alongside equity markets in 2019 and exited the position at a meaningful gain before the company's fiscal Q1 2019 (calendar Q4 2018) earnings report.

Our second-best performing investment during the period was our investment in Zayo, a fiber and data center company that owns key infrastructure assets in large metropolitan areas. We initiated a position in Zayo at the end of 2018 after the company released disappointed earnings and embarked on a spin/separation plan to break up its businesses. We believed this action plan was a pre-cursor to the company selling itself and saw an opportunity to profit in multiple ways, either as a spin-off scenario or a potential full sale. In early Q1 2019, numerous press reports claimed several private equity firms had approached the company, confirming our take-private theory. The subsequent rally in Zayo shares resulted in positive returns for the Fund over the quarter. While we still believe a sale will occur, we have begun to monetize the position as the risk/reward appears less attractive following the run-up in the share price.

Conversely, the Fund's largest detractor for the period was our investment in CorePoint Lodging, a real-estate investment trust spun-off from La Quinta that now owns the hotel assets of its former parent. In May 2018, La Quinta announced its first earnings report, which disappointed investors with soft margin guidance and a lowered expectation of cash balances due to a change

www.arbitragefunds.com | 1-800-295-4485
50



The Water Island Long/Short Fund  Manager Commentary (continued)

May 31, 2019 (Unaudited)

in expected tax reimbursement proceeds from its former parent (now owned by Wyndham Hotels & Resorts). We believe the business is fundamentally undervalued but recognize a turnaround will take time as management looks to restore confidence in the business and outlook. As a result of the long duration turnaround aspects to this investment, we have liquidated the position and allocated the capital to shorter duration opportunities.

The second-largest detractor for the period was our investment in Keurig Dr. Pepper. We established a short position in Keurig Dr. Pepper in early Q3 2018 after the completion of the Keurig Green Mountain and Dr. Pepper merger. Our short was premised on the belief that market expectations for synergies were overly aggressive and that management's ability to cut costs was unproven. Furthermore, we believed fundamentals would face headwinds as the company would lose rights to distribute growth brands, which played out in the loss of Fiji and Body Armor. With leverage over six times, we expected these headwinds to have a significant impact to the equity value of the company. Our error was underestimating the potential technical squeeze caused by a small public float and demand from investors bullish on the name. We have since exited the position as it reached our single name loss limit.

Annual Report | May 31, 2019
51



The Water Island Long/Short Fund  Portfolio Information

May 31, 2019 (Unaudited)

Performance (annualized returns as of May 31, 2019)

  One
Year
 Since
Inception*
 

The Water Island Long/Short Fund, Class R

  

-0.38

%

  

0.42

%

 

The Water Island Long/Short Fund, Class I

  

-0.38

%

  

0.42

%

 

The Water Island Long/Short Fund, Class C**

  

-0.38

%

  

0.42

%

 

The Water Island Long/Short Fund, Class A***

  

-0.38

%

  

0.42

%

 

S&P 500® Index

  

3.78

%

  

8.76

%

 

ICE BofA Merrill Lynch U.S. 3-Month Treasury Bill Index

  

2.26

%

  

0.93

%

 

Current performance may be higher or lower than performance quoted above. Any performance data quoted represents past performance and the investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. Returns shown above include the reinvestment of all dividends and capital gains. Performance results do not include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles and may differ from the amount reported in the Financial Highlights. Contractual fee waivers are currently in effect. Without such fee waivers, performance numbers would be reduced. You can obtain performance data current to the most recent month end by calling 1-800-295-4485 or going to www.arbitragefunds.com.

* Class R, Class I, Class C and Class A inception: 12/31/14.

** Class C shares are subject to a 1.00% contingent deferred sales charge on all purchases redeemed in 12 months of purchase.

*** Class A shares are subject to a maximum front-end sales load of 3.25% on purchases up to $500,000. The shares are also subject to a deferred sales charge of up to 1.00% on purchases of $500,000 or more purchased without a front-end sales load and redeemed within 18 months of purchase.

The Total Annual Fund Operating Expenses for Class R, Class I, Class C and Class A are 12.59%, 12.34%, 13.34% and 12.59%, respectively. The Adviser has agreed to waive fees (not including the effects of interest, dividends on short positions, brokerage commissions, acquired fund fees and expenses, taxes, or other extraordinary expenses) in excess of 1.69%, 1.44%, 2.44% and 1.69% for Class R, Class I, Class C and Class A, respectively, until at least September 30, 2019. These expense ratios are as stated in the current prospectus and may differ from the expense ratios disclosed in the financial highlights in this report.

The S&P 500® Index is an unmanaged index consisting of 500 stocks.

The ICE Bank of America (BofA) Merrill Lynch U.S. 3-Month Treasury Bill Index tracks the performance of the U.S. dollar denominated U.S. Treasury Bills publicly issued in the U.S. domestic market with a remaining term to final maturity of less than 3 months.

An investor may not invest directly in an index.

www.arbitragefunds.com | 1-800-295-4485
52



The Water Island Long/Short Fund  Portfolio Information (continued)

May 31, 2019 (Unaudited)

Growth of $10,000 Investment

The chart represents historical performance of a hypothetical investment of $10,000 in the Class R shares of the Fund since inception. Past performance does not guarantee future results. This chart does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

  

Sector Weighting

The following chart shows the sector weightings of The Water Island Long/Short Fund's investments (including short sales and excluding derivatives) as of the report date.

Annual Report | May 31, 2019
53



The Water Island Long/Short Fund  Portfolio of Investments

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - 44.19%

 

Auto Parts & Equipment - 3.34%

 

Altra Industrial Motion Corp.(a)(b)

  

2,525

  

$

79,209

  

Biotechnology - 1.29%

 

Acorda Therapeutics, Inc.(a)(b)(c)

  

3,300

   

30,657

  

Chemicals - 5.09%

 

Air Products & Chemicals, Inc.

  

62

   

12,623

  

Axalta Coating Systems Ltd.(a)(b)(c)

  

2,300

   

54,073

  

Celanese Corp., Class A

  

25

   

2,373

  

Eastman Chemical Co.

  

32

   

2,078

  

Element Solutions, Inc.(a)(b)(c)

  

4,607

   

43,582

  

Huntsman Corp.(b)

  

112

   

1,945

  

LyondellBasell Industries N.V., Class A

  

57

   

4,232

  
   

120,906

  

Commercial Services - 2.34%

 

Herc Holdings, Inc.(a)(b)(c)

  

1,633

   

55,571

  

Computers & Computer Services - 2.10%

 

International Business Machines Corp.(b)

  

18

   

2,286

  

Perspecta, Inc.(a)(b)

  

2,196

   

47,675

  
   

49,961

  

Construction Materials - 5.36%

 

Johnson Controls International Plc(a)

  

3,303

   

127,232

  

Internet - 1.64%

 

Alibaba Group Holding Ltd., Sponsored ADR(b)(c)

  

261

   

38,957

  

Lodging - 3.39%

 

Wyndham Hotels & Resorts, Inc.(a)(b)

  

1,508

   

80,437

  

Media - 2.69%

 

Kabel Deutschland Holding AG(b)

  

133

   

15,898

  

Tribune Publishing Co.(b)(c)

  

4,884

   

47,961

  
   

63,859

  

Miscellaneous Manufacturing - 1.71%

 

Ingersoll-Rand Plc(b)

  

230

   

27,218

  

Trinity Industries, Inc.(b)

  

689

   

13,284

  
   

40,502

  

Pharmaceuticals - 2.16%

 

McKesson Europe AG(b)

  

1,526

   

45,688

  

Paratek Pharmaceuticals, Inc.(b)(c)

  

1,575

   

5,717

  
   

51,405

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
54



The Water Island Long/Short Fund  Portfolio of Investments (continued)

May 31, 2019

  

Shares

 

Value

 

COMMON STOCKS - 44.19% (Continued)

 

Retail - 4.60%

 

Jack in the Box, Inc.(a)(b)

  

397

  

$

33,030

  

Lowe's Cos., Inc.(b)

  

550

   

51,304

  

Red Robin Gourmet Burgers, Inc.(a)(b)(c)

  

970

   

24,813

  
   

109,147

  

Software - 5.22%

 

Avaya Holdings Corp.(a)(b)(c)

  

3,844

   

48,357

  

LiveRamp Holdings, Inc.(a)(b)(c)

  

1,283

   

65,921

  

Oracle Corp.(b)

  

58

   

2,935

  

Pivotal Software, Inc., Class A(c)

  

14

   

279

  

SecureWorks Corp., Class A(c)

  

7

   

102

  

VMware, Inc., Class A(b)

  

36

   

6,371

  
   

123,965

  

Telecommunications - 2.87%

 

LogMeIn, Inc.(a)(b)

  

950

   

68,238

  

Transportation - 0.39%

 

Norfolk Southern Corp.

  

47

   

9,172

  
TOTAL COMMON STOCKS
(Cost $1,082,501)
  

1,049,218

  

 

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CONVERTIBLE CORPORATE BONDS - 0.43%

 

Pharmaceuticals - 0.43%

 

Paratek Pharmaceuticals, Inc.(b)

 

05/01/2024

  

4.750

%

 

$

15,000

  

$

10,144

  
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost $13,523)
  

10,144

  

 

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(c) - 2.60%

 

Call Options Purchased - 0.07%

 

DXC Technology Co.

 

09/2019

 

$

55.00

  

$

28,524

   

6

  

$

630

  

LiveRamp Holdings, Inc.

 

08/2019

  

60.00

   

25,690

   

5

   

575

  

LogMeIn, Inc.

 

06/2019

  

90.00

   

50,281

   

7

   

53

  

 

Uniti Group, Inc.

 

 

  

06/2019

  

12.50

   

16,337

   

17

   

127

  
  

07/2019

  

12.50

   

16,337

   

17

   

255

  
TOTAL CALL OPTIONS PURCHASED
(Cost $8,061)
          

1,640

  

See Notes to Financial Statements.

Annual Report | May 31, 2019
55



The Water Island Long/Short Fund  Portfolio of Investments (continued)

May 31, 2019

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(c) - 2.60% (Continued)

 

Put Options Purchased - 2.53%

 

Acorda Therapeutics, Inc.

 

10/2019

 

$

9.00

  

$

30,657

   

33

  

$

5,775

  

Altra Industrial Motion Corp.

 

06/2019

  

32.00

   

40,781

   

13

   

1,950

  

Aramark

 

06/2019

  

25.00

   

34,790

   

10

   

2,400

  

Avaya Holdings Corp.

 
  

07/2019

  

10.00

   

6,290

   

5

   

175

  
  

08/2019

  

10.00

   

20,128

   

16

   

912

  
  

08/2019

  

12.50

   

37,740

   

30

   

4,425

  

Axalta Coating Systems Ltd.

 
  

06/2019

  

24.00

   

16,457

   

7

   

613

  
  

07/2019

  

24.00

   

11,755

   

5

   

613

  

Element Solutions, Inc.

 
  

06/2019

  

10.00

   

13,244

   

14

   

980

  
  

08/2019

  

10.00

   

12,298

   

13

   

1,267

  

Herc Holdings, Inc.

 
  

06/2019

  

30.00

   

17,015

   

5

   

213

 ��
  

06/2019

  

35.00

   

10,209

   

3

   

660

  

iShares Russell 2000 ETF

 
  

08/2019

  

144.00

   

43,758

   

3

   

1,362

  
  

08/2019

  

146.00

   

43,758

   

3

   

1,608

  
  

08/2019

  

148.00

   

43,758

   

3

   

1,887

  
  

11/2019

  

148.00

   

43,758

   

3

   

2,533

  
  

11/2019

  

150.00

   

43,758

   

3

   

2,829

  
  

11/2019

  

152.00

   

43,758

   

3

   

3,148

  
  

12/2019

  

140.00

   

364,650

   

25

   

15,075

  

Jack in the Box, Inc.

 

06/2019

  

70.00

   

24,960

   

3

   

23

  
Johnson Controls
International Plc
 

06/2019

  

45.00

   

19,260

   

5

   

3,280

  

LiveRamp Holdings, Inc.

 

08/2019

  

50.00

   

46,242

   

9

   

2,925

  

LogMeIn, Inc.

 

06/2019

  

75.00

   

43,098

   

6

   

2,370

  

Perspecta, Inc.

 

06/2019

  

20.00

   

21,710

   

10

   

375

  
Red Robin Gourmet
Burgers, Inc.
 

09/2019

  

30.00

   

10,232

   

4

   

2,300

  
Wyndham Hotels &
Resorts, Inc.
 

06/2019

  

50.00

   

42,672

   

8

   

280

  

Zayo Group Holdings, Inc.

 

06/2019

  

25.00

   

45,780

   

14

   

35

  
TOTAL PUT OPTIONS PURCHASED
(Cost $43,865)
          

60,013

  
TOTAL PURCHASED OPTIONS
(Cost $51,926)
          

61,653

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
56



The Water Island Long/Short Fund  Portfolio of Investments (continued)

May 31, 2019

  

Yield

 

Shares

 

Value

 

SHORT-TERM INVESTMENTS - 58.16%

 

Money Market Funds

 
Morgan Stanley Institutional Liquidity
Fund - Government Portfolio, Institutional Class
  

2.326

%(d)

  

690,446

  

$

690,446

  
State Street Institutional U.S. Government Money
Market Fund, Premier Class
  

2.338

%(d)

  

690,447

   

690,447

  
  

1,380,893

  
TOTAL SHORT-TERM INVESTMENTS
(Cost $1,380,893)
  

1,380,893

  
Total Investments - 105.38%
(Cost $2,528,843)
  

2,501,908

  

Liabilities in Excess of Other Assets - (5.38)%(e)

  

(127,752

)

 

NET ASSETS - 100.00%

 

$

2,374,156

  

Portfolio Footnotes

(a)  Underlying security for a written/purchased call/put option.

(b)  Security, or a portion of security, is being held as collateral for short sales, swap contracts, written option contracts or forward foreign currency exchange contracts. At May 31, 2019, the aggregate market value of those securities was $801,050, representing 33.74% of net assets.

(c)  Non-income-producing security.

(d)  Rate shown is the 7-day effective yield as of May 31, 2019.

(e)  Includes cash held as collateral for short sales and written option contracts.

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (16.84%)

 

Biotechnology - (0.91%)

 

Corteva, Inc.

  

(800

)

 

$

(21,576

)

 

Chemicals - (2.18%)

 

Dow, Inc.

  

(238

)

  

(11,129

)

 

Linde Plc

  

(127

)

  

(22,930

)

 

PPG Industries, Inc.

  

(63

)

  

(6,593

)

 

RPM International, Inc.

  

(103

)

  

(5,512

)

 

Sherwin-Williams Co. (The)

  

(13

)

  

(5,453

)

 
   

(51,617

)

 

Commercial Services - (1.59%)

 

Booz Allen Hamilton Holding Corp., Class A

  

(140

)

  

(8,844

)

 

United Rentals, Inc.

  

(262

)

  

(28,846

)

 
   

(37,690

)

 

See Notes to Financial Statements.

Annual Report | May 31, 2019
57



The Water Island Long/Short Fund  Portfolio of Investments (continued)

May 31, 2019

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (16.84%) (Continued)

 

Computers & Computer Services - (3.58%)

 

CACI International, Inc., Class A

  

(44

)

 

$

(8,955

)

 

Dell Technologies, Inc., Class C

  

(125

)

  

(7,444

)

 

Leidos Holdings, Inc.

  

(118

)

  

(8,889

)

 

Luxoft Holding, Inc., Class A

  

(1,038

)

  

(59,757

)

 
   

(85,045

)

 

Hand/Machine Tools - (0.36%)

 

Regal Beloit Corp.

  

(118

)

  

(8,579

)

 

Leisure Time - (0.87%)

 

OneSpaWorld Holdings Ltd.

  

(1,650

)

  

(20,641

)

 

Lodging - (1.84%)

 

Choice Hotels International, Inc.

  

(174

)

  

(14,318

)

 

Hilton Worldwide Holdings, Inc.

  

(181

)

  

(16,189

)

 

Marriott International, Inc., Class A

  

(106

)

  

(13,233

)

 
   

(43,740

)

 

Machinery - Diversified - (1.14%)

 

Gardner Denver Holdings, Inc.

  

(794

)

  

(26,972

)

 

Media - (0.14%)

 

Gannett Co., Inc.

  

(432

)

  

(3,396

)

 

Metal Fabricate & Hardware - (1.06%)

 

Rexnord Corp.

  

(460

)

  

(12,103

)

 

Timken Co. (The)

  

(299

)

  

(13,159

)

 
   

(25,262

)

 

Real Estate Investment Trusts - (0.69%)

 

Uniti Group, Inc.

  

(1,700

)

  

(16,337

)

 

Retail - (1.10%)

 

Home Depot, Inc. (The)

  

(137

)

  

(26,009

)

 

Software - (0.51%)

 

Micro Focus International Plc, Sponsored ADR

  

(509

)

  

(12,201

)

 

Transportation - (0.44%)

 

CSX Corp.

  

(140

)

  

(10,426

)

 

Trucking & Leasing - (0.43%)

 

GATX Corp.

  

(129

)

  

(9,007

)

 

Greenbrier Cos., Inc. (The)

  

(44

)

  

(1,197

)

 
   

(10,204

)

 
TOTAL COMMON STOCKS
(Proceeds $420,143)
  

(399,695

)

 

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
58



The Water Island Long/Short Fund  Portfolio of Investments (continued)

May 31, 2019

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

EXCHANGE-TRADED FUNDS - (1.51%)

 

Equity Fund - (1.51%)

 

Technology Select Sector SPDR® Fund

  

(500

)

 

$

(35,945

)

 
TOTAL EXCHANGE-TRADED FUNDS
(Proceeds $35,370)
  

(35,945

)

 

MUTUAL FUNDS - (1.85%)

 

Telecommunications - (1.85%)

 

Altaba, Inc.

  

(743

)

  

(43,986

)

 
TOTAL MUTUAL FUNDS
(Cost $(55,292))
  

(43,986

)

 
TOTAL SECURITIES SOLD SHORT
(Proceeds $510,805)
 

$

(479,626

)

 

 

WRITTEN OPTIONS Expiration Exercise
Date
 Notional
Price
 

Amount

 

Contracts

 

Value

 

Written Call Options

 

Avaya Holdings Corp.

 

08/2019

 

$

17.50

  

$

(20,128

)

  

(16

)

 

$

(640

)

 

DXC Technology Co.

 

09/2019

  

65.00

   

(28,524

)

  

(6

)

  

(120

)

 
Johnson Controls
International Plc
 

06/2019

  

45.00

   

(19,260

)

  

(5

)

  

(30

)

 

LiveRamp Holdings, Inc.

 

08/2019

  

70.00

   

(25,690

)

  

(5

)

  

(88

)

 
Red Robin Gourmet
Burgers, Inc.
 

06/2019

  

40.00

   

(10,232

)

  

(4

)

  

(10

)

 
TOTAL WRITTEN CALL OPTIONS
(Premiums received $1,896)
          

(888

)

 

Written Put Options

 

iShares Russell 2000 ETF

 
  

11/2019

  

138.00

   

(29,172

)

  

(2

)

  

(949

)

 
  

11/2019

  

140.00

   

(29,172

)

  

(2

)

  

(1,069

)

 
  

11/2019

  

142.00

   

(29,172

)

  

(2

)

  

(1,203

)

 
  

12/2019

  

130.00

   

(364,650

)

  

(25

)

  

(8,575

)

 
TOTAL WRITTEN PUT OPTIONS
(Premiums received $9,247)
          

(11,796

)

 
TOTAL WRITTEN OPTIONS
(Premiums received $11,143)
         

$

(12,684

)

 

See Notes to Financial Statements.

Annual Report | May 31, 2019
59



The Water Island Long/Short Fund  Portfolio of Investments (continued)

May 31, 2019

EQUITY SWAP CONTRACTS

Swap
Counterparty/
Payment
Frequency
 Reference
Obligation
 Rate
Paid/
Received
by the
Fund
 Termination
Date
 Upfront
Payments
Paid
 Upfront
Payments
Received
 Market
Value
 Notional
Amount
 Unrealized
Appreciation
 
Morgan
Stanley &
Co./Monthly
 
 
 
 
 Air Liquide
SA
 
 
 
 
 
 Paid
1 Month-
EUR
LIBOR
plus
50 bps
(0.089%)
 





10/14/2019
 

$

  

$

  

$

  

$

(8,697

)

 

$

  

OUTSTANDING FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Appreciation
 

USD

64,706

  

EUR

56,880

  

Goldman Sachs & Co.

 

06/14/2019

 

$

1,109

  
Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Depreciation
 

EUR

1,750

  

USD

1,967

  

Goldman Sachs & Co.

 

06/14/2019

 

$

(9

)

 

The following is a summary of investments classified by country exposure:

Country

 

% of Net Assets(a)

 

Germany

  

2.59

%

 

China

  

1.64

%

 

United States

  

101.15

%

 

Liabilities in Excess of Other Assets

  

(5.38

)%

 
   

100.00

%

 

(a)  These percentages represent long positions only and are not net of short positions.

Abbreviations:

ADR - American Depositary Receipt

AG - Aktiengesellschaft is a German term that refers to a corporation that is limited by shares, i.e., owned by shareholders.

bps - Basis Points. 100 Basis Points is equal to 1 percentage point.

ETF - Exchange-Traded Fund

EUR - Euro

EUR LIBOR - London Interbank Offered Rate denominated in Euro

Ltd. - Limited

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
60



The Water Island Long/Short Fund  Portfolio of Investments (continued)

May 31, 2019

N.V. - Naamloze Vennootschap is the Dutch term for a public limited liability corporation.

Plc - Public Limited Company

SA - Generally designates corporations in various countries, mostly those employing civil law. This translates literally in all languages mentioned as anonymous company.

SPDR - Standard & Poor's Depositary Receipt

USD - United States Dollar

The following table summarizes The Water Island Long/Short Fund's investments and derivative financial instruments categorized in the disclosure hierarchy as of May 31, 2019:

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

Common Stocks**

 

$

1,049,218

  

$

  

$

  

$

1,049,218

  

Convertible Corporate Bonds**

  

   

10,144

   

   

10,144

  

Purchased Options

  

61,653

   

   

   

61,653

  

Short-Term Investments

  

1,380,893

   

   

   

1,380,893

  

TOTAL

 

$

2,491,764

  

$

10,144

  

$

  

$

2,501,908

  

Other Financial Instruments***

 

Assets

 

Forward Foreign Currency Exchange Contracts

 

$

  

$

1,109

  

$

  

$

1,109

  

Equity Swap

  

   

   

   

  

Liabilities

 

Common Stocks**

  

(399,695

)

  

   

   

(399,695

)

 

Exchange-Traded Funds

  

(35,945

)

  

   

   

(35,945

)

 

Mutual Funds

  

(43,986

)

  

   

   

(43,986

)

 

Written Options

  

(12,684

)

  

   

   

(12,684

)

 

Forward Foreign Currency Exchange Contracts

  

   

(9

)

  

   

(9

)

 

TOTAL

 

$

(492,310

)

 

$

1,100

  

$

  

$

(491,210

)

 

*  Refer to footnote 2 of the Notes to Financial Statements where leveling hierarchy is defined.

**  Refer to Portfolio of Investments for sector information.

***  Other financial instruments are instruments such as written options, securities sold short, equity swaps and forward foreign currency exchange contracts.

See Notes to Financial Statements.

Annual Report | May 31, 2019
61



The Water Island Long/Short Fund  Portfolio of Investments (continued)

May 31, 2019

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund's assets and liabilities during the period ended May 31, 2019:

Investments
in Securities
 Balance as of
May 31, 2018
 Realized
Gain (Loss)
 Change in
Unrealized
Appreciation
 

Purchases

 Sales
Proceeds
 Transfers
into
Level 3
 Transfers
out of
Level 3
 Balance as of
May 31, 2019
 Net change in
Unrealized
Appreciation
included in the
Statement of
Operations
attributable to
Level 3
investments
held at
May 31, 2019
 
Common
Stock
 

$

70,117

  

$

10,058

  

$

74

  

$

  

$

(80,249

)

 

$

  

$

  

$

  

$

  

Total

 

$

70,117

  

$

10,058

  

$

74

  

$

  

$

(80,249

)

 

$

  

$

  

$

  

$

  

See Notes to Financial Statements.

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This Page Intentionally Left Blank



The Arbitrage Funds

  The Arbitrage
Fund
 The Arbitrage
Event-Driven
Fund
 

ASSETS

 

Investments:

 

At cost of unaffiliated investments

 

$

1,706,225,300

  

$

130,363,955

  

At cost of affiliated investments

 

$

15,340,129

  

$

  

At fair value of unaffiliated investments (Note 2)(a)

 

$

1,719,751,374

  

$

130,301,032

  

At fair value of affiliated investments (Note 2)

 

$

15,375,997

  

$

  

Cash

  

2,747

   

593

  

Cash denominated in foreign currency (Cost $117,244, $8,576, $0 and $0)

  

117,537

   

8,597

  

Deposits with brokers for securities sold short (Note 2)

  

531,521,835

   

34,797,435

  

Segregated cash for swaps (Note 2)

  

   

260,000

  

Receivable for investment securities sold

  

29,457,490

   

1,224,729

  

Receivable for capital shares sold

  

2,164,399

   

204,537

  

Unrealized appreciation on forward foreign currency exchange contracts (Note 8)

  

6,201,218

   

286,302

  

Dividends and interest receivable

  

4,024,445

   

469,115

  

Receivable due from Adviser (Note 5)

  

   

  

Prepaid expenses and other assets

  

1,251,942

   

83,147

  

Total Assets

  

2,309,868,984

   

167,635,487

  

LIABILITIES

 
Securities sold short, at value (Note 2) (proceeds $525,710,837, $35,969,196, $4,545,919 and
$510,805)
  

534,502,682

   

35,603,608

  

Written options, at value (Note 2) (premiums received $212,201, $24,946, $1,260 and $11,143)

  

186,600

   

19,990

  

Collateral for securities loaned

  

   

29,924

  

Payable for investment securities purchased

  

21,985,888

   

6,775,997

  

Unrealized depreciation on forward foreign currency exchange contracts (Note 8)

  

1,090,635

   

115,270

  

Payable for capital shares redeemed

  

1,819,085

   

95,975

  

Payable to Adviser (Note 5)

  

1,549,681

   

123,754

  

Dividends payable on securities sold short

  

977,800

   

36,287

  

Payable to Distributor (Note 5)

  

55,352

   

7,414

  

Payable to Administrator (Note 5)

  

31,333

   

6,043

  

Payable to Transfer Agent (Note 5)

  

116,163

   

30,815

  

Payable to Custodian

  

51,008

   

8,690

  

Income distribution payable

  

   

  

Audit and legal fees payable

  

114,930

   

23,272

  

Payable to Trustees

  

22,494

   

14,526

  

Chief Compliance Officer Fees payable (Note 5)

  

13,212

   

282

  

Chief Financial Officer Fees payable (Note 5)

  

5,497

   

938

  

Other accrued expenses and liabilities

  

65,402

   

16,260

  

Total Liabilities

  

562,587,762

   

42,909,045

  

NET ASSETS

 

$

1,747,281,222

  

$

124,726,442

  

NET ASSETS CONSIST OF:

 

Paid-in capital

 

$

1,709,145,609

  

$

183,563,118

  

Distributable earnings (Accumulated loss)

  

38,135,613

   

(58,836,676

)

 

NET ASSETS

 

$

1,747,281,222

  

$

124,726,442

  

(a) Includes market value of securities on loan:

 

$

  

$

27,156

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
64



  Statement of Assets and Liabilities

May 31, 2019

  
The Water
Island Credit
Opportunities Fund
 The Water
Island
Long/Short
Fund
 

ASSETS

 

Investments:

 

At cost of unaffiliated investments

 

$

59,208,250

  

$

2,528,843

  

At cost of affiliated investments

 

$

  

$

  

At fair value of unaffiliated investments (Note 2)(a)

 

$

58,879,683

  

$

2,501,908

  

At fair value of affiliated investments (Note 2)

 

$

  

$

  

Cash

  

232

   

  

Cash denominated in foreign currency (Cost $117,244, $8,576, $0 and $0)

  

   

  

Deposits with brokers for securities sold short (Note 2)

  

4,210,599

   

513,432

  

Segregated cash for swaps (Note 2)

  

   

  

Receivable for investment securities sold

  

143,254

   

50,044

  

Receivable for capital shares sold

  

40,014

   

  

Unrealized appreciation on forward foreign currency exchange contracts (Note 8)

  

   

1,109

  

Dividends and interest receivable

  

791,858

   

3,856

  

Receivable due from Adviser (Note 5)

  

   

6,646

  

Prepaid expenses and other assets

  

25,121

   

6,538

  

Total Assets

  

64,090,761

   

3,083,533

  

LIABILITIES

 
Securities sold short, at value (Note 2) (proceeds $525,710,837, $35,969,196, $4,545,919 and
$510,805)
  

4,303,105

   

479,626

  

Written options, at value (Note 2) (premiums received $212,201, $24,946, $1,260 and $11,143)

  

80

   

12,684

  

Collateral for securities loaned

  

   

  

Payable for investment securities purchased

  

1,374,132

   

175,165

  

Unrealized depreciation on forward foreign currency exchange contracts (Note 8)

  

   

9

  

Payable for capital shares redeemed

  

119,639

   

  

Payable to Adviser (Note 5)

  

14,131

   

  

Dividends payable on securities sold short

  

885

   

728

  

Payable to Distributor (Note 5)

  

2,102

   

13

  

Payable to Administrator (Note 5)

  

3,498

   

2,080

  

Payable to Transfer Agent (Note 5)

  

5,038

   

273

  

Payable to Custodian

  

2,339

   

2,904

  

Income distribution payable

  

2,171

   

  

Audit and legal fees payable

  

18,520

   

15,599

  

Payable to Trustees

  

14,193

   

13,918

  

Chief Compliance Officer Fees payable (Note 5)

  

696

   

23

  

Chief Financial Officer Fees payable (Note 5)

  

746

   

590

  

Other accrued expenses and liabilities

  

444

   

5,765

  

Total Liabilities

  

5,861,719

   

709,377

  

NET ASSETS

 

$

58,229,042

  

$

2,374,156

  

NET ASSETS CONSIST OF:

 

Paid-in capital

 

$

61,241,004

  

$

2,407,595

  

Distributable earnings (Accumulated loss)

  

(3,011,962

)

  

(33,439

)

 

NET ASSETS

 

$

58,229,042

  

$

2,374,156

  

(a) Includes market value of securities on loan:

 

$

  

$

  

Annual Report | May 31, 2019
65



The Arbitrage Funds

  The Arbitrage
Fund
 The Arbitrage
Event-Driven
Fund
 

PRICING OF SHARES:

 

CLASS R SHARES:

 

Net assets applicable to Class R shares

 

$

163,349,170

  

$

30,422,712

  

Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value)

  

12,639,819

   

3,213,616

  

Net asset value and offering price per share

 

$

12.92

  

$

9.47

  

CLASS I SHARES:

 

Net assets applicable to Class I shares

 

$

1,546,541,637

  

$

92,710,404

  

Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value)

  

116,145,614

   

9,717,503

  

Net asset value and offering price per share

 

$

13.32

  

$

9.54

  

CLASS C SHARES:

 

Net assets applicable to Class C shares

 

$

19,049,809

  

$

794,206

  

Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value)

  

1,543,878

   

85,524

  

Net asset value and offering price per share(a)

 

$

12.34

  

$

9.29

  

CLASS A SHARES:

 

Net assets applicable to Class A shares

 

$

18,340,606

  

$

799,120

  

Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value)

  

1,421,688

   

84,447

  

Net asset value and offering price per share(a)

 

$

12.90

  

$

9.46

  

Maximum offering price per share (NAV/(100% — maximum sales charge))

 

$

13.23

  

$

9.78

  

Maximum sales charge

  

2.50

%

  

3.25

%

 

(a)  Redemption price varies based on length of time held (Note 1).

(b)  Per share amounts may not recalculate due to rounding of net assets and/or shares outstanding.

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
66



  Statement of Assets and Liabilities

May 31, 2019

  
The Water
Island Credit
Opportunities Fund
 The Water
Island
Long/Short
Fund
 

PRICING OF SHARES:

 

CLASS R SHARES:

 

Net assets applicable to Class R shares

 

$

7,844,644

  

$

10,184

  

Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value)

  

808,837

   

1,031

  

Net asset value and offering price per share

 

$

9.70

  

$

9.88

  

CLASS I SHARES:

 

Net assets applicable to Class I shares

 

$

49,795,396

  

$

2,343,604

  

Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value)

  

5,158,321

   

237,284

  

Net asset value and offering price per share

 

$

9.65

  

$

9.88

  

CLASS C SHARES:

 

Net assets applicable to Class C shares

 

$

468,160

  

$

10,184

  

Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value)

  

48,439

   

1,031

  

Net asset value and offering price per share(a)

 

$

9.67

(b)

 

$

9.88

  

CLASS A SHARES:

 

Net assets applicable to Class A shares

 

$

120,842

  

$

10,184

  

Shares of beneficial interest outstanding (unlimited number of shares authorized, no par value)

  

12,519

   

1,031

  

Net asset value and offering price per share(a)

 

$

9.65

  

$

9.88

  

Maximum offering price per share (NAV/(100% — maximum sales charge))

 

$

9.97

  

$

10.21

  

Maximum sales charge

  

3.25

%

  

3.25

%

 

Annual Report | May 31, 2019
67



The Arbitrage Funds

  The Arbitrage
Fund
 The Arbitrage
Event-Driven
Fund
 

INVESTMENT INCOME

 

Dividend income

 

$

24,922,414

  

$

1,512,538

  

Dividend income from affiliated investments

  

263,187

   

  

Foreign taxes withheld on dividends

  

(83,866

)

  

(928

)

 

Interest income

  

5,504,223

   

2,462,548

  

Total Investment Income

  

30,605,958

   

3,974,158

  

EXPENSES

 

Investment advisory fees (Note 5)

  

18,523,903

   

1,736,743

  

Distribution and service fees (Note 5)

 

Class R

  

488,305

   

95,023

  

Class C

  

210,432

   

9,495

  

Class A

  

45,043

   

2,036

  

Administrative fees (Note 5)

  

376,188

   

62,831

  

Chief Compliance Officer fees (Note 5)

  

183,941

   

12,924

  

Trustees' fees

  

115,120

   

79,276

  

Dividend expense

  

8,064,471

   

643,218

  

Interest rebate expense

  

35,497

   

2,997

  

Transfer agent fees (Note 5)

  

1,312,216

   

364,506

  

Custodian and bank service fees

  

420,771

   

114,854

  

Registration and filing fees

  

95,060

   

60,979

  

Printing of shareholder reports

  

144,141

   

46,532

  

Professional fees

  

284,108

   

36,869

  

Line of credit interest expense (Note 4)

  

   

35,500

  

Insurance expense

  

80,486

   

6,315

  

Chief Financial Officer fees (Note 5)

  

62,345

   

11,359

  

Other expenses

  

80,059

   

17,188

  

Total Expenses

  

30,522,086

   

3,338,645

  

Fees waived by the Adviser, Class R (Note 5)

  

(21,007

)

  

(150,425

)

 

Fees waived by the Adviser, Class I (Note 5)

  

(164,727

)

  

(392,244

)

 

Fees waived by the Adviser, Class C (Note 5)

  

(2,267

)

  

(3,752

)

 

Fees waived by the Adviser, Class A (Note 5)

  

(1,945

)

  

(3,225

)

 

Net Expenses

  

30,332,140

   

2,788,999

  

NET INVESTMENT INCOME

  

273,818

   

1,185,159

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
68



  Statement of Operations

For the Year Ended May 31, 2019

  
The Water
Island Credit
Opportunities Fund
 The Water
Island
Long/Short
Fund
 

INVESTMENT INCOME

 

Dividend income

 

$

147,003

  

$

37,840

  

Dividend income from affiliated investments

  

   

  

Foreign taxes withheld on dividends

  

   

(357

)

 

Interest income

  

2,441,260

   

13,342

  

Total Investment Income

  

2,588,263

   

50,825

  

EXPENSES

 

Investment advisory fees (Note 5)

  

514,904

   

27,627

  

Distribution and service fees (Note 5)

 

Class R

  

17,525

   

26

  

Class C

  

5,068

   

102

  

Class A

  

357

   

26

  

Administrative fees (Note 5)

  

43,586

   

27,034

  

Chief Compliance Officer fees (Note 5)

  

6,129

   

222

  

Trustees' fees

  

77,478

   

76,312

  

Dividend expense

  

153,627

   

16,246

  

Interest rebate expense

  

289

   

  

Transfer agent fees (Note 5)

  

53,291

   

2,978

  

Custodian and bank service fees

  

20,028

   

50,605

  

Registration and filing fees

  

58,691

   

8,968

  

Printing of shareholder reports

  

13,749

   

12,987

  

Professional fees

  

23,448

   

15,819

  

Line of credit interest expense (Note 4)

  

3,695

   

  

Insurance expense

  

2,417

   

96

  

Chief Financial Officer fees (Note 5)

  

8,685

   

7,069

  

Other expenses

  

11,062

   

6,744

  

Total Expenses

  

1,014,029

   

252,861

  

Fees waived by the Adviser, Class R (Note 5)

  

(35,953

)

  

(938

)

 

Fees waived by the Adviser, Class I (Note 5)

  

(244,066

)

  

(201,824

)

 

Fees waived by the Adviser, Class C (Note 5)

  

(2,613

)

  

(937

)

 

Fees waived by the Adviser, Class A (Note 5)

  

(740

)

  

(938

)

 

Net Expenses

  

730,657

   

48,224

  

NET INVESTMENT INCOME

  

1,857,606

   

2,601

  

Annual Report | May 31, 2019
69



The Arbitrage Funds

  The Arbitrage
Fund
 The Arbitrage
Event-Driven
Fund
 

REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCIES

 

Net realized gains (losses) from:

 

Unaffiliated investments

 

$

18,263,290

  

$

2,456,816

  

Purchased option contracts

  

(9,906,367

)

  

(1,475,621

)

 

Swap contracts

  

6,330,396

   

347,357

  

Securities sold short

  

54,909,157

   

(413,048

)

 

Written option contracts

  

7,785,695

   

872,256

  

Forward currency contracts

  

20,593,887

   

918,981

  

Foreign currency transactions (Note 8)

  

836,947

   

37,222

  

Net change in unrealized appreciation (depreciation) on:

   

Unaffiliated investments

  

(11,301,841

)

  

(1,942,929

)

 

Affiliated investments

  

4,775

   

  

Purchased option contracts

  

(869,661

)

  

19,748

  

Swap contracts

  

(19,040

)

  

  

Securities sold short

  

(3,373,640

)

  

963,822

  

Written option contracts

  

(21,922

)

  

(107,896

)

 

Forward currency contracts

  

(12,510,293

)

  

(556,649

)

 

Foreign currency transactions (Note 8)

  

(353,986

)

  

(302

)

 

NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCIES

  

70,367,397

   

1,119,757

  

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

 

$

70,641,215

  

$

2,304,916

  

See Notes to Financial Statements.

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70



  Statement of Operations

For the Year Ended May 31, 2019

  
The Water
Island Credit
Opportunities Fund
 The Water
Island
Long/Short
Fund
 

REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCIES

 

Net realized gains (losses) from:

 

Unaffiliated investments

 

$

(136,053

)

 

$

200,171

  

Purchased option contracts

  

(2,246

)

  

(60,947

)

 

Swap contracts

  

   

(11,587

)

 

Securities sold short

  

154,774

   

(132,947

)

 

Written option contracts

  

65,984

   

17,583

  

Forward currency contracts

  

73,267

   

11,557

  

Foreign currency transactions (Note 8)

  

(2,445

)

  

(193

)

 

Net change in unrealized appreciation (depreciation) on:

   

Unaffiliated investments

  

(653,777

)

  

(86,799

)

 

Affiliated investments

  

   

  

Purchased option contracts

  

19,075

   

11,438

  

Swap contracts

  

   

  

Securities sold short

  

163,621

   

45,404

  

Written option contracts

  

(26,152

)

  

(1,628

)

 

Forward currency contracts

  

(55,745

)

  

(5,741

)

 

Foreign currency transactions (Note 8)

  

384

   

(1

)

 

NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCIES

  

(399,313

)

  

(13,690

)

 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

 

$

1,458,293

  

$

(11,089

)

 

Annual Report | May 31, 2019
71



The Arbitrage Funds

  

The Arbitrage Fund

 
  Year Ended
May 31, 2019
 Year Ended
May 31, 2018
 

FROM OPERATIONS

 

Net investment income

 

$

273,818

  

$

6,493,223

  

Net realized gains (losses) from:

 

Unaffiliated investments

  

18,263,290

   

40,054,475

  

Purchased option contracts

  

(9,906,367

)

  

1,192,356

  

Swap contracts

  

6,330,396

   

3,039,770

  

Securities sold short

  

54,909,157

   

(44,952,162

)

 

Written option contracts

  

7,785,695

   

5,899,696

  

Forward currency contracts

  

20,593,887

   

(11,729,216

)

 

Foreign currency transactions

  

836,947

   

(3,771,261

)

 

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

(11,301,841

)

  

2,338,832

  

Affiliated investments

  

4,775

   

31,093

  

Purchased option contracts

  

(869,661

)

  

641,174

  

Swap contracts

  

(19,040

)

  

19,040

  

Securities sold short

  

(3,373,640

)

  

(11,177,824

)

 

Written option contracts

  

(21,922

)

  

313,012

  

Forward currency contracts

  

(12,510,293

)

  

18,928,428

  

Foreign currency transactions

  

(353,986

)

  

247,641

  

Net increase (decrease) in net assets resulting from operations

  

70,641,215

   

7,568,277

  

FROM DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

 

Distributions, Class R

  

(3,337,705

)

  

(7,912,943

)

 

Distributions, Class I

  

(28,493,325

)

  

(58,536,445

)

 

Distributions, Class C

  

(258,793

)

  

(728,863

)

 

Distributions, Class A

  

(312,255

)

  

(418,896

)

 

Decrease in net assets from distributions to shareholders

  

(32,402,078

)

  

(67,597,147

)(a)

 

FROM CAPITAL SHARE TRANSACTIONS (NOTE 7):

 

Proceeds from shares sold

  

573,691,155

   

777,369,604

  

Shares issued in reinvestment of distributions

  

25,056,881

   

49,184,317

  

Proceeds from redemption fees collected (Note 2)

  

   

4,227

  

Payments for shares redeemed

  

(662,269,228

)

  

(863,324,352

)

 

Net increase (decrease) in net assets from capital share transactions

  

(63,521,192

)

  

(36,766,204

)

 

TOTAL INCREASE (DECREASE) IN NET ASSETS

  

(25,282,055

)

  

(96,795,074

)

 

NET ASSETS

 

Beginning of year

  

1,772,563,277

   

1,869,358,351

  

End of year(a)(b)

 

$

1,747,281,222

  

$

1,772,563,277

  

(a)  Included in total distributions for net investment income and net realized gains, respectively, as of May 31, 2018 was $(1,534,226) and $(6,378,717) for Class R, $(15,683,047) and $(42,853,398) for Class I, $(2,577) and $(726,286) for Class C, and $(93,341) and $(325,555) for Class A. The accumulated net investment income (loss) included in net assets was $(13,595,408) as of May 31, 2018.

(b)  Included in total distributions for net investment income and net realized gains, respectively, as of May 31, 2018 was $(119,357) and $0 for Class R, $(608,995) and $0 for Class I, $0 and $0 for Class C, and $(1,916) and $0 for Class A. The accumulated net investment income (loss) included in net assets was $137,554 as of May 31, 2018.

See Notes to Financial Statements.

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72



  Statement of Changes in Net Assets

  

The Arbitrage Event-Driven Fund

 
  Year Ended
May 31, 2019
 Year Ended
May 31, 2018
 

FROM OPERATIONS

 

Net investment income

 

$

1,185,159

  

$

710,672

  

Net realized gains (losses) from:

 

Unaffiliated investments

  

2,456,816

   

7,068,491

  

Purchased option contracts

  

(1,475,621

)

  

176,327

  

Swap contracts

  

347,357

   

491,212

  

Securities sold short

  

(413,048

)

  

(7,058,252

)

 

Written option contracts

  

872,256

   

990,890

  

Forward currency contracts

  

918,981

   

(391,883

)

 

Foreign currency transactions

  

37,222

   

(299,434

)

 

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

(1,942,929

)

  

(117,598

)

 

Affiliated investments

  

   

  

Purchased option contracts

  

19,748

   

(47,796

)

 

Swap contracts

  

   

  

Securities sold short

  

963,822

   

(102,711

)

 

Written option contracts

  

(107,896

)

  

124,180

  

Forward currency contracts

  

(556,649

)

  

731,389

  

Foreign currency transactions

  

(302

)

  

(9,009

)

 

Net increase (decrease) in net assets resulting from operations

  

2,304,916

   

2,266,478

  

FROM DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

 

Distributions, Class R

  

(546,554

)

  

(119,357

)

 

Distributions, Class I

  

(1,734,805

)

  

(608,995

)

 

Distributions, Class C

  

(5,311

)

  

  

Distributions, Class A

  

(13,015

)

  

(1,916

)

 

Decrease in net assets from distributions to shareholders

  

(2,299,685

)

  

(730,268

)(b)

 

FROM CAPITAL SHARE TRANSACTIONS (NOTE 7):

 

Proceeds from shares sold

  

18,462,931

   

62,289,254

  

Shares issued in reinvestment of distributions

  

1,993,650

   

616,739

  

Proceeds from redemption fees collected (Note 2)

  

   

201

  

Payments for shares redeemed

  

(45,994,464

)

  

(55,109,703

)

 

Net increase (decrease) in net assets from capital share transactions

  

(25,537,883

)

  

7,796,491

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

  

(25,532,652

)

  

9,332,701

  

NET ASSETS

 

Beginning of year

  

150,259,094

   

140,926,393

  

End of year(a)(b)

 

$

124,726,442

  

$

150,259,094

  

Annual Report | May 31, 2019
73



The Arbitrage Funds

  The Water Island
Credit Opportunities Fund
 
  Year Ended
May 31, 2019
 Year Ended
May 31, 2018
 

FROM OPERATIONS

 

Net investment income

 

$

1,857,606

  

$

1,216,196

  

Net realized gains (losses) from:

 

Unaffiliated investments

  

(136,053

)

  

(337,585

)

 

Purchased option contracts

  

(2,246

)

  

(9,095

)

 

Swap contracts

  

   

  

Securities sold short

  

154,774

   

274,941

  

Written option contracts

  

65,984

   

15,814

  

Forward currency contracts

  

73,267

   

24,779

  

Foreign currency transactions

  

(2,445

)

  

3,357

  

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

(653,777

)

  

634,951

  

Purchased option contracts

  

19,075

   

2,224

  

Swap contracts

  

   

  

Securities sold short

  

163,621

   

(84,809

)

 

Written option contracts

  

(26,152

)

  

18,059

  

Forward currency contracts

  

(55,745

)

  

55,745

  

Foreign currency transactions

  

384

   

(384

)

 

Net increase (decrease) in net assets resulting from operations

  

1,458,293

   

1,814,193

  

FROM DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

 

Distributions, Class R

  

(223,168

)

  

(303,919

)

 

Distributions, Class I

  

(1,623,472

)

  

(1,078,145

)

 

Distributions, Class C

  

(12,522

)

  

(10,515

)

 

Distributions, Class A

  

(4,639

)

  

(8,084

)

 

Decrease in net assets from distributions to shareholders

  

(1,863,801

)

  

(1,400,663

)(c)

 

FROM CAPITAL SHARE TRANSACTIONS (NOTE 7):

 

Proceeds from shares sold

  

31,563,229

   

14,355,166

  

Shares issued in reinvestment of distributions

  

1,841,724

   

1,314,693

  

Proceeds from redemption fees collected (Note 2)

  

   

  

Payments for shares redeemed

  

(21,303,781

)

  

(26,804,020

)

 

Net increase (decrease) in net assets from capital share transactions

  

12,101,172

   

(11,134,161

)

 

TOTAL INCREASE (DECREASE) IN NET ASSETS

  

11,695,664

   

(10,720,631

)

 

NET ASSETS

 

Beginning of year

  

46,533,378

   

57,254,009

  

End of year(c)(d)

 

$

58,229,042

  

$

46,533,378

  

(c)  Included in total distributions for net investment income and net realized gains, respectively, as of May 31, 2018 was $(303,919) and $0 for Class R, $(1,078,145) and $0 for Class I, $(10,515) and $0 for Class C, and $(8,084) and $0 for Class A. The accumulated net investment income (loss) included in net assets was $9,713 as of May 31, 2018.

(d)  The accumulated net investment income (loss) included in net assets was $(6,841) as of May 31, 2018.

See Notes to Financial Statements.

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74



  Statement of Changes in Net Assets

  

The Water Island Long/Short Fund

 
  Year Ended
May 31, 2019
 Year Ended
May 31, 2018
 

FROM OPERATIONS

 

Net investment income

 

$

2,601

  

$

(4,962

)

 

Net realized gains (losses) from:

 

Unaffiliated investments

  

200,171

   

213,124

  

Purchased option contracts

  

(60,947

)

  

4,811

  

Swap contracts

  

(11,587

)

  

5,809

  

Securities sold short

  

(132,947

)

  

(214,152

)

 

Written option contracts

  

17,583

   

24,527

  

Forward currency contracts

  

11,557

   

(11,998

)

 

Foreign currency transactions

  

(193

)

  

(1,038

)

 

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

(86,799

)

  

2,002

  

Purchased option contracts

  

11,438

   

(2,070

)

 

Swap contracts

  

   

  

Securities sold short

  

45,404

   

2,021

  

Written option contracts

  

(1,628

)

  

177

  

Forward currency contracts

  

(5,741

)

  

10,251

  

Foreign currency transactions

  

(1

)

  

(133

)

 

Net increase (decrease) in net assets resulting from operations

  

(11,089

)

  

28,369

  

FROM DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

 

Distributions, Class R

  

(206

)

  

  

Distributions, Class I

  

(43,718

)

  

  

Distributions, Class C

  

(206

)

  

  

Distributions, Class A

  

(206

)

  

  

Decrease in net assets from distributions to shareholders

  

(44,336

)

  

  

FROM CAPITAL SHARE TRANSACTIONS (NOTE 7):

 

Proceeds from shares sold

  

366,929

   

135,037

  

Shares issued in reinvestment of distributions

  

44,336

   

  

Proceeds from redemption fees collected (Note 2)

  

   

  

Payments for shares redeemed

  

(189,524

)

  

(34,125

)

 

Net increase (decrease) in net assets from capital share transactions

  

221,741

   

100,912

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

  

166,316

   

129,281

  

NET ASSETS

 

Beginning of year

  

2,207,840

   

2,078,559

  

End of year(c)(d)

 

$

2,374,156

  

$

2,207,840

  

Annual Report | May 31, 2019
75



The Arbitrage Fund – Class R  Financial Highlights

Selected Per Share Data and Ratios for a Share Outstanding Throughout the Periods Presented:

  

Year Ended May 31,

 
  

2019

 

2018

 

2017

 

2016

 

2015

 
Net asset value,
beginning of period
 

$

12.65

  

$

13.06

  

$

12.78

  

$

12.97

  

$

12.58

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

(0.03

)(c)

  

0.05

   

(0.13

)(b)

  

(0.06

)

  

(0.11

)

 
Net realized and unrealized
gains (losses) on investments
and foreign currencies
  

0.52

   

(0.01

)(c)

  

0.53

(d)

  

0.17

   

0.53

  

Total from investment operations

  

0.49

   

0.04

   

0.40

   

0.11

   

0.42

  

Less distributions

 

From net investment income

  

(0.06

)

  

(0.09

)

  

   

   

  

From net realized gains

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

  

(0.03

)

 

Total distributions

  

(0.22

)

  

(0.45

)

  

(0.12

)

  

(0.30

)

  

(0.03

)

 
Proceeds from redemption
fees collected
  

   

0.00

(e)

  

0.00

(e)

  

0.00

(e)

  

0.00

(e)

 

Net asset value, end of period

 

$

12.92

  

$

12.65

  

$

13.06

  

$

12.78

  

$

12.97

  

Total return(f)

  

3.89

%

  

0.31

%

  

3.17

%

  

0.87

%

  

3.35

%

 
Net assets, end of period
(in 000s)
 

$

163,349

  

$

222,309

  

$

340,353

  

$

433,936

  

$

500,440

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(g)

  

1.94

%

  

1.91

%

  

1.87

%(b)

  

1.88

%

  

2.31

%

 
Net expenses after advisory
fees waived and expenses
reimbursed(g)(h)
  

1.93

%

  

1.90

%

  

1.87

%(b)

  

1.88

%

  

2.31

%

 

Net investment income (loss)

  

(0.20

%)(c)

  

0.41

%

  

(1.00

%)(b)

  

(0.51

%)

  

(0.87

%)

 

Portfolio turnover rate

  

419

%

  

362

%

  

363

%

  

321

%

  

514

%

 

(a)  Per share amounts were calculated using average shares outstanding for the year.

(b)  Includes a non-recurring refund by the custodian for overbilling of prior years' out-of-pocket fees. This amounted to less than $0.01 per share and is less than 0.005% of average net assets.

(c)  The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to timing of sales and redemptions of Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.

(d)  Includes estimated proceeds from the Fund's participation in a class action lawsuit. This represents a non-recurring gain in the amount of $0.01 per share.

(e)  Amount rounds to less than $0.01 per share.

(f)  Total return is a measure of the change in the value of an investment in the Fund over the years covered, which assumes any dividends or capital gains distributions are reinvested in shares of the Fund. Returns shown do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares.

(g)  Dividend expense totaled 0.46%, 0.42%, 0.36%, 0.34% and 0.68% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively. Interest rebate expense and line of credit interest expense totaled 0.00%, 0.01%, 0.03%, 0.07% and 0.18% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

(h)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 1.47%, 1.47%, 1.48%, 1.47% and 1.45% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

See Notes to Financial Statements.

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76



The Arbitrage Fund – Class I  Financial Highlights

Selected Per Share Data and Ratios for a Share Outstanding Throughout the Periods Presented:

  

Year Ended May 31,

 
  

2019

 

2018

 

2017

 

2016

 

2015

 
Net asset value,
beginning of period
 

$

13.03

  

$

13.46

  

$

13.13

  

$

13.28

  

$

12.86

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

0.01

   

0.05

   

(0.10

)(b)

  

(0.03

)

  

(0.09

)

 
Net realized and unrealized
gains on investments and
foreign currencies
  

0.54

   

0.01

   

0.55

(c)

  

0.18

   

0.54

  

Total from investment operations

  

0.55

   

0.06

   

0.45

   

0.15

   

0.45

  

Less distributions

 

From net investment income

  

(0.10

)

  

(0.13

)

  

   

   

  

From net realized gains

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

  

(0.03

)

 

Total distributions

  

(0.26

)

  

(0.49

)

  

(0.12

)

  

(0.30

)

  

(0.03

)

 
Proceeds from redemption
fees collected
  

   

0.00

(d)

  

0.00

(d)

  

0.00

(d)

  

0.00

(d)

 

Net asset value, end of period

 

$

13.32

  

$

13.03

  

$

13.46

  

$

13.13

  

$

13.28

  

Total return(e)

  

4.21

%

  

0.50

%

  

3.47

%

  

1.16

%

  

3.51

%

 
Net assets, end of period
(in 000s)
 

$

1,546,542

  

$

1,510,598

  

$

1,492,094

  

$

1,395,178

  

$

1,514,685

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(f)

  

1.69

%

  

1.66

%

  

1.62

%(b)

  

1.63

%

  

2.06

%

 
Net expenses after advisory
fees waived and expenses
reimbursed(f)(g)
  

1.68

%

  

1.65

%

  

1.62

%(b)

  

1.63

%

  

2.06

%

 

Net investment income (loss)

  

0.06

%

  

0.35

%

  

(0.76

%)(b)

  

(0.24

%)

  

(0.65

%)

 

Portfolio turnover rate

  

419

%

  

362

%

  

363

%

  

321

%

  

514

%

 

(a)  Per share amounts were calculated using average shares outstanding for the year.

(b)  Includes a non-recurring refund by the custodian for overbilling of prior years' out-of-pocket fees. This amounted to less than $0.01 per share and is less than 0.005% of average net assets.

(c)  Includes estimated proceeds from the Fund's participation in a class action lawsuit. This represents a non-recurring gain in the amount of $0.01 per share.

(d)  Amount rounds to less than $0.01 per share.

(e)  Total return is a measure of the change in the value of an investment in the Fund over the years covered, which assumes any dividends or capital gains distributions are reinvested in shares of the Fund. Returns shown do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares.

(f)  Dividend expense totaled 0.46%, 0.42%, 0.36%, 0.34% and 0.68% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively. Interest rebate expense and line of credit interest expense totaled 0.00%, 0.01%, 0.03%, 0.07% and 0.18% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

(g)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 1.22%, 1.22%, 1.23%, 1.22% and 1.20% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

See Notes to Financial Statements.

Annual Report | May 31, 2019
77



The Arbitrage Fund – Class C  Financial Highlights

Selected Per Share Data and Ratios for a Share Outstanding Throughout the Periods Presented:

  

Year Ended May 31,

 
  

2019

 

2018

 

2017

 

2016

 

2015

 
Net asset value,
beginning of period
 

$

12.12

  

$

12.54

  

$

12.37

  

$

12.65

  

$

12.37

  
Income (loss) from
investment operations
 

Net investment loss(a)

  

(0.12

)(b)

  

(0.07

)(b)

  

(0.22

)(c)

  

(0.16

)

  

(0.20

)

 
Net realized and unrealized
gains on investments and
foreign currencies
  

0.50

   

0.01

   

0.51

(d)

  

0.18

   

0.51

  

Total from investment operations

  

0.38

   

(0.06

)

  

0.29

   

0.02

   

0.31

  

Less distributions

 

From net investment income

  

   

(0.00

)(e)

  

   

   

  

From net realized gains

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

  

(0.03

)

 

Total distributions

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

  

(0.03

)

 
Proceeds from redemption
fees collected
  

   

   

   

   

  

Net asset value, end of period

 

$

12.34

  

$

12.12

  

$

12.54

  

$

12.37

  

$

12.65

  

Total return(f)(g)

  

3.11

%

  

(0.45

%)

  

2.38

%

  

0.18

%

  

2.52

%

 
Net assets, end of period
(in 000s)
 

$

19,050

  

$

22,917

  

$

26,900

  

$

30,814

  

$

32,958

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(h)

  

2.69

%

  

2.66

%

  

2.62

%(c)

  

2.63

%

  

3.06

%

 
Net expenses after advisory
fees waived and expenses
reimbursed(h)(i)
  

2.68

%

  

2.65

%

  

2.62

%(c)

  

2.63

%

  

3.06

%

 

Net investment loss

  

(0.94

%)(b)

  

(0.56

%)

  

(1.76

%)(c)

  

(1.28

%)

  

(1.60

%)

 

Portfolio turnover rate

  

419

%

  

362

%

  

363

%

  

321

%

  

514

%

 

(a)  Per share amounts were calculated using average shares outstanding for the year.

(b)  The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to timing of sales and redemptions of Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.

(c)  Includes a non-recurring refund by the custodian for overbilling of prior years' out-of-pocket fees. This amounted to less than $0.01 per share and is less than 0.005% of average net assets.

(d)  Includes estimated proceeds from the Fund's participation in a class action lawsuit. This represents a non-recurring gain in the amount of $0.01 per share.

(e)  Amount rounds to less than $0.01 per share.

(f)  Total return is a measure of the change in the value of an investment in the Fund over the years covered, which assumes any dividends or capital gains distributions are reinvested in shares of the Fund. Returns shown do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares.

(g)  Total return excludes sales charges, if any, and would be lower for the period presented if it reflected these charges.

(h)  Dividend expense totaled 0.46%, 0.42%, 0.36%, 0.34% and 0.68% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively. Interest rebate expense and line of credit interest expense totaled 0.00%, 0.01%, 0.03%, 0.07% and 0.18% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

(i)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 2.22%, 2.22%, 2.23%, 2.22% and 2.20% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
78



The Arbitrage Fund – Class A  Financial Highlights

Selected Per Share Data and Ratios for a Share Outstanding Throughout the Periods Presented:

  

Year Ended May 31,

 
  

2019

 

2018

 

2017

 

2016

 

2015

 
Net asset value,
beginning of period
 

$

12.63

  

$

13.07

  

$

12.79

  

$

12.97

  

$

12.59

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

(0.02

)(d)

  

(b)

  

(0.13

)(c)

  

(0.07

)

  

(0.09

)

 
Net realized and unrealized
gains on investments and
foreign currencies
  

0.52

   

0.02

   

0.53

(e)

  

0.19

   

0.50

  

Total from investment operations

  

0.50

   

0.02

   

0.40

   

0.12

   

0.41

  

Less distributions

 

From net investment income

  

(0.07

)

  

(0.10

)

  

   

   

  

From net realized gains

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

  

(0.03

)

 

Total distributions

  

(0.23

)

  

(0.46

)

  

(0.12

)

  

(0.30

)

  

(0.03

)

 
Proceeds from redemption
fees collected
  

   

   

   

   

  

Net asset value, end of period

 

$

12.90

  

$

12.63

  

$

13.07

  

$

12.79

  

$

12.97

  

Total return(f)(g)

  

3.94

%

  

0.21

%

  

3.17

%

  

0.95

%

  

3.27

%

 
Net assets, end of period
(in 000s)
 

$

18,341

  

$

16,740

  

$

10,012

  

$

8,421

  

$

17,458

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(h)

  

1.94

%

  

1.91

%

  

1.87

%(c)

  

1.87

%

  

2.31

%

 
Net expenses after advisory
fees waived and expenses
reimbursed(h)(i)
  

1.93

%

  

1.90

%

  

1.87

%(c)

  

1.87

%

  

2.31

%

 

Net investment loss

  

(0.19

%)(d)

  

(0.01

%)

  

(1.02

%)(c)

  

(0.56

%)

  

(0.70

%)

 

Portfolio turnover rate

  

419

%

  

362

%

  

363

%

  

321

%

  

514

%

 

(a)  Per share amounts were calculated using average shares outstanding for the year.

(b)  Amount rounds to less than $0.01 per share.

(c)  Includes a non-recurring refund by the custodian for overbilling of prior years' out-of-pocket fees. This amounted to less than $0.01 per share and is less than 0.005% of average net assets.

(d)  The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to timing of sales and redemptions of Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.

(e)  Includes estimated proceeds from the Fund's participation in a class action lawsuit. This represents a non-recurring gain in the amount of $0.01 per share.

(f)  Total return is a measure of the change in the value of an investment in the Fund over the years covered, which assumes any dividends or capital gains distributions are reinvested in shares of the Fund. Returns shown do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares or the imposition of any sales load.

(g)  Total return excludes sales charges, if any, and would be lower for the period presented if it reflected these charges.

(h)  Dividend expense totaled 0.46%, 0.42%, 0.36%, 0.33% and 0.68% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively. Interest rebate expense and line of credit interest expense totaled 0.00%, 0.01%, 0.03%, 0.07% and 0.18% of average net assets for the the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

(i)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 1.47%, 1.47%, 1.48%, 1.47% and 1.45% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

See Notes to Financial Statements.

Annual Report | May 31, 2019
79



The Arbitrage Event-Driven Fund – Class R  Financial Highlights

Selected Per Share Data and Ratios for a Share Outstanding Throughout the Periods Presented:

  

Year Ended May 31,

 
  

2019

 

2018

 

2017

 

2016

 

2015

 
Net asset value,
beginning of period
 

$

9.46

  

$

9.34

  

$

8.98

  

$

9.73

  

$

10.29

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

0.07

   

0.06

   

(0.04

)(b)

  

(0.02

)

  

0.04

  
Net realized and unrealized
gains (losses) on investments
and foreign currencies
  

0.08

   

0.09

   

0.40

(c)

  

(0.53

)

  

(0.36

)

 

Total from investment operations

  

0.15

   

0.15

   

0.36

   

(0.55

)

  

(0.32

)

 

Less distributions

 

From net investment income

  

(0.14

)

  

(0.03

)

  

   

(0.20

)

  

(0.08

)

 

From net realized gains

  

   

   

   

(0.00

)(d)

  

(0.16

)

 

Total distributions

  

(0.14

)

  

(0.03

)

  

   

(0.20

)

  

(0.24

)

 
Proceeds from redemption
fees collected
  

   

0.00

(d)

  

0.00

(d)

  

0.00

(d)

  

0.00

(d)

 

Net asset value, end of period

 

$

9.47

  

$

9.46

  

$

9.34

  

$

8.98

  

$

9.73

  

Total return(e)

  

1.60

%

  

1.56

%

  

4.01

%

  

(5.55

%)

  

(3.12

%)

 
Net assets, end of period
(in 000s)
 

$

30,423

  

$

45,383

  

$

70,277

  

$

80,114

  

$

195,014

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(f)

  

2.58

%

  

2.59

%

  

2.56

%(b)

  

2.62

%

  

2.52

%

 
Net expenses after advisory
fees waived and expenses
reimbursed(f)(g)
  

2.18

%

  

2.16

%

  

2.26

%

  

2.46

%

  

2.50

%

 

Net investment income (loss)

  

0.70

%

  

0.58

%

  

(0.45

%)(b)

  

(0.27

%)

  

0.37

%

 

Portfolio turnover rate

  

504

%

  

421

%

  

409

%

  

350

%

  

451

%

 

(a)  Per share amounts were calculated using average shares outstanding for the year.

(b)  Includes a non-recurring refund by the custodian for overbilling of prior years' out-of-pocket fees. This amounted to less than $0.01 per share and 0.01% of average net assets.

(c)  Includes estimated proceeds from the Fund's participation in a class action lawsuit. This represents a non-recurring gain in the amount of less than $0.005 per share.

(d)  Amount rounds to less than $0.01 per share.

(e)  Total return is a measure of the change in the value of an investment in the Fund over the years covered, which assumes any dividends or capital gains distributions are reinvested in shares of the Fund. Returns shown do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares.

(f)  Dividend expense totaled 0.46%, 0.44%, 0.53%, 0.58% and 0.55% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively. Interest rebate expense and line of credit interest expense totaled 0.03%, 0.03%, 0.04%, 0.19% and 0.26% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

(g)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 1.69%, 1.69%, 1.69%, 1.69% and 1.69% of average net assets for the years ended May 31, 2019, 2018, 2017, 2016 and 2015, respectively.

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
80



The Arbitrage Event-Driven Fund – Class I  Financial Highlights

Selected Per Share Data and Ratios for a Share Outstanding Throughout the Periods Presented:

  

Year Ended May 31,

 
  

2019

 

2018

 

2017

 

2016

 

2015

 
Net asset value,
beginning of period
 

$

9.53

  

$

9.43

  

$

9.04

  

$

9.81

  

$

10.37

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

0.09

   

0.04

   

(0.02

)(b)

  

(0.02

)

  

0.06

  
Net realized and unrealized
gains (losses) on investments
and foreign currencies
  

0.09

   

0.12

   

0.41

(c)

  

(0.51

)

  

(0.37

)

 

Total from investment operations

  

0.18

   

0.16

   

0.39

   

(0.53

)

  

(0.31

)

 

Less distributions

 

From net investment income

  

(0.17

)

  

(0.06

)

  

   

(0.24

)

  

(0.09

)

 

From net realized gains

  

   

   

   

(0.00

)(d)

  

(0.16

)

 

Total distributions

  

(0.17

)

  

(0.06

)

  

   

(0.24

)

  

(0.25

)

 
Proceeds from redemption
fees collected
  

   

0.00

(d)

  

0.00

(d)

  

0.00

(d)

  

0.00

(d)

 

Net asset value, end of period

 

$

9.54

  

$

9.53

  

$

9.43

  

$

9.04

  

$

9.81

  

Total return(e)

  

1.88

%

  

1.69

%

  

4.31

%

  

(5.27

%)

  

(2.96

%)

 
Net assets, end of period
(in 000s)
 

$

92,710

  

$

103,001

  

$

68,272

  

$

95,155

  

$

390,102

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(f)

  

2.33

%

  

2.34

%

  

2.31

%(b)

  

2.37

%

  

2.27

%

 
Net expenses after advisory
fees waived and expenses
reimbursed(f)(g)
  

1.93

%

  

1.91

%

  

2.01

%

  

2.21

%

  

2.25

%

 

Net investment income (loss)

  

0.92

%

  

0.46

%

  

(0.22

%)(b)

  

(0.26

%)

  

0.62

%

 

Portfolio turnover rate

  

504

%

  

421

%

  

409

%

  

350

%

  

451

%

 

(a)  Per share amounts were calculated using average shares outstanding for the year.<