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Arbitrage Funds

Filed: 7 Aug 20, 12:37pm

 

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, 2020

 

 

 

Item 1. Reports to Stockholders.

 

 

 

Annual Report

May 31, 2020

Arbitrage Fund

Water Island Diversified Event-Driven Fund

Water Island Credit Opportunities Fund

Water Island Long/Short Fund

Paper copies of The Arbitrage Funds' 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

  

Arbitrage Fund

 

Manager Commentary

  

3

  

Portfolio Information

  

6

  

Portfolio of Investments

  

8

  

Water Island Diversified Event-Driven Fund

 

Manager Commentary

  

16

  

Portfolio Information

  

18

  

Portfolio of Investments

  

20

  

Water Island Credit Opportunities Fund

 

Manager Commentary

  

30

  

Portfolio Information

  

32

  

Portfolio of Investments

  

34

  

Water Island Long/Short Fund

 

Manager Commentary

  

44

  

Portfolio Information

  

46

  

Portfolio of Investments

  

48

  

Statements of Assets and Liabilities

  

58

  

Statements of Operations

  

62

  

Statements of Changes in Net Assets

  

66

  

Financial Highlights

 

Arbitrage Fund - Class R

  

70

  

Arbitrage Fund - Class I

  

71

  

Arbitrage Fund - Class C

  

72

  

Arbitrage Fund - Class A

  

73

  

Water Island Diversified Event-Driven Fund - Class R

  

74

  

Water Island Diversified Event-Driven Fund - Class I

  

75

  

Water Island Diversified Event-Driven Fund - Class C

  

76

  

Water Island Diversified Event-Driven Fund - Class A

  

77

  

Water Island Credit Opportunities Fund - Class R

  

78

  

Water Island Credit Opportunities Fund - Class I

  

79

  

Water Island Credit Opportunities Fund - Class C

  

80

  

Water Island Credit Opportunities Fund - Class A

  

81

  

Water Island Long/Short Fund - Class R

  

82

  

Water Island Long/Short Fund - Class I

  

83

  

Notes to Financial Statements

  

84

  

Report of Independent Registered Public Accounting Firm

  

111

  

Disclosure of Fund Expenses

  

112

  

Additional Information

  

115

  

Approval of Investment Advisory Agreements

  

116

  

Liquidity Risk

  

121

  

Trustees & Officers

  

122

  


The Arbitrage Funds  Shareholder Letter

May 31, 2020 (Unaudited)

Dear Fellow Shareholders,

The past fiscal year – and the past few months in particular – has been an unprecedented time not just for investors but for much of humanity. Nearly a year ago, most conversations regarding financial markets focused on the US/China trade war, concerns about inflation and slowing global growth, and whether the Federal Reserve ("Fed") would reverse course after more than two years of small but steady interest rate hikes and cut rates for the first time in over a decade. Not only did the Fed implement a 25-basis-point cut in August 2019, but scarcely more than six months later the Fed Funds rate was back at zero, where it was mired for seven years following the Financial Crisis. In the face of widespread uncertainty and the potential for massive economic losses stemming from the COVID-19 pandemic, the Fed had swiftly cut rates to zero and embarked on a massive stimulus program to bolster the economy and financial markets. Further stimulus programs from Congress were also passed to help turn the tide. Though March 2020 officially saw the end of the longest bull run in history, with the S&P 500 Index having traded down nearly 34% at one point, investors responded with confidence. Through April and May markets in the US began to recover just as quickly as they declined. Optimism around progress on coronavirus vaccines and the potential re-opening of economies across the nation may have played a part, but one must also remember the adage, "Don't fight the Fed."

What does such a challenging and unpredictable environment mean for us as event-driven investors? We are cautious not to say that broader market moves are entirely inconsequential for our event-driven strategies, but in general the idiosyncratic nature of our funds' return drivers was maintained throughout the volatility. During the worst moments of the downturn, when levered investors and panicked sellers sought liquidity wherever it was available, we did see correlations converge – even in our most idiosyncratic, most definitive investment opportunities (such as merger arbitrage investments). This is not unexpected in an extreme bear market as these types of positions are often both less impacted by market moves and easier to sell, and we saw many parallels in 2020 to our experiences during 2008. While periods of market stress can lead to a spike in short-term volatility in the strategy, they can also present attractive opportunities to initiate or scale up positions at favorable rates of return, and as of May 31, each of our funds had generated positive returns for both the fiscal year and the calendar year-to-date period.

Looking ahead, we believe we are by no means out of the woods yet – neither for event-driven strategies nor markets overall. We expect to encounter bouts of volatility in the months ahead. Not only has the ultimate outcome of the COVID-19 pandemic yet to be written, but we have the added wrinkle of a presidential election year in the US. Merger arbitrage returns could be challenged in the short term as interest rates are subdued, the pace of newly announced mergers and acquisitions (M&A) is likely to abate before it picks up again, and M&A targets and acquirers are more likely to attempt to abandon a definitive transaction during a time of economic distress and uncertainty. That said, the current slate of announced deals has provided plenty of opportunity and – as always – a definitive merger agreement is a binding contract. With few exceptions (such as a material adverse change in a company's business or failure to secure financing, a shareholder vote, or regulatory approval for a deal) a definitive transaction, once announced, must close. Our job as arbitrageurs is to discern which transactions are at greatest risk of incurring these exceptions – the deals to avoid – and which warrant adding to the portfolio. Furthermore, despite potential headwinds for merger arb, we also have reason to be optimistic. Following a period in which asset prices have been depressed, after an initial slowdown in M&A, consolidation activity typically resumes quickly. Companies in a position of strength seek to make opportunistic acquisitions while companies in a position of weakness must combine to survive.

Annual Report | May 31, 2020
1



The Arbitrage Funds  Shareholder Letter (continued)

May 31, 2020 (Unaudited)

We also tend to see an increase in competitive bidding situations where multiple topping bids can still result in a takeout price far below where a target had been trading mere months prior. Topping bids are a boon to returns and we witnessed such a scenario in 2009, coming out of the Financial Crisis, when competitive bidders emerged in multiple deals throughout the course of the year. Outside of our merger arbitrage strategy, we intend to remain focused on the types of catalysts that can best help isolate portfolios from broader market moves – i.e., shorter duration investments with more definitive outcomes. This includes a robust pipeline of spin-offs as well as speculative M&A opportunities in several transactions that were rumored to have been underway yet were called off in light of the pandemic, but which we now believe are more likely to resume. The portfolios have also begun investing in special purpose acquisition companies, which are specifically designed to engage in an acquisition as a means to take public the target company.

Regardless of the specific flavor of event-driven investing, whether it be pure-play merger arbitrage, long/short equity and credit investing, or a multi-strategy approach combining all of the above, we will continue to seek to generate returns from the outcomes of idiosyncratic corporate catalysts rather than broad market direction, while also striving to preserve capital during times of market stress. Above all else, throughout the ongoing health crisis we hope that you and your families remain safe, and you may rest assured that our goal is to steward our clients' assets with the same care that we safeguard the health of our own colleagues and families. Thank you for your continued support.

Sincerely,
The Investment Team
Water Island Capital

The discussion of market trends and companies throughout this commentary are not intended as advice to any person regarding the advisability of investing in any particular security. Some of our comments are based on current management expectations and are considered "forward-looking statements." Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time of the commentary and are subject to change any time based on market and other conditions, and we have no obligation to update them.

Glossary

Basis Point: An amount equal to 1/100 of 1%.

Fed Funds Rate: The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight.

Long/Short: A strategy that invests both long (i.e., purchases securities, typically with an expectation that their prices will go up) and short (i.e., sells securities, typically with an expectation that their prices will go down).

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



Arbitrage Fund  Manager Commentary

May 31, 2020 (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 3.27% for the fiscal year ending May 31, 2020. Returns were generated predominantly in the Americas region, though Europe contributed as well. The Asia Pacific region detracted from returns slightly. The top performing sectors in the Fund were information technology and consumer discretionary. Real estate and consumer staples were the only sectors that detracted from returns over the period.

The Fund's top performing deal for the period was our position in the acquisition of Caesars Entertainment by Eldorado Resorts. In June 2019, Eldorado Resorts – a US-based holding company for casino hotels – agreed to acquire Caesars Entertainment – a local peer – for $10.0 billion in cash and stock. During Q1 2020, casinos across the nation were forced to shutter due to the novel coronavirus outbreak, causing the share prices of casino operators to plummet. This led many investors to question the desire of Caesars and Eldorado to consummate their transaction, sending the deal spread wider. In our analysis, the merger agreement and the strategic rationale for the transaction remained strong, and with the financing for the deal already committed, we believed there was still a high likelihood of reaching a successful conclusion. The volatility in the deal spread allowed us to increase our position at favorable rates of return. The portfolio benefited from a tightening in the deal spread as the market rallied in April and May, casino operator share prices began to recover, and the deal progressed through the regulatory approval process – providing confidence to investors that the transaction was increasingly likely to close. We anticipate the deal will close in mid-2020 after the receipt of all required regulatory approvals.

The second-best performer was our position in AbbVie's merger with Allergan. In June 2019, pharmaceutical companies Allergan and AbbVie announced their intent to merge. The terms of

Annual Report | May 31, 2020
3



Arbitrage Fund  Manager Commentary (continued)

May 31, 2020 (Unaudited)

the deal call for AbbVie to pay $85.0 billion in cash and stock to acquire Allergan. We had developed a high degree of conviction in this transaction and built a core position in the deal coming into 2020. Based on the deal timeline, our initial expectation for completion was in early 2020. The deal spread widened amidst the extreme market volatility of Q1, and the widespread quarantining stemming from the global coronavirus pandemic led to slight delays in the regulatory approval process. This provided us an opportunity to increase our position at very favorable rates of return as we did not believe any of these developments would derail the transaction, and we were rewarded when the deal closed successfully in May.

Conversely, the top detractor in the portfolio for the period was our position in Illumina's attempted acquisition of Pacific Biosciences. In November 2018, Illumina – a US developer of tools for DNA sequencing and analysis – agreed to acquire Pacific Biosciences – a US DNA sequencing technology firm – for $1.1 billion in cash. The transaction encountered objections from multiple global regulators over the course of a long, fraught antitrust review process, primarily on a novel basis of potential competition – that is, despite limited overlap between the companies' businesses at the current time, it was feared Illumina was trying to take out a nascent competitor before it could grow. Ultimately, the companies decided to terminate the transaction shortly into 2020 rather than fight the regulators in court. We maintained our exposure to Pacific Biosciences as we believed the company remained an attractive takeout candidate – indeed, the UK regulatory authority's investigation revealed Illumina believed no fewer than four of its major competitors were potential suitors of Pacific Biosciences. While this position detracted from returns amidst widespread market volatility in Q1 2020, we continue to believe Pacific Biosciences is likely to be acquired and we are monitoring the situation closely.

The Fund's second-worst performer was Simon Property Group's planned acquisition of Taubman Centers. In February 2020, Taubman Centers – a US-based real estate investment trust focused on shopping centers – agreed to be acquired by local peer Simon Property Group for $3.2 billion in cash. As the novel coronavirus pandemic spread and malls shuttered or saw their traffic plummet amidst mass quarantines, investors began to fear Simon Property may attempt to abandon the transaction and Taubman shares plummeted as much as 24% from their peak during the quarter. We maintained our exposure to the deal as we believe the definitive merger agreement in this transaction is one of the strongest contracts in our space today, and we believe Simon has very few – if any – avenues to escape its obligation to complete the merger. In June, Simon filed to terminate the transaction, claiming Taubman has been disproportionately impacted by the pandemic and has breached its obligations under the merger agreement. Taubman in turn claimed Simon's termination is invalid and without merit, and the company believes Simon continues to be bound to the transaction in all respects. Our conviction in our position has not wavered, as we believe Taubman by far has the stronger case for several reasons. The merger agreement carves out pandemics as reasons by which a material adverse change (MAC) may be claimed. Furthermore, Taubman's obligations under the agreement only call for the company to exercise "commercially reasonable" efforts in conducting its ordinary course of business. There are no financing contingencies on this deal, and it is being funded solely from Simon's balance sheet. We have reviewed Simon's court filing, which we believe makes what are at best dubious claims to support the company's argument for termination (even more so as malls reopen and foot traffic resumes). Lastly, the case was filed in Michigan, where Taubman is both domiciled and headquartered. In our experience through similar court cases and appraisal rights processes, a "home court" advantage in such proceedings is very much a real thing. Taubman is a highly strategic asset for Simon, and there is a chance the lawsuit is simply an attempt by Simon to convince Taubman to agree to a cut in deal terms to avoid lengthy, costly litigation – but if the

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



Arbitrage Fund  Manager Commentary (continued)

May 31, 2020 (Unaudited)

case does go to trial, we are confident that Taubman can emerge victorious and require Simon to complete the deal on its original terms.

Glossary

Commercially Reasonable Efforts: A legal concept with varying definitions in different jurisdictions, but generally understood to mean acting reasonably and not against one's own interests (a level below "best efforts").

Deal Spread: The difference between the price at which a target company's shares currently trade and the price an acquiring company has agreed to pay

Annual Report | May 31, 2020
5



Arbitrage Fund  Portfolio Information

May 31, 2020 (Unaudited)

Performance (annualized returns as of May 31, 2020)

  One
Year
 Five
Year
 Ten
Year
 Since
Inception*
 

Arbitrage Fund, Class R

  

3.07

%

  

2.25

%

  

2.30

%

  

3.91

%

 

Arbitrage Fund, Class I

  

3.27

%

  

2.51

%

  

2.55

%

  

3.03

%

 

Arbitrage Fund, Class C**

  

2.24

%

  

1.48

%

  

N/A

   

1.25

%

 

Arbitrage Fund, Class A***

  

3.00

%

  

2.24

%

  

N/A

   

2.24

%

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

1.84

%

  

1.19

%

  

0.64

%

  

1.62

%

 

S&P 500® Index

  

12.84

%

  

9.86

%

  

13.15

%

  

5.85

%

 

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. The "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 within 12 months of purchase.

*** Class A shares are subject to a maximum front-end sales load of 2.75% 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.

**** Merger arbitrage and event-driven investing are market neutral investment strategies, which typically exhibit low betas and low correlations to broad equity and credit market indices. As such, the adviser has determined that a more appropriate benchmark for Arbitrage Fund is a measure of the risk-free rate, in this case the ICE Bank of America (BofA) Merrill Lynch U.S. 3-Month Treasury Bill Index.

The Total Annual Fund Operating Expenses for Class R, Class I, Class C and Class A are 1.99%, 1.74%, 2.74% and 1.99%, 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 ICE 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.

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

An investor may not invest directly in an index.

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



Arbitrage Fund  Portfolio Information (continued)

May 31, 2020 (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.

* Concentration Risk: The Fund may invest a large proportion of the Fund's assets in securities of issuers in a single sector over a given time. During such a period of concentration, the Fund may be subject to greater volatility with respect to its portfolio securities than a fund that is more broadly diversified.

Annual Report | May 31, 2020
7



Arbitrage Fund  Portfolio of Investments

May 31, 2020

  

Shares

 

Value

 

COMMON STOCKS - 66.60%

 

Auto Parts & Equipment - 1.23%

 

Delphi Technologies Plc(a)

  

1,321,984

  

$

17,027,154

  

Banks - 1.33%

 

IBERIABANK Corp.

  

432,845

   

18,356,956

  

Biotechnology - 1.40%

 

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

  

2,841,492

   

10,002,052

  

Stemline Therapeutics, Inc.(a)

  

779,725

   

9,263,133

  
   

19,265,185

  

Computers & Computer Services - 0.43%

 

Ingenico Group SA

  

42,904

   

5,915,100

  

Distribution/Wholesale - 4.43%

 

Anixter International, Inc.(a)

  

638,341

   

61,095,617

  

Diversified Financial Services - 14.10%

 

Bolsas y Mercados Espanoles SHMSF SA

  

653,721

   

23,888,834

  

E*TRADE Financial Corp.(b)

  

1,222,072

   

55,653,159

  

Legg Mason, Inc.(b)

  

1,074,711

   

53,552,849

  

TD Ameritrade Holding Corp.(b)

  

1,649,558

   

61,479,027

  
   

194,573,869

  

Electrical Components & Equipment - 0.70%

 

OSRAM Licht AG(a)

  

214,289

   

9,657,586

  

Electronics - 5.75%

 

Isra Vision AG

  

142,190

   

7,891,903

  

KEMET Corp.(b)

  

2,051,583

   

55,454,288

  

Tech Data Corp.(a)

  

117,778

   

16,046,075

  
   

79,392,266

  

Entertainment - 0.72%

 

Flutter Entertainment Plc(a)

  

78,425

   

9,956,662

  

Healthcare - Products - 4.76%

 

QIAGEN N.V.(a)

  

327,727

   

14,300,722

  

Wright Medical Group N.V.(a)

  

1,737,101

   

51,331,334

  
   

65,632,056

  

Insurance - 2.81%

 

TOWER Ltd.(a)

  

9,485,696

   

3,591,831

  

Willis Towers Watson Plc

  

173,364

   

35,175,556

  
   

38,767,387

  

Internet - 0.25%

 

Meet Group, Inc.(a)

  

566,523

   

3,501,112

  

See Notes to Financial Statements.

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



Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2020

  

Shares

 

Value

 

COMMON STOCKS - 66.60% (Continued)

 

Lodging - 5.34%

 

Caesars Entertainment Corp.(a)(b)

  

6,476,350

  

$

73,765,626

  

Pharmaceuticals - 1.29%

 

Portola Pharmaceuticals, Inc.(a)

  

987,904

   

17,732,877

  

Real Estate Investment Trusts - 2.71%

 

Front Yard Residential Corp.

  

366,925

   

2,751,938

  

Taubman Centers, Inc.

  

839,174

   

34,691,453

  
   

37,443,391

  

Retail - 5.96%

 

Tiffany & Co.(b)

  

641,915

   

82,248,569

  

Semiconductors - 2.14%

 

Adesto Technologies Corp.(a)

  

609,153

   

7,352,477

  

AVX Corp.(a)(c)

  

1,022,500

   

22,239,375

  
   

29,591,852

  

Software - 4.39%

 

Instructure, Inc.(a)(c)

  

249,706

   

12,235,594

  

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

  

843,793

   

30,798,444

  

Onemarket Ltd.(a)(c)

  

111,800

   

72,285

  

RIB Software SE(a)

  

542,175

   

17,453,406

  
   

60,559,729

  

Telecommunications - 6.86%

 

Cincinnati Bell, Inc.(a)

  

701,576

   

10,334,215

  

Gilat Satellite Networks Ltd.(a)

  

600,640

   

5,021,350

  

LogMeIn, Inc.

  

934,820

   

79,366,218

  
   

94,721,783

  
TOTAL COMMON STOCKS
(Cost $931,572,475)
  

919,204,777

  

RIGHTS - 0.06%

 

Elanco Animal Health, Inc. CVR(c)

  

1,124,589

   

  

Media General, Inc. CVR(c)

  

613,589

   

  

NewStar Financial, Inc. CVR(c)

  

1,514,945

   

840,340

  
TOTAL RIGHTS
(Cost $394,097)
  

840,340

  

See Notes to Financial Statements.

Annual Report | May 31, 2020
9



Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2020

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 0.73%

 

Entertainment - 0.73%

 
Stars Group Holdings B.V. /
Stars Group
US Co-Borrower LLC(d)
 

07/15/2026

  

7.000

%

 

$

9,542,000

  

$

10,114,520

  
TOTAL CORPORATE BONDS
(Cost $10,289,641)
  

10,114,520

  

 

  

Shares

 

Value

 

MUTUAL FUNDS - 4.80%

 

Water Island Diversified Event-Driven Fund, Class I(e)

  

6,589,384

  

$

66,223,311

  
TOTAL MUTUAL FUNDS
(Cost $60,459,409)
  

66,223,311

  

 

  

Yield

 

Shares

 

Value

 

SHORT-TERM INVESTMENTS - 19.05%

 

Money Market Funds

 
Morgan Stanley Institutional Liquidity Fund
Government Portfolio, Institutional Class
  

0.094

%(f)

  

131,427,234

  

$

131,427,234

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

0.249

%(f)

  

131,427,234

   

131,427,234

  
       

262,854,468

  
TOTAL SHORT-TERM INVESTMENTS
(Cost $262,854,468)
  

262,854,468

  
Total Investments - 91.24%
(Cost $1,265,570,090)
  

1,259,237,416

  

Other Assets in Excess of Liabilities - 8.76%(g)

  

120,938,282

  

NET ASSETS - 100.00%

 

$

1,380,175,698

  

Portfolio Footnotes

(a)  Non-income-producing security.

(b)  Security, or a portion of security, is being held as collateral for short sales or forward foreign currency exchange contracts. At May 31, 2020, the aggregate fair market value of those securities was $156,327,060, representing 11.33% of net assets.

(c)  Security fair valued using significant unobservable inputs and classified as a Level 3 security. As of May 31, 2020, the total fair market value of these securities was $66,186,038, representing 4.80% of net assets.

(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, 2020, these securities had a total value of $10,114,520 or 0.73% of net assets.

See Notes to Financial Statements.

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



Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2020

(e)  Affiliated investment.

(f)  Rate shown is the 7-day effective yield as of May 31, 2020.

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

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (7.34%)

 

Banks - (2.96%)

 

First Horizon National Corp.

  

(1,984,490

)

 

$

(18,554,982

)

 

Morgan Stanley

  

(505,806

)

  

(22,356,625

)

 
   

(40,911,607

)

 

Distribution/Wholesale - (0.19%)

 

WESCO International, Inc.

  

(78,961

)

  

(2,629,401

)

 

Electronics - (0.07%)

 

Comtech Telecommunications Corp.

  

(50,603

)

  

(901,240

)

 

Entertainment - (2.22%)

 

Eldorado Resorts, Inc.

  

(582,224

)

  

(20,645,663

)

 

Flutter Entertainment Plc

  

(78,427

)

  

(9,956,891

)

 
   

(30,602,554

)

 

Environmental Control - (0.72%)

 

Advanced Disposal Services, Inc.

  

(317,259

)

  

(9,892,136

)

 

Insurance - (0.75%)

 

Aon Plc, Class A

  

(52,632

)

  

(10,365,872

)

 

Real Estate Investment Trusts - (0.07%)

 

American Homes 4 Rent, Class A

  

(17,991

)

  

(454,093

)

 

Invitation Homes, Inc.

  

(18,860

)

  

(496,018

)

 
   

(950,111

)

 

Software - (0.36%)

 

Worldline SA

  

(67,421

)

  

(5,023,308

)

 
TOTAL COMMON STOCKS
(Proceeds $93,554,854)
  

(101,276,229

)

 

EXCHANGE-TRADED FUNDS - (0.12%)

 

Equity Funds - (0.12%)

 

Consumer Discretionary Select Sector SPDR® Fund

  

(4,835

)

  

(600,459

)

 

iShares Russell Mid-Cap Growth ETF

  

(1,402

)

  

(216,777

)

 

iShares U.S. Real Estate ETF

  

(6,256

)

  

(484,339

)

 

VanEck Vectors Semiconductor ETF

  

(2,735

)

  

(385,717

)

 
   

(1,687,292

)

 
TOTAL EXCHANGE-TRADED FUNDS
(Proceeds $1,546,604)
  

(1,687,292

)

 
TOTAL SECURITIES SOLD SHORT
(Proceeds $95,101,458)
 

$

(102,963,521

)

 

See Notes to Financial Statements.

Annual Report | May 31, 2020
11



Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2020

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
 
Goldman
Sachs &
Co./
Monthly
 
 
 
 DP World
Plc
 
 
 
 
 
 Paid
1 Month+
2BD-
LIBOR
plus
95 bps
(1.121%)
 





02/24/2021
 

$

  

$

  

$

  

$

(3,226,462

)

 

$

  
Goldman
Sachs &
Co./
Monthly
 
 
 Morgan
Stanley
 
 
 
 
 Received
1 Month
LIBOR
Minus
40 bps
(-0.070%)
 




04/30/2021
  

   

   

   

33,998,065

   

  
Morgan
Stanley &
Co./
Monthly
 
 
 
 Aon Plc
 
 
 
 
 
 
 Received
1 Month-
Federal
Rate
Minus
40 bps
(-0.350%)
 





08/12/2021
  

   

   

   

26,509,667

   

  
Morgan
Stanley &
Co./
Monthly
 
 
 
 Borgwarner,
Inc.
 
 
 
 
 
 Received
1 Month-
Federal
Rate
Minus
40 bps
(-0.350%)
 





08/12/2021
  

   

   

   

18,326,690

   

  
Morgan
Stanley &
Co./
Monthly
 
 
 
 Charles
Schwab
Corp.
 
 
 
 
 Received
1 Month-
Federal
Rate
Minus
40 bps
(-0.350%)
 





08/12/2021
  

   

   

   

64,197,420

   

  
    

 

 

 

 

 

 

 

 

 

 

$

  

$

139,805,380

  

$

  

See Notes to Financial Statements.

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



Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2020

OUTSTANDING FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Appreciation
 

CAD

50,164,900

  

USD

35,830,117

  

Goldman Sachs & Co.

 

06/15/2020

 

$

604,658

  

EUR

20,860,800

  

USD

22,836,822

  

Goldman Sachs & Co.

 

06/15/2020

  

325,729

  

USD

67,014,234

  

EUR

59,511,800

  

Goldman Sachs & Co.

 

06/15/2020

  

935,985

  

GBP

11,143,600

  

USD

13,136,067

  

Goldman Sachs & Co.

 

06/15/2020

  

626,931

  

USD

21,464,337

  

GBP

17,010,600

  

Goldman Sachs & Co.

 

06/15/2020

  

455,251

  

NZD

3,225,100

  

USD

1,926,232

  

Goldman Sachs & Co.

 

06/15/2020

  

75,669

  

USD

59,020

  

NZD

94,900

  

Goldman Sachs & Co.

 

06/15/2020

  

113

  

USD

21,389,598

  

ZAR

361,211,200

  

Goldman Sachs & Co.

 

06/15/2020

  

838,276

  

ZAR

361,211,200

  

USD

20,359,200

  

Goldman Sachs & Co.

 

06/15/2020

  

192,122

  
  

$

4,054,734

  
Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Depreciation
 

USD

68,651

  

AUD

108,400

  

Goldman Sachs & Co.

 

06/15/2020

 

$

(3,604

)

 

USD

35,998,773

  

CAD

50,164,900

  

Goldman Sachs & Co.

 

06/15/2020

  

(436,003

)

 

EUR

681,800

  

USD

766,236

  

Goldman Sachs & Co.

 

06/15/2020

  

(9,207

)

 

USD

31,250,792

  

EUR

28,682,200

  

Goldman Sachs & Co.

 

06/15/2020

  

(596,161

)

 

GBP

5,867,000

  

USD

7,286,204

  

Goldman Sachs & Co.

 

06/15/2020

  

(40,116

)

 

USD

5,450,731

  

NZD

8,916,500

  

Goldman Sachs & Co.

 

06/15/2020

  

(83,964

)

 
  

$

(1,169,055

)

 

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

Country

 

% of Net Assets(a)

 

Netherlands

  

5.49

%

 

United Kingdom

  

3.78

%

 

Germany

  

2.53

%

 

Spain

  

1.73

%

 

Ireland

  

0.72

%

 

France

  

0.43

%

 

Israel

  

0.36

%

 

New Zealand

  

0.26

%

 

United States Virgin Islands

  

0.20

%

 

Australia

  

0.01

%

 

United States

  

75.73

%

 

Other Assets in Excess of Liabilities

  

8.76

%

 
   

100.00

%

 

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

Abbreviations:

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

AUD - Australian dollar

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

See Notes to Financial Statements.

Annual Report | May 31, 2020
13



Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2020

CAD - Canadian dollar

CVR - Contingent Value Rights

ETF - Exchange-Traded Fund

EUR - Euro

GBP - British pound

LIBOR - London Interbank Offered Rate

LLC - Limited Liability Company

Ltd. - Limited

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

NZD - New Zealand dollar

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.

SE - SE Regulation. A European Company which can operate on a Europe-wide basis and be governed by Community law directly applicable in all Member States

SPDR - Standard & Poor's Depositary Receipt

USD - United States Dollar

ZAR - South African rand

The following table summarizes the Arbitrage Fund's investments and derivative financial instruments categorized in the fair value hierarchy as of May 31, 2020:

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

Common Stocks

 

Auto Parts & Equipment

 

$

17,027,154

  

$

  

$

  

$

17,027,154

  

Banks

  

18,356,956

   

   

   

18,356,956

  

Biotechnology

  

19,265,185

   

   

   

19,265,185

  
Computers & Computer
Services
  

5,915,100

   

   

   

5,915,100

  

Distribution/Wholesale

  

61,095,617

   

   

   

61,095,617

  

Diversified Financial Services

  

194,573,869

   

   

   

194,573,869

  
Electrical Components &
Equipment
  

9,657,586

   

   

   

9,657,586

  

Electronics

  

79,392,266

   

   

   

79,392,266

  

Entertainment

  

9,956,662

   

   

   

9,956,662

  

Healthcare - Products

  

65,632,056

   

   

   

65,632,056

  

Insurance

  

38,767,387

   

   

   

38,767,387

  

Internet

  

3,501,112

   

   

   

3,501,112

  

Lodging

  

73,765,626

   

   

   

73,765,626

  

Pharmaceuticals

  

17,732,877

   

   

   

17,732,877

  

Real Estate Investment Trusts

  

37,443,391

   

   

   

37,443,391

  

Retail

  

82,248,569

   

   

   

82,248,569

  

Semiconductors

  

7,352,477

   

   

22,239,375

   

29,591,852

  

Software

  

17,453,406

   

   

43,106,323

   

60,559,729

  

Telecommunications

  

94,721,783

   

   

   

94,721,783

  

Rights

  

   

   

840,340

   

840,340

  

Corporate Bonds**

  

   

10,114,520

   

   

10,114,520

  

Mutual Funds

  

66,223,311

   

   

   

66,223,311

  

Short-Term Investments

  

262,854,468

   

   

   

262,854,468

  

TOTAL

 

$

1,182,936,858

  

$

10,114,520

  

$

66,186,038

  

$

1,259,237,416

  

See Notes to Financial Statements.

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



Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2020

Other Financial Instruments***

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 
Forward Foreign Currency
Exchange Contracts
 

$

  

$

4,054,734

  

$

  

$

4,054,734

  

Equity Swaps

  

0

   

   

   

0

  

Liabilities

 

Common Stocks**

  

(101,276,229

)

  

   

   

(101,276,229

)

 

Exchange-Traded Funds

  

(1,687,292

)

  

   

   

(1,687,292

)

 
Forward Foreign Currency
Exchange Contracts
  

   

(1,169,055

)

  

   

(1,169,055

)

 

TOTAL

 

$

(102,963,521

)

 

$

2,885,679

  

$

  

$

(100,077,842

)

 

*  Refer to footnote 2 where leveling hierarchy is defined.

**  Refer to Portfolio of Investments for sector information.

***  Other financial instruments are instruments such as 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, 2020:

Investments
in Securities
 Balance as of
May 31, 2019
 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, 2020
 Net change in
Unrealized
(Depreciation)
included in the
Statement of
Operations
attributable to
Level 3
investments
held at
May 31, 2020
 
Common
Stocks
 

$

33,540,061

  

$

140,664

  

$

1,339,574

  

$

87,939,061

  

$

(57,675,319

)

 

$

61,657

  

$

  

$

65,345,698

  

$

383,962

  

Rights

  

1,125,511

   

(83,154

)

  

(16,914

)

  

   

(185,103

)

  

   

   

840,340

   

78,020

  

Total

 

$

34,665,572

  

$

57,510

  

$

1,322,660

  

$

87,939,061

  

$

(57,860,422

)

 

$

61,657

  

$

  

$

66,186,038

  

$

461,982

  

The following table summarizes the quantitative inputs used for investments categorized as Level 3 of the fair value hierarchy as of May 31, 2020:

Investments in
Securities
 Fair Value at
May 31, 2020
 Valuation
Technique
 Unobservable
Input
 Range of
Values
 Weighted
Average
 
Common Stocks
 
 
 
 

$

65,345,698


 Deal Value,
Last Trade
 
 
 Final
determination
on Dissent, Final
Liquidation Value
 $21.75-$49, .97 AUD
 
 
 
 $33.78
 
 
 
 
Rights
 
 
 

$

840,340

 Discounted,
probability
adjusted value
 Discount Rate,
Probability
 
 10%, 90%
 
 
 45%
 
 
 

See Notes to Financial Statements.

Annual Report | May 31, 2020
15



Water Island Diversified Event-Driven Fund  Manager Commentary

May 31, 2020 (Unaudited)

Water Island Diversified Event-Driven Fund (formerly known as Arbitrage Event-Driven) |

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

Water Island Diversified Event-Driven (AEDNX) returned 5.83% for the fiscal year ending May 31, 2020. Both hard and soft catalysts investments contributed to returns overall, as did all three sub-strategies – merger arbitrage, credit opportunities, and equity special situations. Returns were driven predominantly by the Americas region, though both the European and Asia Pacific regions contributed slightly as well. The Fund's top-performing sectors were consumer discretionary and information technology. The only sector to detract from returns was real estate.

The Fund's top performing deal for the period was our merger arbitrage position in the acquisition of Caesars Entertainment by Eldorado Resorts. In June 2019, Eldorado Resorts – a US-based holding company for casino hotels – agreed to acquire Caesars Entertainment – a local peer – for $10.0 billion in cash and stock. During Q1 2020, casinos across the nation were forced to shutter due to the novel coronavirus outbreak, causing the share prices of casino operators to plummet. This led many investors to question the desire of Caesars and Eldorado to consummate their transaction, sending the deal spread wider. In our analysis, the merger agreement and the strategic rationale for the transaction remained strong, and with the financing for the deal already committed, we believed there was still a high likelihood of reaching a successful conclusion. The volatility in the deal spread allowed us to increase our position at favorable rates of return. The portfolio benefited from a tightening in the deal spread as the market rallied in April and May, casino operator share prices began to recover, and the deal progressed through the regulatory approval process – providing confidence to investors that the transaction was increasingly likely to close. We anticipate the deal will close in mid-2020 after the receipt of all required regulatory approvals.

The second-best performer was our merger arbitrage position in the AbbVie-Allergan tie-up. In June 2019, pharmaceutical companies Allergan and AbbVie announced their intent to merge. The terms of the deal call for AbbVie to pay $85.0 billion in cash and stock to acquire Allergan. We had developed a high degree of conviction in this transaction and built a core position in the deal coming into 2020. Based on the deal timeline, our initial expectation for completion was in early 2020. The deal spread widened amidst the extreme market volatility of Q1, and the widespread

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



Water Island Diversified Event-Driven Fund  Manager Commentary (continued)

May 31, 2020 (Unaudited)

quarantining stemming from the global coronavirus pandemic led to slight delays in the regulatory approval process. This provided us an opportunity to increase our position at very favorable rates of return as we did not believe any of these developments would derail the transaction, and we were rewarded when the deal closed successfully in May.

Conversely, the top detractor in the portfolio for the period was our merger arbitrage position in Illumina's attempted acquisition of Pacific Biosciences. In November 2018, Illumina – a US developer of tools for DNA sequencing and analysis – agreed to acquire Pacific Biosciences – a US DNA sequencing technology firm – for $1.1 billion in cash. The transaction encountered objections from multiple global regulators over the course of a long, fraught antitrust review process, primarily on a novel basis of potential competition – that is, despite limited overlap between the companies' businesses at the current time, it was feared Illumina was trying to take out a nascent competitor before it could grow. Ultimately, the companies decided to terminate the transaction shortly into 2020 rather than fight the regulators in court. We maintained our exposure to Pacific Biosciences as we believed the company remained an attractive takeout candidate – indeed, the UK regulatory authority's investigation revealed Illumina believed no fewer than four of its major competitors were potential suitors of Pacific Biosciences. While this position detracted from returns amidst widespread market volatility in Q1 2020, we continue to believe Pacific Biosciences is likely to be acquired and we are monitoring the situation closely.

The Fund's second-worst performer was our merger arbitrage position in Simon Property Group's planned acquisition of Taubman Centers. In February 2020, Taubman Centers – a US-based real estate investment trust focused on shopping centers – agreed to be acquired by local peer Simon Property Group for $3.2 billion in cash. As the novel coronavirus pandemic spread and malls shuttered or saw their traffic plummet amidst mass quarantines, investors began to fear Simon Property may attempt to abandon the transaction and Taubman shares plummeted as much as 24% from their peak during the quarter. We maintained our exposure to the deal as we believe the definitive merger agreement in this transaction is one of the strongest contracts in our space today, and we believe Simon has very few – if any – avenues to escape its obligation to complete the merger. In June, Simon filed to terminate the transaction, claiming Taubman has been disproportionately impacted by the pandemic and has breached its obligations under the merger agreement. Taubman in turn claimed Simon's termination is invalid and without merit, and the company believes Simon continues to be bound to the transaction in all respects. Our conviction in our position has not wavered, as we believe Taubman by far has the stronger case for several reasons. The merger agreement carves out pandemics as reasons by which a material adverse change (MAC) may be claimed. Furthermore, Taubman's obligations under the agreement only call for the company to exercise "commercially reasonable" efforts in conducting its ordinary course of business. There are no financing contingencies on this deal, and it is being funded solely from Simon's balance sheet. We have reviewed Simon's court filing, which we believe makes what are at best dubious claims to support the company's argument for termination (even more so as malls reopen and foot traffic resumes). Lastly, the case was filed in Michigan, where Taubman is both domiciled and headquartered. In our experience through similar court cases and appraisal rights processes, a "home court" advantage in such proceedings is very much a real thing. Taubman is a highly strategic asset for Simon, and there is a chance the lawsuit is simply an attempt by Simon to convince Taubman to agree to a cut in deal terms to avoid lengthy, costly litigation – but if the case does go to trial, we are confident that Taubman can emerge victorious and require Simon to complete the deal on its original terms.

Annual Report | May 31, 2020
17



Water Island Diversified Event-Driven Fund  Portfolio Information

May 31, 2020 (Unaudited)

Performance (annualized returns as of May 31, 2020)

  One
Year
 Five
Year
 Ten
Year
 Since
Inception*
 

Water Island Diversified Event-Driven Fund, Class R

  

5.49

%

  

1.35

%

  

N/A

   

1.78

%

 

Water Island Diversified Event-Driven Fund, Class I

  

5.83

%

  

1.62

%

  

N/A

   

2.03

%

 

Water Island Diversified Event-Driven Fund, Class C**

  

4.74

%

  

0.61

%

  

N/A

   

0.78

%

 

Water Island Diversified Event-Driven Fund, Class A***

  

5.62

%

  

1.38

%

  

N/A

   

1.33

%

 

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

  

1.84

%

  

1.19

%

  

N/A

   

0.65

%

 

Bloomberg Barclays U.S. Aggregate Bond Index

  

9.42

%

  

3.94

%

  

N/A

   

3.63

%

 

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. The "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 within 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 $250,000 purchased without a front-end sales charge and redeemed within 18 months of purchase.

**** Merger arbitrage and event-driven investing are market neutral investment strategies, which typically exhibit low betas and low correlations to broad equity and credit market indices. As such, the adviser has determined that a more appropriate benchmark for Water Island Diversified Event-Driven Fund is a measure of the risk-free rate, in this case the ICE Bank of America (BofA) Merrill Lynch U.S. 3-Month Treasury Bill Index.

The Total Annual Fund Operating Expenses for Class R, Class I, Class C and Class A are 2.62%, 2.37%, 3.37% and 2.62%, 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, 2021. 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 ICE 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.

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.

An investor may not invest directly in an index.

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



Water Island Diversified Event-Driven Fund  Portfolio Information (continued)

May 31, 2020 (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 Diversified Event-Driven Fund's investments (including short sales and excluding derivatives) as of the report date.

* Concentration Risk: The Fund may invest a large proportion of the Fund's assets in securities of issuers in a single sector over a given time. During such a period of concentration, the Fund may be subject to greater volatility with respect to its portfolio securities than a fund that is more broadly diversified.

Annual Report | May 31, 2020
19



Water Island Diversified Event-Driven Fund  Portfolio of Investments

May 31, 2020

  

Shares

 

Value

 

COMMON STOCKS - 69.08%

 

Auto Parts & Equipment - 2.27%

 

Delphi Technologies Plc(a)

  

189,750

  

$

2,443,980

  

Biotechnology - 3.01%

 

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

  

460,403

   

1,620,618

  

Stemline Therapeutics, Inc.(a)

  

135,912

   

1,614,635

  
   

3,235,253

  

Computers & Computer Services - 0.45%

 

HP, Inc.

  

27,416

   

415,078

  

Perspecta, Inc.(b)

  

3,259

   

72,252

  
   

487,330

  

Diversified Financial Services - 9.37%

 

Bolsas y Mercados Espanoles SHMSF SA

  

20,528

   

750,152

  

E*TRADE Financial Corp.

  

42,077

   

1,916,187

  

Legg Mason, Inc.

  

42,939

   

2,139,650

  

TD Ameritrade Holding Corp.(b)

  

141,195

   

5,262,338

  
   

10,068,327

  

Electronics - 1.16%

 

Tech Data Corp.(a)

  

9,189

   

1,251,909

  

Energy - Alternate Sources - 0.28%

 

Championx Corp.(a)

  

33,175

   

300,897

  

Engineering & Construction - 0.14%

 

AECOM(a)(b)

  

3,912

   

151,668

  

Entertainment - 1.48%

 

Flutter Entertainment Plc(a)

  

12,548

   

1,593,122

  

Healthcare - Products - 6.57%

 

Wright Medical Group N.V.(a)

  

238,862

   

7,058,372

  

Healthcare - Services - 0.16%

 

Metlifecare Ltd.

  

64,168

   

166,897

  

Holding Companies-Diversified - 3.14%

 

CC Neuberger Principal Holdings(a)

  

46,018

   

468,923

  

Collier Creek Holdings, Class A(a)

  

43,259

   

463,737

  

Foley Trasimene Acquisition Corp.(a)

  

27,234

   

279,149

  

Fortress Value Acquisition Corp.(a)

  

35,134

   

351,691

  

GigCapital3, Inc.(a)

  

54,696

   

543,678

  

Graf Industrial Corp.(a)

  

32,802

   

340,813

  

Live Oak Acquisition Corp.(a)

  

53,988

   

531,242

  

Sustainable Opportunities Acquisition Corp.(a)

  

40,491

   

400,861

  
   

3,380,094

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
20



Water Island Diversified Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2020

  

Shares

 

Value

 

COMMON STOCKS - 69.08% (Continued)

 

Insurance - 2.55%

 

Willis Towers Watson Plc

  

13,529

  

$

2,745,034

  

Internet - 1.91%

 

Grubhub, Inc.(a)

  

5,689

   

322,794

  

IAC/interactivecorp(a)

  

4,086

   

1,104,732

  

Meet Group, Inc.(a)

  

101,981

   

630,242

  
   

2,057,768

  

Lodging - 8.93%

 

Caesars Entertainment Corp.(a)(b)

  

842,715

   

9,598,524

  

Media - 0.41%

 

Madison Square Garden Entertainment Corp.(a)(b)

  

5,515

   

436,954

  

Pharmaceuticals - 2.15%

 

Paratek Pharmaceuticals, Inc.(a)(b)

  

52,781

   

234,348

  

Portola Pharmaceuticals, Inc.(a)(b)

  

115,593

   

2,074,894

  
   

2,309,242

  

Real Estate Investment Trusts - 4.11%

 

Front Yard Residential Corp.

  

28,550

   

214,125

  

Taubman Centers, Inc.(b)

  

101,628

   

4,201,302

  
   

4,415,427

  

Retail - 6.30%

 

Tiffany & Co.(b)

  

52,854

   

6,772,183

  

Software - 4.12%

 

Instructure, Inc.(a)(c)

  

19,650

   

962,850

  

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

  

48,463

   

1,768,899

  

RIB Software SE(a)

  

52,532

   

1,691,082

  
   

4,422,831

  

Telecommunications - 10.57%

 

Cincinnati Bell, Inc.(a)(d)

  

109,283

   

1,609,739

  

Gilat Satellite Networks Ltd.(a)

  

140,004

   

1,170,433

  

LogMeIn, Inc.

  

101,029

   

8,577,362

  
   

11,357,534

  
TOTAL COMMON STOCKS
(Cost $73,892,218)
  

74,253,346

  

See Notes to Financial Statements.

Annual Report | May 31, 2020
21



Water Island Diversified Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2020

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 6.97%

 

Commercial Services - 2.10%

 
Nielsen Co. Luxembourg SARL
(The)(b)(e)
 

10/01/2021

  

5.500

%

 

$

1,611,000

  

$

1,613,014

  

Refinitiv US Holdings, Inc.(e)

 

05/15/2026

  

6.250

%

  

608,000

   

649,040

  
         

2,262,054

  

Entertainment - 1.56%

 
Stars Group Holdings B.V. /
Stars Group US
Co-Borrower LLC(e)
 

07/15/2026

  

7.000

%

  

1,585,000

   

1,680,100

  

Household Products - 0.83%

 
Avon International Operations,
Inc.(b)(e)
 

08/15/2022

  

7.875

%

  

892,000

   

888,673

  

Oil & Gas - 0.29%

 
Northern Oil and Gas, Inc.,
(8.50% Cash + 1.00% PIK)
 

05/15/2023

  

8.500

%

  

366,000

   

307,440

  

Storage/Warehousing - 0.94%

 

Mobile Mini, Inc.(b)

 

07/01/2024

  

5.875

%

  

986,000

   

1,010,650

  

Telecommunications - 1.25%

 

Cincinnati Bell, Inc.(e)

 

07/15/2024

  

7.000

%

  

1,305,000

   

1,344,150

  
TOTAL CORPORATE BONDS
(Cost $7,617,322)
  

7,493,067

  

CONVERTIBLE CORPORATE BONDS - 2.08%

 

Pharmaceuticals - 1.34%

 

Dermira, Inc.(b)

 

05/15/2022

  

3.000

%

  

1,430,000

   

1,444,300

  

Semiconductors - 0.74%

 

Adesto Technologies Corp.(b)(e)

 

09/15/2024

  

4.250

%

  

674,000

   

790,559

  
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost $2,249,469)
  

2,234,859

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
22



Water Island Diversified Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2020

  

Shares

 

Value

 

WARRANTS - 0.02%

 

Investment Company Security - 0.02%

 
Graf Industrial Corp., Exercise
Price $11.50, Expires 12/31/2025(a)
  

42,707

  

$

21,353

  

Telecommunications - 0.00%(f)

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

5,548

   

2,164

  
TOTAL WARRANTS
(Cost $19,482)
    

23,517

  

 

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(a) - 0.01%

 

Call Option Purchased - 0.01%

 

Cincinnati Bell, Inc.

 

08/2020

 

$

12.50

  

$

82,488

   

56

  

$

7,840

  
TOTAL CALL OPTIONS PURCHASED
(Cost $1,104)
  

7,840

  
TOTAL PURCHASED OPTIONS
(Cost $1,104)
  

7,840

  

 

  

Yield

 

Shares

 

Value

 

SHORT-TERM INVESTMENTS - 16.91%

 

Money Market Funds

 
Morgan Stanley Institutional Liquidity Fund
Government Portfolio, Institutional Class
  

0.094

%(g)

  

9,085,428

  

$

9,085,428

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

0.249

%(g)

  

9,085,428

   

9,085,428

  
           

18,170,856

  
TOTAL SHORT-TERM INVESTMENTS
(Cost $18,170,856)
  

18,170,856

  
Total Investments - 95.07%
(Cost $101,950,451)
      

102,183,485

  

Other Assets in Excess of Liabilities - 4.93%(h)

      

5,295,924

  

NET ASSETS - 100.00%

 

$

107,479,409

  

Portfolio Footnotes

(a)  Non-income-producing security.

(b)  Security, or a portion of security, is being held as collateral for short sales or forward foreign currency exchange contracts. At May 31, 2020, the aggregate fair market value of those securities was $29,539,966, representing 27.48% of net assets.

See Notes to Financial Statements.

Annual Report | May 31, 2020
23



Water Island Diversified Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2020

(c)  Security fair valued using significant unobservable inputs and classified as a Level 3 security. As of May 31, 2020, the total fair market value of these securities was $2,731,749, representing 2.54% 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, 2020, these securities had a total value of $6,965,536 or 6.48% of net assets.

(f)  Less than 0.005% of net assets.

(g)  Rate shown is the 7-day effective yield as of May 31, 2020.

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

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (11.19%)

 

Banks - (1.81%)

 

Morgan Stanley

  

(43,901

)

 

$

(1,940,424

)

 

Commercial Services - (0.01%)

 

Booz Allen Hamilton Holding Corp., Class A

  

(170

)

  

(13,559

)

 

Computers & Computer Services - (0.20%)

 

CACI International, Inc., Class A

  

(48

)

  

(12,037

)

 

Hewlett Packard Enterprise Co.

  

(4,814

)

  

(46,744

)

 

International Business Machines Corp.

  

(518

)

  

(64,698

)

 

Science Applications International Corp.

  

(141

)

  

(12,414

)

 

Seagate Technology Plc

  

(1,565

)

  

(83,008

)

 
   

(218,901

)

 

Electronics - (0.19%)

 

Comtech Telecommunications Corp.

  

(11,737

)

  

(209,036

)

 

Engineering & Construction - (0.11%)

 

Jacobs Engineering Group, Inc.

  

(464

)

  

(38,986

)

 

Stantec, Inc.

  

(1,472

)

  

(44,263

)

 

WSP Global, Inc.

  

(611

)

  

(39,433

)

 
   

(122,682

)

 

Entertainment - (3.36%)

 

Eldorado Resorts, Inc.

  

(56,802

)

  

(2,014,199

)

 

Flutter Entertainment Plc

  

(12,549

)

  

(1,593,238

)

 
   

(3,607,437

)

 

Environmental Control - (0.75%)

 

Advanced Disposal Services, Inc.

  

(24,685

)

  

(769,678

)

 

Tetra Tech, Inc.

  

(492

)

  

(38,819

)

 
   

(808,497

)

 

Insurance - (2.68%)

 

Aon Plc, Class A

  

(14,611

)

  

(2,877,637

)

 

See Notes to Financial Statements.

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



Water Island Diversified Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2020

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (11.19%) (Continued)

 

Internet - (1.33%)

 

ANGI Homeservices, Inc., Class A

  

(15,200

)

 

$

(164,920

)

 

Match Group, Inc.

  

(9,729

)

  

(866,270

)

 

Uber Technologies, Inc.

  

(10,951

)

  

(397,741

)

 
   

(1,428,931

)

 

Real Estate Investment Trusts - (0.07%)

 

American Homes 4 Rent, Class A

  

(1,400

)

  

(35,336

)

 

Invitation Homes, Inc.

  

(1,467

)

  

(38,582

)

 
   

(73,918

)

 

Semiconductors - (0.44%)

 

Adesto Technologies Corp.

  

(38,931

)

  

(469,897

)

 

Telecommunications - (0.24%)

 

Cincinnati Bell, Inc.

  

(17,617

)

  

(259,498

)

 
TOTAL COMMON STOCKS
(Proceeds $10,710,822)
  

(12,030,417

)

 

EXCHANGE-TRADED FUNDS - (0.42%)

 

Equity Funds - (0.42%)

 

Consumer Discretionary Select Sector SPDR® Fund

  

(404

)

  

(50,173

)

 

iShares Russell Mid-Cap Growth ETF

  

(175

)

  

(27,058

)

 

iShares U.S. Real Estate ETF

  

(754

)

  

(58,375

)

 

VanEck Vectors Oil Services ETF

  

(2,422

)

  

(287,637

)

 

VanEck Vectors Semiconductor ETF

  

(213

)

  

(30,039

)

 
   

(453,282

)

 
TOTAL EXCHANGE-TRADED FUNDS
(Proceeds $436,601)
  

(453,282

)

 
TOTAL SECURITIES SOLD SHORT
(Proceeds $11,147,423)
 

$

(12,483,699

)

 

See Notes to Financial Statements.

Annual Report | May 31, 2020
25



Water Island Diversified Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2020

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
 
 
 
 Borgwarner,
Inc.
 
 
 
 
 
 Received
1 Month-
Federal
Rate
Minus
40 bps
(-0.350%)
 





08/19/2021
 

$

  

$

  

$

  

$

2,630,674

  

$

  
Morgan
Stanley &
Co./
Monthly
 
 
 
 Charles
Schwab
Corp.
 
 
 
 
 Received
1 Month-
Federal
Rate
Minus
40 bps
(-0.350%)
 





08/19/2021
  

   

   

   

5,494,697

   

  
            

$

  

$

8,125,371

  

$

  

OUTSTANDING FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Appreciation
 

CAD

5,965,300

  

USD

4,255,168

  

Goldman Sachs & Co.

 

06/15/2020

 

$

77,432

  

EUR

1,529,300

  

USD

1,667,668

  

Goldman Sachs & Co.

 

06/15/2020

  

30,373

  

USD

3,552,692

  

EUR

3,156,800

  

Goldman Sachs & Co.

 

06/15/2020

  

47,575

  

GBP

927,500

  

USD

1,099,208

  

Goldman Sachs & Co.

 

06/15/2020

  

46,308

  

USD

1,170,339

  

GBP

927,500

  

Goldman Sachs & Co.

 

06/15/2020

  

24,822

  

NZD

44,300

  

USD

26,848

  

Goldman Sachs & Co.

 

06/15/2020

  

650

  
  

$

227,160

  
Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Depreciation
 

USD

4,219,365

  

CAD

5,910,800

  

Goldman Sachs & Co.

 

06/15/2020

 

$

(73,652

)

 

USD

628,270

  

EUR

572,900

  

Goldman Sachs & Co.

 

06/15/2020

  

(7,843

)

 

USD

190,290

  

NZD

313,200

  

Goldman Sachs & Co.

 

06/15/2020

  

(4,119

)

 
  

$

(85,614

)

 

See Notes to Financial Statements.

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



Water Island Diversified Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2020

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

Country

 

% of Net Assets(a)

 

Netherlands

  

8.13

%

 

United Kingdom

  

4.82

%

 

Germany

  

1.57

%

 

Luxembourg

  

1.50

%

 

Ireland

  

1.48

%

 

Israel

  

1.09

%

 

Spain

  

0.70

%

 

United States Virgin Islands

  

0.20

%

 

New Zealand

  

0.16

%

 

United States

  

75.42

%

 

Other Assets in Excess of Liabilities

  

4.93

%

 
   

100.00

%

 

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

Abbreviations:

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

CAD - Canadian dollar

ETF - Exchange-Traded Fund

EUR - Euro

GBP - British pound

LLC - Limited Liability Company

Ltd. - Limited

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

NZD - New Zealand dollar

PIK - Payment-in-kind

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.

SE - SE Regulation. A European Company which can operate on a Europe-wide basis and be governed by Community law directly applicable in all Member States

SPDR - Standard & Poor's Depositary Receipt

USD - United States Dollar

See Notes to Financial Statements.

Annual Report | May 31, 2020
27



Water Island Diversified Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2020

The following table summarizes the Water Island Diversified Event-Driven Fund's investments and derivative financial instruments categorized in the fair value hierarchy as of May 31, 2020:

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

Common Stocks

 

Auto Parts & Equipment

 

$

2,443,980

  

$

  

$

  

$

2,443,980

  

Biotechnology

  

3,235,253

   

   

   

3,235,253

  

Computers & Computer Services

  

487,330

   

   

   

487,330

  

Diversified Financial Services

  

10,068,327

   

   

   

10,068,327

  

Electronics

  

1,251,909

   

   

   

1,251,909

  

Energy - Alternate Sources

  

300,897

   

   

   

300,897

  

Engineering & Construction

  

151,668

   

   

   

151,668

  

Entertainment

  

1,593,122

   

   

   

1,593,122

  

Healthcare - Products

  

7,058,372

   

   

   

7,058,372

  

Healthcare - Services

  

166,897

   

   

   

166,897

  

Holding Companies-Diversified

  

3,380,094

   

   

   

3,380,094

  

Insurance

  

2,745,034

   

   

   

2,745,034

  

Internet

  

2,057,768

   

   

   

2,057,768

  

Lodging

  

9,598,524

   

   

   

9,598,524

  

Media

  

436,954

   

   

   

436,954

  

Pharmaceuticals

  

2,309,242

   

   

   

2,309,242

  

Real Estate Investment Trusts

  

4,415,427

   

   

   

4,415,427

  

Retail

  

6,772,183

   

   

   

6,772,183

  

Software

  

1,691,082

   

   

2,731,749

   

4,422,831

  

Telecommunications

  

11,357,534

   

   

   

11,357,534

  

Corporate Bonds**

  

   

7,493,067

   

   

7,493,067

  

Convertible Corporate Bonds**

  

   

2,234,859

   

   

2,234,859

  

Warrants

  

21,353

   

2,164

   

   

23,517

  

Purchased Options

  

7,840

   

   

   

7,840

  

Short-Term Investments

  

18,170,856

   

   

   

18,170,856

  

TOTAL

 

$

89,721,646

  

$

9,730,090

  

$

2,731,749

  

$

102,183,485

  

Other Financial Instruments***

 

Assets

 
Forward Foreign Currency
Exchange Contracts
 

$

  

$

227,160

  

$

  

$

227,160

  

Equity Swaps

  

0

   

   

   

0

  

Liabilities

 

Common Stocks**

  

(12,030,417

)

  

   

   

(12,030,417

)

 

Exchange-Traded Funds

  

(453,282

)

  

   

   

(453,282

)

 
Forward Foreign Currency
Exchange Contracts
  

   

(85,614

)

  

   

(85,614

)

 

TOTAL

 

$

(12,483,699

)

 

$

141,546

  

$

  

$

(12,342,153

)

 

*  Refer to footnote 2 where leveling hierarchy is defined.

See Notes to Financial Statements.

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



Water Island Diversified Event-Driven Fund  Portfolio of Investments (continued)

May 31, 2020

**  Refer to Portfolio of Investments for sector information.

***  Other financial instruments are instruments such as 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, 2020:

Investments
in Securities
 Balance as of
May 31, 2019
 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, 2020
 Net change in
Unrealized
(Depreciation)
included in the
Statement of
Operations
attributable to
Level 3
investments
held at
May 31, 2020
 
Corporate
Bonds
 

$

0

  

$

7

  

$

  

$

  

$

(7

)

 

$

  

$

  

$

0

  

$

  
Common
Stock
  

1,768,900

   

30,085

   

17,532

   

6,300,528

   

(5,385,296

)

  

   

   

2,731,749

   

17,532

  

Total

 

$

1,768,900

  

$

30,092

  

$

17,532

  

$

6,300,528

  

$

(5,385,303

)

 

$

  

$

  

$

2,731,749

  

$

17,532

  

The following table summarizes the quantitative inputs used for investments categorized as Level 3 of the fair value hierarchy as of May 31, 2020:

Investments in
Securities
 Fair Value at
May 31, 2020
 Valuation
Technique
 Unobservable
Input
 Range of
Values
 Weighted
Average
 
Common Stocks
 
 
 

$

2,731,749

 Deal Value
 
 
 Final
determination
on Dissent
 $36.50-$49
 
 
 $40.91
 
 
 

See Notes to Financial Statements.

Annual Report | May 31, 2020
29



Water Island Credit Opportunities Fund  Manager Commentary

May 31, 2020 (Unaudited)

Water Island Credit Opportunities Fund | 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 investment approach. 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 2.82% for the fiscal year ending May 31, 2020. The portfolio's returns were driven predominantly from the Americas, though the European region also contributed positively to performance. The Fund's top-performing sectors were information technology and communication services. The only sector that detracted from returns over the period was energy.

The Fund's top contributor for the period was our position in broad credit market hedges. 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 smaller drawdowns. Amidst the extreme volatility during Q1 2020, these hedges served their intended purpose and generated gains for the Fund. The top event contributor was our position in Boeing bonds. Boeing is one of the world's most powerful aerospace and defense companies. Over the past year, the company has faced some of the most serious challenges in its history. Following the grounding of the 737 Max due to software and avionics issues, combined with the significant impact of the COVID-19 pandemic on the company's airline customers, Boeing needed to raise short-term liquidity to cover its global obligations and manufacturing infrastructure. In April 2020, the company raised $25 billion through various debt tranches which were brought to market at historically wide spreads. We purchased some of this debt as a medium-term investment which is predicated on Boeing eventually re-capturing a temporary loss of business as well as the re-launch of its 737 Max project following adequate testing.

The second-best performing event contributor was our position in Synaptics convertible bonds. Synaptics is a US-based developer of human user interface hardware and software such as trackpads and biometrics. We initiated a long/short position with a long convertible bond hedged with a short equity position which reflected our expectation of higher volatility with the company having refocused its operations and strategy following a spurned takeover offer in 2018. During April and May of 2020, the bonds increased in value after the market's March sell-off, and as convertible investors began to appreciate the positive risk/reward in these bonds.

Conversely, the Fund's top detractor for the fiscal year was our position in QEP Resources bonds. QEP Resources is a natural gas and oil exploration company located in the Permian and Williston Basins. Since the inception of this position, our focus has been on the front-end of QEP's maturity

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



Water Island Credit Opportunities Fund  Manager Commentary (continued)

May 31, 2020 (Unaudited)

curve and the company's efforts to de-lever its balance sheet through asset sales and operational changes. During Q1 2020, QEP bonds sold off with nearly the entire energy sector due to dramatic supply and demand imbalances which were brought about by global production issues and the COVID-19 pandemic. While the position was the fund's largest detractor for the fiscal year, we added to our position during April and May as we continued to believe that QEP had multiple ways to redeem its 2021 bonds. In short course, we were rewarded for our conviction. On QEP's most recent earnings call, management confirmed the company indeed intended to use all its resources to address its upcoming maturities. Bond prices moved significantly higher on the news and as of this writing the position is now a positive contributor to returns.

The Fund's second-largest detractor was our position in Triumph Group bonds. Triumph Group designs, manufactures, distributes, and repairs both commercial and military aircraft systems. Our investment focused on Triumph's 2022 notes as the company's new management restructures its businesses and leads de-levering efforts with the sale of its aero-structures division. During Q4 2019 and Q1 2020, Triumph's bond and stock prices dropped significantly due to Boeing's 737 MAX issues (for which Triumph serves as a supplier) and as the COVID-19 pandemic forced a temporary shut-down of the aero and aviation industry. Although our hedges offset some mark-to-market losses, the position overall detracted from returns during the period. During this time, management began to take aggressive steps to increase liquidity and to restructure operations to preserve cash and working capital. These actions were announced in late May which did result in a partial recovery in the company's bond prices.

Glossary

Convertible Bond: A type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value.

Debt Tranche: A collection of debt securities that are separated and grouped by risk or other characteristics in order to be marketable to different investors.

Mark-to-Market: A measure of value using the most recently available market price.

Annual Report | May 31, 2020
31



Water Island Credit Opportunities Fund  Portfolio Information

May 31, 2020 (Unaudited)

Performance (annualized returns as of May 31, 2020)

  One
Year
 Five
Year
 Ten
Year
 Since
Inception*
 

Water Island Credit Opportunities Fund, Class R

  

2.46

%

  

2.17

%

  

N/A

   

2.35

%

 

Water Island Credit Opportunities Fund, Class I

  

2.82

%

  

2.44

%

  

N/A

   

2.59

%

 

Water Island Credit Opportunities Fund, Class C**

  

1.70

%

  

1.42

%

  

N/A

   

1.62

%

 

Water Island Credit Opportunities Fund, Class A***

  

2.56

%

  

2.16

%

  

N/A

   

2.22

%

 

Bloomberg Barclays Capital U.S. Aggregate Bond Index

  

9.42

%

  

3.94

%

  

N/A

   

3.22

%

 

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

  

1.84

%

  

1.19

%

  

N/A

   

0.80

%

 

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 $250,000 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 2.11%, 1.86%, 2.86% and 2.11%, 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, 2021. 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
32



Water Island Credit Opportunities Fund  Portfolio Information (continued)

May 31, 2020 (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.

* Concentration Risk: The Fund may invest a large proportion of the Fund's assets in securities of issuers in a single sector over a given time. During such a period of concentration, the Fund may be subject to greater volatility with respect to its portfolio securities than a fund that is more broadly diversified.

Annual Report | May 31, 2020
33



Water Island Credit Opportunities Fund  Portfolio of Investments

May 31, 2020

  

Shares

 

Value

 

COMMON STOCKS - 1.22%

 

Auto Parts & Equipment - 0.71%

 

BorgWarner, Inc.

  

13,395

  

$

430,649

  

Entertainment - 0.51%

 

Eldorado Resorts, Inc.(a)

  

405

   

14,361

  

Flutter Entertainment Plc(a)

  

2,359

   

299,494

  
   

313,855

  
TOTAL COMMON STOCKS
(Cost $696,089)
  

744,504

  

 

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

BANK LOAN - 1.60%

 

Commercial Services - 1.60%

 
Refinitiv US Holdings, Inc.,
2018 USD Term Loan B,
Variable Rate, (1 mo. USD
LIBOR plus 3.250%)
 

10/01/2025

  

3.424

%

 

$

994,962

  

$

981,460

  
TOTAL BANK LOANS
(Cost $1,000,640)
  

981,460

  

CORPORATE BONDS - 72.73%

 

Aerospace & Defense - 3.82%

 

Boeing Co. (The)

 

05/01/2050

  

5.805

%

  

1,250,000

   

1,414,899

  

Triumph Group, Inc.(b)

 

06/01/2022

  

5.250

%

  

1,135,000

   

928,396

  
   

2,343,295

  

Auto Manufacturers - 4.42%

 

Navistar International Corp.(c)

 
  

05/01/2025

  

9.500

%

  

750,000

   

806,250

  
  

11/01/2025

  

6.625

%

  

2,032,000

   

1,899,920

  
   

2,706,170

  

Auto Parts & Equipment - 2.66%

 

Delphi Technologies Plc(b)(c)

 

10/01/2025

  

5.000

%

  

1,581,000

   

1,631,987

  

Banks - 1.40%

 
Truist Bank, Variable Rate,
(3 mo. USD LIBOR
plus 0.65%)
 

03/15/2028

  

1.391

%

  

1,000,000

   

856,378

  

See Notes to Financial Statements.

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



Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2020

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 72.73% (Continued)

 

Commercial Services - 6.62%

 
Nielsen Co. Luxembourg
SARL (The)(c)
 

10/01/2021

  

5.500

%

 

$

1,844,000

  

$

1,846,305

  

Refinitiv US Holdings, Inc.(b)(c)

 

05/15/2026

  

6.250

%

  

2,069,000

   

2,208,658

  
   

4,054,963

  

Computers & Computer Services - 4.45%

 
Dell International LLC /
EMC Corp.(c)
 

06/15/2021

  

4.420

%

  

750,000

   

764,066

  
Dell International LLC /
EMC Corp.(b)(c)
 

10/01/2026

  

4.900

%

  

1,000,000

   

1,080,594

  

NCR Corp.

 

07/15/2022

  

5.000

%

  

882,000

   

882,847

  
   

2,727,507

  

Electrical Components & Equipment - 1.35%

 

WESCO Distribution, Inc.

 

12/15/2021

  

5.375

%

  

833,000

   

828,835

  

Electronics - 1.69%

 

Tech Data Corp.

 

02/15/2027

  

4.950

%

  

1,000,000

   

1,034,008

  

Engineering & Construction - 1.53%

 
AECOM Global II LLC /
URS Fox US LP(b)
 

04/01/2022

  

5.000

%

  

938,000

   

940,345

  

Entertainment - 7.36%

 

Eldorado Resorts, Inc.

 
  

08/01/2023

  

7.000

%

  

1,329,000

   

1,339,247

  
  

04/01/2025

  

6.000

%

  

180,000

   

183,787

  
Stars Group Holdings B.V. /
Stars Group US
Co-Borrower LLC(c)
 

07/15/2026

  

7.000

%

  

2,820,000

   

2,989,200

  
   

4,512,234

  

Environmental Control - 1.69%

 
Advanced Disposal
Services, Inc.(c)
 

11/15/2024

  

5.625

%

  

1,000,000

   

1,033,750

  

Food - 2.07%

 

TreeHouse Foods, Inc.

 

03/15/2022

  

4.875

%

  

1,270,000

   

1,270,787

  

Household Products - 5.54%

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

08/15/2022

  

7.875

%

  

1,844,000

   

1,837,122

  

Edgewell Personal Care Co.

 

05/19/2021

  

4.700

%

  

1,500,000

   

1,558,350

  
   

3,395,472

  

See Notes to Financial Statements.

Annual Report | May 31, 2020
35



Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2020

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CORPORATE BONDS - 72.73% (Continued)

 

Insurance - 3.49%

 
Fidelity & Guaranty Life
Holdings, Inc.(c)
 

05/01/2025

  

5.500

%

 

$

2,000,000

  

$

2,140,000

  

Media - 0.79%

 

Walt Disney Co. (The)(b)

 

09/01/2049

  

2.750

%

  

500,000

   

485,669

  

Office/Business Equip - 2.54%

 

Xerox Corp.

 

05/15/2021

  

4.500

%

  

1,553,000

   

1,557,473

  

Oil & Gas - 5.18%

 
Northern Oil and Gas, Inc.,
(8.50% Cash + 1.00% PIK)
 

05/15/2023

  

8.500

%

  

1,459,238

   

1,225,760

  

QEP Resources, Inc.

 

03/01/2021

  

6.875

%

  

2,780,000

   

1,946,000

  
   

3,171,760

  

Pharmaceuticals - 1.66%

 

Bausch Health Companies, Inc.(c)

 

03/15/2022

  

6.500

%

  

1,000,000

   

1,017,300

  

Pipelines - 2.78%

 

NuStar Logistics LP

 

09/01/2020

  

4.800

%

  

1,692,000

   

1,705,748

  

Semiconductors - 0.42%

 

Microchip Technology, Inc.

 

06/01/2021

  

3.922

%

  

250,000

   

254,130

  

Storage/Warehousing - 2.33%

 

Mobile Mini, Inc.(b)

 

07/01/2024

  

5.875

%

  

1,391,000

   

1,425,775

  

Telecommunications - 8.94%

 

Cincinnati Bell, Inc.(c)

 

07/15/2024

  

7.000

%

  

2,300,000

   

2,369,000

  

Cincinnati Bell, Inc.(b)(c)

 

10/15/2025

  

8.000

%

  

2,000,000

   

2,065,000

  

Hughes Satellite Systems Corp.

 

06/15/2021

  

7.625

%

  

1,000,000

   

1,045,200

  
   

5,479,200

  
TOTAL CORPORATE BONDS
(Cost $45,528,259)
  

44,572,786

  

CONVERTIBLE CORPORATE BONDS - 21.55%

 

Pharmaceuticals - 5.59%

 

Dermira, Inc.

 

05/15/2022

  

3.000

%

  

1,938,000

   

1,957,380

  

Jazz Investments I Ltd.

 

08/15/2021

  

1.875

%

  

1,500,000

   

1,467,015

  
   

3,424,395

  

See Notes to Financial Statements.

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



Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2020

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

CONVERTIBLE CORPORATE BONDS - 21.55% (Continued)

 

Semiconductors - 10.92%

 

Adesto Technologies Corp.(b)(c)

 

09/15/2024

  

4.250

%

 

$

2,500,000

  

$

2,932,341

  

ON Semiconductor Corp.(b)

 

12/01/2020

  

1.000

%

  

2,000,000

   

2,129,788

  

Synaptics, Inc.

 

06/15/2022

  

0.500

%

  

1,500,000

   

1,633,713

  
   

6,695,842

  

Software - 5.04%

 

Verint Systems, Inc.(b)

 

06/01/2021

  

1.500

%

  

2,000,000

   

1,991,474

  

Nuance Communications, Inc.(b)

 

12/15/2035

  

1.000

%

  

1,000,000

   

1,095,844

  
   

3,087,318

  
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost $12,733,324)
  

13,207,555

  

 

  

Shares

 

Value

 

WARRANTS - 0.00%(d)

 

Telecommunications - 0.00%(d)

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

3,017

  

$

1,177

  
TOTAL WARRANTS
(Cost $0)
    

1,177

  

PREFERRED STOCKS - 2.06%

 

Real Estate Investment Trusts - 2.06%

 

Taubman Centers, Inc., Series J

  

55,711

   

1,264,640

  
TOTAL PREFERRED STOCKS
(Cost $1,260,049)
    

1,264,640

  

 

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(a) - 1.52%

 

Call Options Purchased - 1.52%

 

AECOM

 
  

06/2020

 

$

35.00

  

$

290,775

   

75

  

$

31,875

  
  

06/2020

  

50.00

   

89,171

   

23

   

46

  
Bausch Health
Companies, Inc.
 

07/2020

  

17.00

   

924,000

   

500

   

116,250

  

Cincinnati Bell, Inc.

 

08/2020

  

12.50

   

60,393

   

41

   

5,740

  

EchoStar Corp.

 

07/2020

  

35.00

   

311,600

   

100

   

7,750

  

Edgewell Personal Care Co.

 

08/2020

  

30.00

   

1,186,380

   

390

   

136,500

  

NCR Corp.

 

07/2020

  

25.00

   

722,000

   

400

   

3,000

  

Nielsen Holdings Plc

 

08/2020

  

18.00

   

1,041,750

   

750

   

18,750

  

See Notes to Financial Statements.

Annual Report | May 31, 2020
37



Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2020

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(a) - 1.52% (Continued)

 

Call Options Purchased - 1.52% (Continued)

 

NuStar Energy LP

 

09/2020

 

$

15.00

  

$

781,650

   

450

  

$

150,750

  

QEP Resources, Inc.

 

09/2020

  

3.00

   

46,094

   

540

   

5,400

  

SPDR S&P 500 ETF Trust

 

07/2020

  

260.00

   

1,673,760

   

55

   

258,363

  

TreeHouse Foods, Inc.

 

08/2020

  

50.00

   

316,260

   

60

   

35,700

  

Triumph Group, Inc.

 
  

09/2020

  

7.50

   

187,250

   

250

   

48,125

  
  

09/2020

  

10.00

   

374,500

   

500

   

57,500

  

WESCO International, Inc.

 

09/2020

  

30.00

   

233,100

   

70

   

50,400

  

Xerox Holdings Corp.

 

10/2020

  

25.00

   

555,800

   

350

   

4,725

  
TOTAL CALL OPTIONS PURCHASED
(Cost $667,975)
          

930,874

  
TOTAL PURCHASED OPTIONS
(Cost $667,975)
          

930,874

  

 

Total Investments - 100.68%
(Cost $61,886,336)
  

61,702,996

  

Liabilities in Excess of Other Assets - (0.68)%(e)

  

(414,720

)

 

NET ASSETS - 100.00%

 

$

61,288,276

  

Portfolio Footnotes

(a)  Non-income-producing security.

(b)  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, 2020, the aggregate fair market value of those securities was $11,899,148, representing 19.42% of net assets.

(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, 2020, these securities had a total value of $26,621,493 or 43.44% of net assets.

(d)  Less than 0.005% of net assets.

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

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
38



Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2020

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (11.32%)

 

Aerospace & Defense - (0.78%)

 

Triumph Group, Inc.

  

(64,100

)

 

$

(480,109

)

 

Auto Parts & Equipment - (0.65%)

 

Delphi Technologies Plc

  

(31,100

)

  

(400,568

)

 

Commercial Services - (0.41%)

 

Nielsen Holdings Plc

  

(18,200

)

  

(252,798

)

 

Distribution/Wholesale - (0.19%)

 

WESCO International, Inc.

  

(3,400

)

  

(113,220

)

 

Engineering & Construction - (0.20%)

 

AECOM

  

(3,100

)

  

(120,187

)

 

Entertainment - (0.49%)

 

Flutter Entertainment Plc

  

(2,360

)

  

(299,594

)

 

Environmental Control - (0.08%)

 

Advanced Disposal Services, Inc.

  

(1,634

)

  

(50,948

)

 

Food - (0.37%)

 

TreeHouse Foods, Inc.

  

(4,300

)

  

(226,653

)

 

Household Products - (0.58%)

 

Edgewell Personal Care Co.

  

(11,700

)

  

(355,914

)

 

Lodging - (0.08%)

 

Caesars Entertainment Corp.

  

(4,500

)

  

(51,255

)

 

Office/Business Equip - (0.05%)

 

Xerox Holdings Corp.

  

(1,825

)

  

(28,981

)

 

Pharmaceuticals - (1.16%)

 

Bausch Health Companies, Inc.

  

(31,900

)

  

(589,512

)

 

Jazz Pharmaceuticals Plc

  

(1,000

)

  

(119,320

)

 
   

(708,832

)

 

Semiconductors - (3.73%)

 

Adesto Technologies Corp.

  

(105,742

)

  

(1,276,306

)

 

ON Semiconductor Corp.

  

(23,800

)

  

(392,462

)

 

Synaptics, Inc.

  

(9,700

)

  

(618,084

)

 
   

(2,286,852

)

 

Software - (1.18%)

 

Nuance Communications, Inc.

  

(22,300

)

  

(510,224

)

 

Verint Systems, Inc.

  

(4,600

)

  

(213,302

)

 
   

(723,526

)

 

See Notes to Financial Statements.

Annual Report | May 31, 2020
39



Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2020

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (11.32%) (Continued)

 

Telecommunications - (1.37%)

 

Cincinnati Bell, Inc.

  

(47,500

)

 

$

(699,675

)

 

EchoStar Corp., Class A

  

(4,500

)

  

(140,220

)

 
   

(839,895

)

 
TOTAL COMMON STOCKS
(Proceeds $6,294,044)
  

(6,939,332

)

 

 

  Maturity
Date
 

Rate

 Principal
Amount
 

Value

 

U.S. TREASURY & GOVERNMENT AGENCIES - (6.06%)

 

Sovereign - (6.06%)

 

U.S. Treasury Bond

 

02/15/2050

  

2.000

%

 

$

(1,850,000

)

 

$

(2,114,854

)

 

U.S. Treasury Bond

 

11/15/2049

  

2.375

%

  

(268,000

)

  

(330,268

)

 

U.S. Treasury Note

 

02/28/2022

  

1.125

%

  

(140,000

)

  

(142,324

)

 

U.S. Treasury Note

 

02/28/2025

  

1.125

%

  

(1,080,000

)

  

(1,122,905

)

 
   

(3,710,351

)

 

 

TOTAL U.S. TREASURY & GOVERNMENT AGENCIES
(Proceeds $3,725,373)
  

(3,710,351

)

 
TOTAL SECURITIES SOLD SHORT
(Proceeds $10,019,417)
 

$

(10,649,683

)

 

 

WRITTEN OPTIONS

 Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

Written Call Options

 
Jazz Pharmaceuticals
Plc
 

06/2020

  

110.00

  

$

(178,980

)

  

(15

)

 

$

(17,100

)

 
TOTAL WRITTEN CALL OPTIONS
(Premiums received $9,133)
  

(17,100

)

 
TOTAL WRITTEN OPTIONS
(Premiums received $9,133)
 

$

(17,100

)

 

See Notes to Financial Statements.

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



Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2020

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
 
 
 
 SPDR
Bloomberg
Barclays
High Yield
Bond ETF
 
 
 Received
1 Month-
Federal
Rate
Minus
40 Bps
(-0.350%)
 

08/19/2021

 

$

  

$

  

$

  

$

1,162,686

  

$

  
Morgan
Stanley &
Co./
Monthly
 
 
 
 iShares
iBoxx $
Investment
Grade
Corporate
Bond ETF
 
 Received
1 Month-
Federal
Rate
Minus
40 Bps
(-0.350%)
 

08/19/2021

  

   

   

   

1,135,372

   

  
Morgan
Stanley &
Co./
Monthly
 
 
 
 NuStar
Energy LP
 
 
 
 
 
 Received
1 Month-
Federal
Rate
Minus
40 Bps
(-0.350%)
 

08/19/2021

  

   

   

   

411,669

   

  
            

$

  

$

2,709,727

  

$

  

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

Country

 

% of Net Assets(a)

 

Netherlands

  

4.88

%

 

Luxembourg

  

3.01

%

 

Ireland

  

2.88

%

 

United Kingdom

  

2.66

%

 

United States

  

87.25

%

 

Liabilities in Excess of Other Assets

  

(0.68

)%

 
   

100.00

%

 

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

See Notes to Financial Statements.

Annual Report | May 31, 2020
41



Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2020

Abbreviations:

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

ETF - Exchange-Traded Fund

LIBOR - London Interbank Offered Rate

LLC - Limited Liability Company

LP - Limited Partnership

Ltd. - Limited

PIK - Payment-in-kind

Plc - Public Limited Company

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

S&P - Standard & Poor's

SPDR - Standard & Poor's Depositary Receipt

USD - United States Dollar

The following table summarizes the Water Island Credit Opportunities Fund's investments and derivative financial instruments categorized in the fair value hierarchy as of May 31, 2020:

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

Common Stocks**

 

$

744,504

  

$

  

$

  

$

744,504

  

Bank Loans

  

   

981,460

   

   

981,460

  

Corporate Bonds**

  

   

44,572,786

   

   

44,572,786

  

Convertible Corporate Bonds**

  

   

13,207,555

   

   

13,207,555

  

Warrants

  

   

1,177

   

   

1,177

  

Preferred Stocks**

  

1,264,640

   

   

   

1,264,640

  

Purchased Options

  

930,874

   

   

   

930,874

  

TOTAL

 

$

2,940,018

  

$

58,762,978

  

$

  

$

61,702,996

  

Other Financial Instruments***

 

Assets

 

Equity Swaps

 

$

0

  

$

  

$

  

$

0

  

Liabilities

 

Common Stocks**

  

(6,939,332

)

  

   

   

(6,939,332

)

 
U.S. Treasury & Government
Agencies
  

   

(3,710,351

)

  

   

(3,710,351

)

 

Written Options

  

(17,100

)

  

   

   

(17,100

)

 

TOTAL

 

$

(6,956,432

)

 

$

(3,710,351

)

 

$

  

$

(10,666,783

)

 

*  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 and equity swaps.

See Notes to Financial Statements.

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



Water Island Credit Opportunities Fund  Portfolio of Investments (continued)

May 31, 2020

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, 2020:

Investments
in Securities
 Balance as of
May 31, 2019
 Realized
Gain/(Loss)
 

Purchases

 Sales
Proceeds
 Amortization
Premium/
Discount
 Transfers
into
Level 3
 Transfers
out of
Level 3
 Balance as of
May 31, 2020
 Net change in
Unrealized
(Depreciation)
included in the
Statement of
Operations
attributable to
Level 3
investments
held at
May 31, 2020
 
Corporate
Bonds
 

$

0

  

$

4

  

$

  

$

(4

)

 

$

  

$

  

$

  

$

  

$

  

Total

 

$

0

  

$

4

  

$

  

$

(4

)

 

$

  

$

  

$

  

$

  

$

  

See Notes to Financial Statements.

Annual Report | May 31, 2020
43



Water Island Long/Short Fund  Manager Commentary

May 31, 2020 (Unaudited)

Water Island Long/Short Fund | Tickers: ATQIX, ATQFX

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 7.84% for the fiscal year ending May 31, 2020. The portfolio's returns were driven predominantly from the Americas, though the European region also contributed positively to performance. Industrials and consumer discretionary were the top contributors on a sector basis. Conversely, health care and energy were the worst performing sectors.

The Fund's top performing deal for the period was our merger arbitrage position in the acquisition of Caesars Entertainment by Eldorado Resorts. In June 2019, Eldorado Resorts – a US-based holding company for casino hotels – agreed to acquire Caesars Entertainment – a local peer – for $10.0 billion in cash and stock. During Q1 2020, casinos across the nation were forced to shutter due to the novel coronavirus outbreak, causing the share prices of casino operators to plummet. This led many investors to question the desire of Caesars and Eldorado to consummate their transaction, sending the deal spread wider. In our analysis, the merger agreement and the strategic rationale for the transaction remained strong, and with the financing for the deal already committed, we believed there was still a high likelihood of reaching a successful conclusion. The volatility in the deal spread allowed us to increase our position at favorable rates of return. The portfolio benefited from a tightening in the deal spread as the market rallied in April and May, casino operator share prices began to recover, and the deal progressed through the regulatory approval process – providing confidence to investors that the transaction was increasingly likely to close. We anticipate the deal will close in mid-2020 after the receipt of all required regulatory approvals.

The second highest contributor was our special situations investment in United Technologies. We invested in United Technologies in Q1 2020 as the company approached the final weeks of its merger with Raytheon and subsequent spin-off of both Otis Worldwide and Carrier Global. Based on our fundamental analysis, we saw the pro forma United Technologies/Raytheon merged company, soon to be named Raytheon Technologies, as fairly valued in the market but the combined Otis and Carrier entities as significantly undervalued. By owning United Technologies and selling short Raytheon shares, we were able to isolate the value of the combined Otis and Carrier businesses ahead of the spin-off completion. Both Otis and Carrier significantly re-rated post spin-off, leading to gains in the fund. We subsequently exited each investment.

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



Water Island Long/Short Fund  Manager Commentary (continued)

May 31, 2020 (Unaudited)

Conversely, the top detractor in the portfolio for the period was our merger arbitrage position in Illumina's attempted acquisition of Pacific Biosciences. In November 2018, Illumina – a US developer of tools for DNA sequencing and analysis – agreed to acquire Pacific Biosciences – a US DNA sequencing technology firm – for $1.1 billion in cash. The transaction encountered objections from multiple global regulators over the course of a long, fraught antitrust review process, primarily on a novel basis of potential competition – that is, despite limited overlap between the companies' businesses at the current time, it was feared Illumina was trying to take out a nascent competitor before it could grow. Ultimately, the companies decided to terminate the transaction shortly into 2020 rather than fight the regulators in court. We maintained our exposure to Pacific Biosciences as we believed the company remained an attractive takeout candidate – indeed, the UK regulatory authority's investigation revealed Illumina believed no fewer than four of its major competitors were potential suitors of Pacific Biosciences. While this position detracted from returns amidst widespread market volatility in Q1 2020, we continue to believe Pacific Biosciences is likely to be acquired and we are monitoring the situation closely.

The Fund's second-worst performer for the fiscal year was our position in broad equity market hedges. 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. Equity markets swiftly recovered late in the fiscal year, and while these hedges behaved as expected, they nonetheless detracted from returns. The second largest event detractor, however, was our special situations investment in Liberty TripAdvisor. Liberty TripAdvisor is a holding company that primarily owns shares in TripAdvisor. We initiated a long position in Liberty TripAdvisor while shorting TripAdvisor shares in September of 2019, in order to invest in the relative discount between the holding company and the underlying asset. As a relative value investment, our expectation was that over time, the discount between owning Liberty TripAdvisor vs. TripAdvisor would revert back to its historical mean. In November 2019, TripAdvisor announced disappointing earnings in light of Google changing its search algorithms, resulting in more traffic being directed to Google-owned properties than to external travel websites such as TripAdvisor, Priceline, and Expedia. The dislocation in TripAdvisor stock resulted in a significant widening of the relative discount. Given the significant devaluation of TripAdvisor, we expect the discount to remain wider than its historical mean for some time, and thus opted to exit our position at the end of 2019.

Glossary

Price-Earnings Ratio: The ratio of a security's price to its earnings.

Re-Rate: A re-rating occurs when the market changes its view of a company sufficiently to make valuation ratios (such as price-earnings ratio) substantially higher or lower.

Short: To sell a borrowed security without owning it, usually with the expectation that the price will decline so it can be bought back later at a profit.

Spin-Off: The creation of an independent company through the sale or distribution of new shares of an existing unit of a parent company.

Annual Report | May 31, 2020
45



Water Island Long/Short Fund  Portfolio Information

May 31, 2020 (Unaudited)

Performance (annualized returns as of May 31, 2020)

  One
Year
 Five
Year
 Ten
Year
 Since
Inception*
 

Water Island Long/Short Fund, Class R

  

7.58

%

  

1.61

%

  

N/A

   

1.71

%

 

Water Island Long/Short Fund, Class I

  

7.84

%

  

1.66

%

  

N/A

   

1.75

%

 

S&P 500® Index

  

12.84

%

  

9.86

%

  

N/A

   

9.50

%

 

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

  

1.84

%

  

1.19

%

  

N/A

   

1.10

%

 

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: 12/31/14. The "Since Inception" returns for securities indices are for the inception date of Class R and Class I shares.

The Total Annual Fund Operating Expenses for Class R and Class I are 11.80% and 11.55%, 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% and 1.44% for Class R and Class I, respectively, until at least September 30, 2021. 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
46



Water Island Long/Short Fund  Portfolio Information (continued)

May 31, 2020 (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.

* Concentration Risk: The Fund may invest a large proportion of the Fund's assets in securities of issuers in a single sector over a given time. During such a period of concentration, the Fund may be subject to greater volatility with respect to its portfolio securities than a fund that is more broadly diversified.

Annual Report | May 31, 2020
47



Water Island Long/Short Fund  Portfolio of Investments

May 31, 2020

  

Shares

 

Value

 

COMMON STOCKS - 76.32%

 

Biotechnology - 0.79%

 

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

  

4,298

  

$

15,129

  

Commercial Services - 0.38%

 

IWG Plc

  

2,000

   

7,306

  

Computers & Computer Services - 2.25%

 

HP, Inc.

  

2,205

   

33,384

  

Perspecta, Inc.(b)

  

439

   

9,733

  
   

43,117

  

Electronics - 1.01%

 

Tech Data Corp.(a)

  

143

   

19,483

  

Energy - Alternate Sources - 1.68%

 

Championx Corp.(a)

  

3,558

   

32,271

  

Engineering & Construction - 2.26%

 

AECOM(a)(b)

  

589

   

22,836

  

frontdoor, Inc.(a)(c)

  

450

   

20,542

  
   

43,378

  

Holding Companies-Diversified - 21.29%

 

CC Neuberger Principal Holdings(a)

  

3,982

   

40,577

  

Collier Creek Holdings, Class A(a)

  

8,750

   

93,800

  

Foley Trasimene Acquisition Corp.(a)

  

2,426

   

24,866

  

Fortress Value Acquisition Corp.(a)

  

3,020

   

30,230

  

GigCapital3, Inc.(a)

  

4,787

   

47,583

  

Graf Industrial Corp.(a)

  

8,795

   

91,380

  

Live Oak Acquisition Corp.(a)

  

4,656

   

45,815

  

Sustainable Opportunities Acquisition Corp.(a)

  

3,491

   

34,561

  
   

408,812

  

Internet - 8.71%

 

Grubhub, Inc.(a)

  

608

   

34,498

  

IAC/interactivecorp(a)

  

365

   

98,685

  

NortonLifeLock, Inc.(b)

  

1,500

   

34,170

  
   

167,353

  

Lodging - 7.19%

 

Caesars Entertainment Corp.(a)(b)

  

12,129

   

138,149

  

Media - 11.11%

 

Liberty Broadband Corp., Class A(a)(b)

  

835

   

112,466

  

Madison Square Garden Entertainment Corp.(a)

  

491

   

38,902

  

Kabel Deutschland Holding AG

  

553

   

62,000

  
   

213,368

  

See Notes to Financial Statements.

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



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

May 31, 2020

  

Shares

 

Value

 
COMMON STOCKS - 76.32% (Continued) 

Miscellaneous Manufacturing - 1.06%

 

Trane Technologies Plc(b)

  

225

  

$

20,297

  

Oil & Gas - 1.83%

 

Marathon Petroleum Corp.(b)

  

1,000

   

35,140

  

Pharmaceuticals - 3.68%

 

McKesson Europe AG

  

2,223

   

63,665

  

Paratek Pharmaceuticals, Inc.(a)(b)

  

1,575

   

6,993

  
   

70,658

  

Real Estate Investment Trusts - 1.74%

 

Front Yard Residential Corp.

  

4,460

   

33,450

  

Retail - 1.23%

 

Tiffany & Co.(b)

  

184

   

23,576

  

Software - 4.72%

 

Change Healthcare, Inc.(a)(b)(c)

  

3,700

   

46,176

  

Instructure, Inc.(a)(d)

  

908

   

44,492

  
   

90,668

  

Telecommunications - 5.39%

 

LogMeIn, Inc.

  

1,219

   

103,493

  
TOTAL COMMON STOCKS
(Cost $1,381,618)
  

1,465,648

  

EXCHANGE-TRADED FUNDS - 0.79%

 

Equity Fund - 0.79%

 

Industrial Select Sector SPDR® Fund(b)

  

223

   

15,090

  
TOTAL EXCHANGE-TRADED FUNDS
(Cost $18,138)
  

15,090

  

WARRANTS - 0.20%

 

Investment Company Security - 0.20%

 

Graf Industrial Corp., Exercise Price $11.50, Expires 12/31/2025(a)

  

7,541

   

3,771

  
TOTAL WARRANTS
(Cost $3,442)
  

3,771

  

PREFERRED STOCKS - 2.62%

 

Real Estate Investment Trusts - 2.62%

 

Taubman Centers, Inc., Series J

  

2,219

   

50,371

  
TOTAL PREFERRED STOCKS
(Cost $50,192)
  

50,371

  

See Notes to Financial Statements.

Annual Report | May 31, 2020
49



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

May 31, 2020

  Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

PURCHASED OPTIONS(a) - 1.73%

 

Call Options Purchased - 0.92%

 

Altra Industrial Motion Corp.

 

07/2020

 

$

21.00

  

$

24,800

   

8

  

$

8,480

  

Aramark

 

07/2020

  

25.00

   

15,534

   

6

   

1,650

  

WESCO International, Inc.

 

09/2020

  

30.00

   

23,310

   

7

   

5,040

  

WillScot Corp.

 

07/2020

  

12.50

   

22,678

   

17

   

2,465

  
TOTAL CALL OPTIONS PURCHASED
(Cost $5,393)
          

17,635

  

Put Options Purchased - 0.81%

 

Change Healthcare, Inc.

           
  

06/2020

  

9.00

   

24,960

   

20

   

850

  
  

07/2020

  

10.00

   

12,480

   

10

   

325

  

frontdoor, Inc.

 

07/2020

  

35.00

   

45,650

   

10

   

975

  

iShares Russell 2000 ETF

           
  

09/2020

  

105.00

   

166,680

   

12

   

2,544

  
  

12/2020

  

120.00

   

208,350

   

15

   

10,950

  
TOTAL PUT OPTIONS PURCHASED
(Cost $26,663)
          

15,644

  
TOTAL PURCHASED OPTIONS
(Cost $32,056)
          

33,279

  

 

  

Yield

 

Shares

 

Value

 

SHORT-TERM INVESTMENTS - 18.48%

 

Money Market Funds

 
Morgan Stanley Institutional Liquidity
Fund Government Portfolio, Institutional Class
  

0.094

%(e)

  

177,494

  

$

177,494

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

0.249

%(e)

  

177,494

   

177,494

  
  

354,988

  
TOTAL SHORT-TERM INVESTMENTS
(Cost $354,988)
  

354,988

  
Total Investments - 100.14%
(Cost $1,840,434)
  

1,923,147

  

Liabilities in Excess of Other Assets - (0.14)%(f)

  

(2,778

)

 

NET ASSETS - 100.00%

 

$

1,920,369

  

See Notes to Financial Statements.

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



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

May 31, 2020

Portfolio Footnotes

(a)  Non-income-producing security.

(b)  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, 2020, the aggregate fair market value of those securities was $457,908, representing 23.84% of net assets.

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

(d)  Security fair valued using significant unobservable inputs and classified as a Level 3 security. As of May 31, 2020, the total fair market value of these securities was $44,492, representing 2.32% of net assets.

(e)  Rate shown is the 7-day effective yield as of May 31, 2020.

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

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 

COMMON STOCKS - (23.65%)

 

Commercial Services - (0.10%)

 

Booz Allen Hamilton Holding Corp., Class A

  

(23

)

 

$

(1,834

)

 

Computers & Computer Services - (1.00%)

 

CACI International, Inc., Class A

  

(7

)

  

(1,755

)

 

Hewlett Packard Enterprise Co.

  

(387

)

  

(3,758

)

 

International Business Machines Corp.

  

(42

)

  

(5,246

)

 

Science Applications International Corp.

  

(19

)

  

(1,673

)

 

Seagate Technology Plc

  

(126

)

  

(6,683

)

 
   

(19,115

)

 

Construction Materials - (0.96%)

 

Johnson Controls International Plc

  

(273

)

  

(8,575

)

 

Lennox International, Inc.

  

(46

)

  

(9,837

)

 
   

(18,412

)

 

Distribution/Wholesale - (1.07%)

 

WESCO International, Inc.

  

(616

)

  

(20,513

)

 

Engineering & Construction - (2.14%)

 

Jacobs Engineering Group, Inc.

  

(70

)

  

(5,881

)

 

Stantec, Inc.

  

(222

)

  

(6,675

)

 

WillScot Corp.

  

(1,700

)

  

(22,678

)

 

WSP Global, Inc.

  

(92

)

  

(5,938

)

 
   

(41,172

)

 

Entertainment - (1.51%)

 

Eldorado Resorts, Inc.

  

(818

)

  

(29,006

)

 

Environmental Control - (0.30%)

 

Tetra Tech, Inc.

  

(74

)

  

(5,839

)

 

Food Service - (0.94%)

 

Aramark

  

(700

)

  

(18,123

)

 

See Notes to Financial Statements.

Annual Report | May 31, 2020
51



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

May 31, 2020

SCHEDULE OF SECURITIES SOLD SHORT

 

Shares

 

Value

 
COMMON STOCKS - (23.65%) (Continued) 

Internet - (7.01%)

 

ANGI Homeservices, Inc., Class A

  

(1,358

)

 

$

(14,734

)

 

Match Group, Inc.

  

(869

)

  

(77,376

)

 

Uber Technologies, Inc.

  

(1,170

)

  

(42,494

)

 
   

(134,604

)

 

Machinery - Diversified - (2.04%)

 

Altra Industrial Motion Corp.

  

(1,266

)

  

(39,246

)

 

Media - (5.33%)

 

Charter Communications, Inc., Class A

  

(188

)

  

(102,272

)

 

Oil & Gas - (0.65%)

 

HollyFrontier Corp.

  

(236

)

  

(7,422

)

 

PBF Energy, Inc., Class A

  

(480

)

  

(5,098

)

 
   

(12,520

)

 

Real Estate Investment Trusts - (0.60%)

 

American Homes 4 Rent, Class A

  

(219

)

  

(5,527

)

 

Invitation Homes, Inc.

  

(229

)

  

(6,023

)

 
   

(11,550

)

 
TOTAL COMMON STOCKS
(Proceeds $421,390)
  

(454,206

)

 

EXCHANGE-TRADED FUNDS - (1.61%)

 

Equity Fund - (1.61%)

 

VanEck Vectors Oil Services ETF

  

(260

)

  

(30,878

)

 
TOTAL EXCHANGE-TRADED FUNDS
(Proceeds $30,607)
  

(30,878

)

 
TOTAL SECURITIES SOLD SHORT
(Proceeds $451,997)
 

$

(485,084

)

 

 

WRITTEN OPTIONS

 Expiration
Date
 Exercise
Price
 Notional
Amount
 

Contracts

 

Value

 

Written Put Options

 

iShares Russell 2000 ETF

 
  

09/2020

 

$

90.00

  

$

(166,680

)

  

(12

)

 

$

(1,284

)

 
  

12/2020

  

110.00

   

(208,350

)

  

(15

)

  

(7,665

)

 
TOTAL WRITTEN PUT OPTIONS
(Premiums received $15,500)
          

(8,949

)

 
TOTAL WRITTEN OPTIONS
(Premiums received $15,500)
         

$

(8,949

)

 

See Notes to Financial Statements.

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



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

May 31, 2020

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
 
 
 
 
 MPLX LP
 
 
 
 
 
 
 Received
1 Month-
Federal
Rate
Minus
40 bps
(-0.350%)
 





03/11/2022
 

$

  

$

  

$

  

$

11,964

  

$

  
Morgan
Stanley &
Co./Monthly
 
 
 
 
 Valero
Energy
Corp.
 
 
 
 
 Received
1 Month-
Federal
Rate
Minus
40 bps
(-0.350%)
 





03/11/2022
  

   

   

   

9,996

   

  
            

$

  

$

21,960

  

$

  

OUTSTANDING FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Appreciation
 

CAD

42,100

  

USD

30,255

  

Goldman Sachs & Co.

 

06/15/2020

 

$

322

  

EUR

6,740

  

USD

7,358

  

Goldman Sachs & Co.

 

06/15/2020

  

125

  

USD

129,897

  

EUR

115,310

  

Goldman Sachs & Co.

 

06/15/2020

  

1,864

  

GBP

10,100

  

USD

12,433

  

Goldman Sachs & Co.

 

06/15/2020

  

41

  

USD

14,402

  

GBP

11,600

  

Goldman Sachs & Co.

 

06/15/2020

  

77

  
  

$

2,429

  
Currency
Purchased
 

Currency Sold

 

Counterparty

 Settlement
Date
 Unrealized
Depreciation
 

USD

23,805

  

CAD

33,910

  

Goldman Sachs & Co.

 

06/15/2020

 

$

(824

)

 

EUR

5,160

  

USD

5,796

  

Goldman Sachs & Co.

 

06/15/2020

  

(66

)

 

USD

9,842

  

EUR

9,020

  

Goldman Sachs & Co.

 

06/15/2020

  

(171

)

 

GBP

2,600

  

USD

3,245

  

Goldman Sachs & Co.

 

06/15/2020

  

(34

)

 

USD

8,596

  

GBP

7,000

  

Goldman Sachs & Co.

 

06/15/2020

  

(50

)

 
  

$

(1,145

)

 

See Notes to Financial Statements.

Annual Report | May 31, 2020
53



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

May 31, 2020

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

Country

 

% of Net Assets(a)

 

Germany

  

6.55

%

 

United States Virgin Islands

  

1.74

%

 

Ireland

  

1.06

%

 

Switzerland

  

0.38

%

 

United States

  

90.41

%

 

Liabilities in Excess of Other Assets

  

(0.14

)%

 
   

100.00

%

 

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

Abbreviations:

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

ETF - Exchange-Traded Fund

EUR - Euro

GBP - British pound

LP - Limited Partnership

Plc - Public Limited 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 fair value hierarchy as of May 31, 2020:

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

Common Stocks

 

Biotechnology

 

$

15,129

  

$

  

$

  

$

15,129

  

Commercial Services

  

7,306

   

   

   

7,306

  

Computers & Computer Services

  

43,117

   

   

   

43,117

  

Electronics

  

19,483

   

   

   

19,483

  

Energy - Alternate Sources

  

32,271

   

   

   

32,271

  

Engineering & Construction

  

43,378

   

   

   

43,378

  

Holding Companies-Diversified

  

408,812

   

   

   

408,812

  

Internet

  

167,353

   

   

   

167,353

  

Lodging

  

138,149

   

   

   

138,149

  

Media

  

213,368

   

   

   

213,368

  

Miscellaneous Manufacturing

  

20,297

   

   

   

20,297

  

Oil & Gas

  

35,140

   

   

   

35,140

  

Pharmaceuticals

  

70,658

   

   

   

70,658

  

Real Estate Investment Trusts

  

33,450

   

   

   

33,450

  

See Notes to Financial Statements.

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



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

May 31, 2020

Investments in Securities at Value*

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Retail

 

$

23,576

  

$

  

$

  

$

23,576

  

Software

  

46,176

   

   

44,492

   

90,668

  

Telecommunications

  

103,493

   

   

   

103,493

  

Exchange-Traded Funds

  

15,090

   

   

   

15,090

  

Warrants

  

3,771

   

   

   

3,771

  

Preferred Stocks**

  

50,371

   

   

   

50,371

  

Purchased Options

  

33,279

   

   

   

33,279

  

Short-Term Investments

  

354,988

   

   

   

354,988

  

TOTAL

 

$

1,878,655

  

$

  

$

44,492

  

$

1,923,147

  

Other Financial Instruments***

 

Assets

 

Forward Foreign Currency Exchange Contracts

 

$

  

$

2,429

  

$

  

$

2,429

  

Equity Swaps

  

0

   

   

   

0

  

Liabilities

 

Common Stocks**

  

(454,206

)

  

   

   

(454,206

)

 

Exchange-Traded Funds

  

(30,878

)

  

   

   

(30,878

)

 

Written Options

  

(8,949

)

  

   

   

(8,949

)

 

Forward Foreign Currency Exchange Contracts

  

   

(1,145

)

  

   

(1,145

)

 

TOTAL

 

$

(494,033

)

 

$

1,284

  

$

  

$

(492,749

)

 

*  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, 2020:

Investments
in Securities
 Balance as of
May 31, 2019
 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, 2020
 Net change in
Unrealized
(Depreciation)
included in the
Statement of
Operations
attributable to
Level 3
investments
held at
May 31, 2020
 
Common
Stock
 

$

0

  

$

2,931

  

$

1,311

  

$

266,280

  

$

(226,030

)

 

$

  

$

  

$

44,492

  

$

1,311

  

Total

 

$

0

  

$

2,931

  

$

1,311

  

$

266,280

  

$

(226,030

)

 

$

  

$

  

$

44,492

  

$

1,311

  

See Notes to Financial Statements.

Annual Report | May 31, 2020
55



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

May 31, 2020

The following table summarizes the quantitative inputs used for investments categorized as Level 3 of the fair value hierarchy as of May 31, 2020:

Investments in
Securities
 Fair Value at
May 31, 2020
 Valuation
Technique
 Unobservable
Input
 Range of
Values
 Weighted
Average
 
Common Stocks
  
   
 

$

44,492
 
 
 Deal Value

 Final
determination
on Dissent
 

$

49

 

$

49.00

 

See Notes to Financial Statements.

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



This Page Intentionally Left Blank



The Arbitrage Funds

  Arbitrage
Fund
 Water Island
Diversified
Event-Driven
Fund
 

ASSETS

 

Investments:

 

At cost of unaffiliated investments

 

$

1,205,110,681

  

$

101,950,451

  

At cost of affiliated investments

 

$

60,459,409

  

$

  

At fair value of unaffiliated investments (Note 2)

 

$

1,193,014,105

  

$

102,183,485

  

At fair value of affiliated investments (Note 2)

 

$

66,223,311

  

$

  

Cash

  

1,211,417

   

273,889

  

Cash denominated in foreign currency (Cost $1,327, $1,750, $0 and $0)

  

1,332

   

1,757

  

Deposits with brokers for securities sold short (Note 2)

  

104,354,506

   

12,219,727

  

Segregated cash for collateral (Note 2)

  

48,725,000

   

1,319,540

  

Receivable for investment securities sold

  

82,130,035

   

5,238,935

  

Receivable for capital shares sold

  

3,325,671

   

9,030

  

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

  

4,054,734

   

227,160

  

Dividends and interest receivable

  

449,585

   

158,158

  

Receivable due from Adviser (Note 5)

  

   

  

Prepaid expenses and other assets

  

77,920

   

29,840

  

Total Assets

  

1,503,567,616

   

121,661,521

  

LIABILITIES

 
Securities sold short, at value (Note 2) (proceeds $95,101,458, $11,147,423, $10,019,417 and
$451,997)
  

102,963,521

   

12,483,699

  

Written options, at value (Note 2) (premiums received $0, $0, $9,133 and $15,500)

  

   

  

Line of credit payable (Note 4)

  

   

  

Payable for investment securities purchased

  

16,564,399

   

1,232,168

  

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

  

1,169,055

   

85,614

  

Payable for capital shares redeemed

  

801,237

   

135,664

  

Payable to Adviser (Note 5)

  

1,179,358

   

101,225

  

Dividends payable on securities sold short

  

   

1,399

  

Payable to Distributor (Note 5)

  

42,815

   

2,151

  

Payable to Administrator (Note 5)

  

92,799

   

15,802

  

Payable to Transfer Agent (Note 5)

  

112,264

   

14,669

  

Payable to Custodian

  

90,519

   

25,516

  

Interest expense payable

  

32,293

   

5,309

  

Payable for swap reset

  

126,571

   

15,600

  

Audit and legal fees payable

  

103,521

   

22,576

  

Payable to Trustees

  

20,156

   

20,156

  

Chief Compliance Officer Fees payable (Note 5)

  

22,694

   

1,783

  

Chief Financial Officer Fees payable (Note 5)

  

5,036

   

931

  

Other accrued expenses and liabilities

  

65,680

   

17,850

  

Total Liabilities

  

123,391,918

   

14,182,112

  

NET ASSETS

 

$

1,380,175,698

  

$

107,479,409

  

NET ASSETS CONSIST OF:

 

Paid-in capital

 

$

1,330,639,186

  

$

160,770,439

  

Distributable earnings (Accumulated loss)

  

49,536,512

   

(53,291,030

)

 

NET ASSETS

 

$

1,380,175,698

  

$

107,479,409

  

See Notes to Financial Statements.

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



  Statement of Assets and Liabilities

  May 31, 2020

  Water
Island Credit
Opportunities Fund
 Water Island
Long/Short
Fund
 

ASSETS

 

Investments:

 

At cost of unaffiliated investments

 

$

61,886,336

  

$

1,840,434

  

At cost of affiliated investments

 

$

  

$

  

At fair value of unaffiliated investments (Note 2)

 

$

61,702,996

  

$

1,923,147

  

At fair value of affiliated investments (Note 2)

 

$

  

$

  

Cash

  

77,226

   

  

Cash denominated in foreign currency (Cost $1,327, $1,750, $0 and $0)

  

   

  

Deposits with brokers for securities sold short (Note 2)

  

10,735,664

   

440,548

  

Segregated cash for collateral (Note 2)

  

1,450,000

   

83,329

  

Receivable for investment securities sold

  

47,694

   

69,936

  

Receivable for capital shares sold

  

47,540

   

  

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

  

   

2,429

  

Dividends and interest receivable

  

685,734

   

1,029

  

Receivable due from Adviser (Note 5)

  

1,560

   

13,504

  

Prepaid expenses and other assets

  

23,050

   

10,408

  

Total Assets

  

74,771,464

   

2,544,330

  

LIABILITIES

 
Securities sold short, at value (Note 2) (proceeds $95,101,458, $11,147,423, $10,019,417 and
$451,997)
  

10,649,683

   

485,084

  

Written options, at value (Note 2) (premiums received $0, $0, $9,133 and $15,500)

  

17,100

   

8,949

  

Line of credit payable (Note 4)

  

2,400,000

   

  

Payable for investment securities purchased

  

185,760

   

66,249

  

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

  

   

1,145

  

Payable for capital shares redeemed

  

124,576

   

6,882

  

Payable to Adviser (Note 5)

  

   

  

Dividends payable on securities sold short

  

510

   

252

  

Payable to Distributor (Note 5)

  

1,390

   

2

  

Payable to Administrator (Note 5)

  

19,873

   

5,879

  

Payable to Transfer Agent (Note 5)

  

5,901

   

230

  

Payable to Custodian

  

6,776

   

6,889

  

Interest expense payable

  

19,563

   

168

  

Payable for swap reset

  

668

   

152

  

Audit and legal fees payable

  

18,997

   

15,909

  

Payable to Trustees

  

20,156

   

20,156

  

Chief Compliance Officer Fees payable (Note 5)

  

1,689

   

43

  

Chief Financial Officer Fees payable (Note 5)

  

778

   

589

  

Other accrued expenses and liabilities

  

9,768

   

5,383

  

Total Liabilities

  

13,483,188

   

623,961

  

NET ASSETS

 

$

61,288,276

  

$

1,920,369

  

NET ASSETS CONSIST OF:

 

Paid-in capital

 

$

64,646,278

  

$

1,848,425

  

Distributable earnings (Accumulated loss)

  

(3,358,002

)

  

71,944

  

NET ASSETS

 

$

61,288,276

  

$

1,920,369

  

Annual Report | May 31, 2020
59



The Arbitrage Funds

  Arbitrage
Fund
 Water Island
Diversified
Event-Driven
Fund
 

PRICING OF SHARES:

 

CLASS R SHARES:

 

Net assets applicable to Class R shares

 

$

98,714,997

  

$

7,694,365

  

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

  

7,571,093

   

771,832

  

Net asset value and offering price per share

 

$

13.04

  

$

9.97

  

CLASS I SHARES:

 

Net assets applicable to Class I shares

 

$

1,243,838,214

  

$

99,068,635

  

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

  

92,359,506

   

9,856,576

  

Net asset value and offering price per share

 

$

13.47

  

$

10.05

  

CLASS C SHARES:

 

Net assets applicable to Class C shares

 

$

19,860,378

  

$

369,318

  

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

  

1,609,355

   

37,960

  

Net asset value and offering price per share(a)

 

$

12.34

  

$

9.73

  

CLASS A SHARES:

 

Net assets applicable to Class A shares

 

$

17,762,109

  

$

347,091

  

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

  

1,365,077

   

34,828

  

Net asset value and offering price per share(a)

 

$

13.01

  

$

9.97

  

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

 

$

13.34

  

$

10.30

  

Maximum sales charge

  

2.75

%

  

3.25

%

 

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

See Notes to Financial Statements.

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



  Statement of Assets and Liabilities

  May 31, 2020

  Water
Island Credit
Opportunities Fund
 Water Island
Long/Short
Fund
 

PRICING OF SHARES:

 

CLASS R SHARES:

 

Net assets applicable to Class R shares

 

$

3,672,697

  

$

10,958

  

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

  

380,824

   

1,049

  

Net asset value and offering price per share

 

$

9.64

  

$

10.45

  

CLASS I SHARES:

 

Net assets applicable to Class I shares

 

$

56,868,836

  

$

1,909,411

  

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

  

5,924,208

   

182,754

  

Net asset value and offering price per share

 

$

9.60

  

$

10.45

  

CLASS C SHARES:

 

Net assets applicable to Class C shares

 

$

658,825

  

$

  

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

  

68,566

   

  

Net asset value and offering price per share(a)

 

$

9.61

  

$

  

CLASS A SHARES:

 

Net assets applicable to Class A shares

 

$

87,918

  

$

  

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

  

9,155

   

  

Net asset value and offering price per share(a)

 

$

9.60

  

$

  

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

 

$

9.92

  

$

  

Maximum sales charge

  

3.25

%

  

  

Annual Report | May 31, 2020
61



The Arbitrage Funds

  Arbitrage
Fund
 Water Island
Diversified
Event-Driven
Fund
 

INVESTMENT INCOME

 

Dividend income

 

$

16,059,077

  

$

1,476,394

  

Dividend income from affiliated investments

  

119,280

   

  

Foreign taxes withheld on dividends

  

(236,046

)

  

(13,682

)

 

Interest income

  

4,329,858

   

804,763

  

Securities lending income

  

   

477

  

Total Investment Income

  

20,272,169

   

2,267,952

  

EXPENSES

 

Investment advisory fees (Note 5)

  

17,217,445

   

1,467,297

  

Distribution and service fees (Note 5)

 

Class R

  

356,873

   

64,332

  

Class C

  

196,500

   

6,378

  

Class A

  

45,572

   

1,865

  

Administrative fees (Note 5)

  

372,592

   

60,266

  

Chief Compliance Officer fees (Note 5)

  

104,929

   

8,846

  

Trustees' fees

  

103,330

   

84,149

  

Dividend expense

  

2,470,776

   

158,443

  

Interest rebate expense

  

   

1,125

  

Transfer agent fees (Note 5)

  

1,292,728

   

298,114

  

Custodian and bank service fees

  

408,346

   

80,786

  

Registration and filing fees

  

96,895

   

61,292

  

Printing of shareholder reports

  

155,380

   

32,427

  

Professional fees

  

265,566

   

34,956

  

Line of credit interest expense (Note 4)

  

97,046

   

10,116

  

Insurance expense

  

72,485

   

5,737

  

Chief Financial Officer fees (Note 5)

  

62,131

   

11,255

  

Other expenses

  

98,715

   

23,449

  

Total Expenses

  

23,417,309

   

2,410,833

  

Fees waived and/or reimbursed by the Adviser, Class R (Note 5)

  

(35,738

)

  

(72,714

)

 

Fees waived and/or reimbursed by the Adviser, Class I (Note 5)

  

(362,985

)

  

(279,224

)

 

Fees waived and/or reimbursed by the Adviser, Class C (Note 5)

  

(4,920

)

  

(1,804

)

 

Fees waived and/or reimbursed by the Adviser, Class A (Note 5)

  

(4,564

)

  

(2,112

)

 

Net Expenses

  

23,009,102

   

2,054,979

  

NET INVESTMENT INCOME (LOSS)

  

(2,736,933

)

  

212,973

  

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
62



  Statement of Operations

  For the Year Ended May 31, 2020

  Water
Island Credit
Opportunities Fund
 Water Island
Long/Short
Fund
 

INVESTMENT INCOME

 

Dividend income

 

$

79,500

  

$

87,378

  

Dividend income from affiliated investments

  

   

  

Foreign taxes withheld on dividends

  

   

(535

)

 

Interest income

  

2,149,302

   

6,202

  

Securities lending income

  

   

  

Total Investment Income

  

2,228,802

   

93,045

  

EXPENSES

 

Investment advisory fees (Note 5)

  

552,515

   

25,052

  

Distribution and service fees (Note 5)

 

Class R

  

18,976

   

26

  

Class C

  

4,679

   

17

  

Class A

  

614

   

4

  

Administrative fees (Note 5)

  

67,951

   

25,335

  

Chief Compliance Officer fees (Note 5)

  

4,291

   

137

  

Trustees' fees

  

83,231

   

82,525

  

Dividend expense

  

42,155

   

4,288

  

Interest rebate expense

  

   

279

  

Transfer agent fees (Note 5)

  

63,213

   

4,849

  

Custodian and bank service fees

  

29,621

   

25,958

  

Registration and filing fees

  

60,651

   

44,720

  

Printing of shareholder reports

  

7,310

   

2,537

  

Professional fees

  

24,740

   

16,106

  

Line of credit interest expense (Note 4)

  

29,477

   

16

  

Insurance expense

  

2,401

   

83

  

Chief Financial Officer fees (Note 5)

  

8,974

   

7,068

  

Other expenses

  

21,351

   

12,223

  

Total Expenses

  

1,022,150

   

251,223

  

Fees waived and/or reimbursed by the Adviser, Class R (Note 5)

  

(46,492

)

  

(1,126

)

 

Fees waived and/or reimbursed by the Adviser, Class I (Note 5)

  

(305,422

)

  

(216,303

)

 

Fees waived and/or reimbursed by the Adviser, Class C (Note 5)

  

(2,868

)

  

(152

)

 

Fees waived and/or reimbursed by the Adviser, Class A (Note 5)

  

(1,504

)

  

(152

)

 

Net Expenses

  

665,864

   

33,490

  

NET INVESTMENT INCOME (LOSS)

  

1,562,938

   

59,555

  

Annual Report | May 31, 2020
63



The Arbitrage Funds

  Arbitrage
Fund
 Water Island
Diversified
Event-Driven
Fund
 

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

 

Net realized gains (losses) from:

 

Unaffiliated investments

 

$

93,070,280

  

$

8,182,595

  

Purchased option contracts

  

(5,039,302

)

  

(621,405

)

 

Swap contracts

  

(12,721,184

)

  

1,324,551

  

Securities sold short

  

(11,978,565

)

  

(2,345,694

)

 

Written option contracts

  

317,902

   

181,455

  

Forward currency contracts

  

3,988,837

   

86,167

  

Foreign currency transactions (Note 8)

  

2,309,502

   

19,249

  

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

(25,875,315

)

  

269,869

  

Affiliated investments

  

5,728,034

   

  

Securities sold short

  

929,782

   

(1,701,864

)

 

Foreign currency transactions (Note 8)

  

389

   

26

  

Purchased option contracts

  

252,665

   

26,088

  

Written option contracts

  

(25,601

)

  

(4,956

)

 

Forward currency contracts

  

(2,224,904

)

  

(29,486

)

 

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

  

48,732,520

   

5,386,595

  

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

 

$

45,995,587

  

$

5,599,568

  

See Notes to Financial Statements.

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



  Statement of Operations

  For the Year Ended May 31, 2020

  Water
Island Credit
Opportunities Fund
 Water Island
Long/Short
Fund
 

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

 

Net realized gains (losses) from:

 

Unaffiliated investments

 

$

175,502

  

$

20,869

  

Purchased option contracts

  

130,754

   

(51,982

)

 

Swap contracts

  

(113,022

)

  

(5,921

)

 

Securities sold short

  

511,864

   

48,669

  

Written option contracts

  

21,926

   

14,261

  

Forward currency contracts

  

   

2,966

  

Foreign currency transactions (Note 8)

  

(106

)

  

(331

)

 

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

(98,597

)

  

118,152

  

Affiliated investments

  

   

  

Securities sold short

  

(873,080

)

  

(64,266

)

 

Foreign currency transactions (Note 8)

  

   

1

  

Purchased option contracts

  

243,824

   

(8,504

)

 

Written option contracts

  

(9,147

)

  

8,092

  

Forward currency contracts

  

   

184

  

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

  

(10,082

)

  

82,190

  

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

 

$

1,552,856

  

$

141,745

  

Annual Report | May 31, 2020
65



The Arbitrage Funds

  

Arbitrage Fund

 
  Year Ended
May 31, 2020
 Year Ended
May 31, 2019
 

FROM OPERATIONS

 

Net investment income (loss)

 

$

(2,736,933

)

 

$

273,818

  

Net realized gains (losses) from:

 

Unaffiliated investments

  

93,070,280

   

18,263,290

  

Purchased option contracts

  

(5,039,302

)

  

(9,906,367

)

 

Swap contracts

  

(12,721,184

)

  

6,330,396

  

Securities sold short

  

(11,978,565

)

  

54,909,157

  

Written option contracts

  

317,902

   

7,785,695

  

Forward currency contracts

  

3,988,837

   

20,593,887

  

Foreign currency transactions

  

2,309,502

   

836,947

  

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

(25,875,315

)

  

(11,301,841

)

 

Affiliated investments

  

5,728,034

   

4,775

  

Securities sold short

  

929,782

   

(3,373,640

)

 

Foreign currency transactions

  

389

   

(353,986

)

 

Purchased option contracts

  

252,665

   

(869,661

)

 

Written option contracts

  

(25,601

)

  

(21,922

)

 

Swap contracts

  

   

(19,040

)

 

Forward currency contracts

  

(2,224,904

)

  

(12,510,293

)

 

Net increase (decrease) in net assets resulting from operations

  

45,995,587

   

70,641,215

  

FROM DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

 

Distributions, Class R

  

(3,028,417

)

  

(3,337,705

)

 

Distributions, Class I

  

(30,760,287

)

  

(28,493,325

)

 

Distributions, Class C

  

(441,292

)

  

(258,793

)

 

Distributions, Class A

  

(377,484

)

  

(312,255

)

 

Decrease in net assets from distributions to shareholders

  

(34,607,480

)

  

(32,402,078

)

 

FROM CAPITAL SHARE TRANSACTIONS (NOTE 7):

 

Proceeds from shares sold

  

388,612,998

   

573,691,155

  

Shares issued in reinvestment of distributions

  

27,514,664

   

25,056,881

  

Payments for shares redeemed

  

(794,621,293

)

  

(662,269,228

)

 

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

  

(378,493,631

)

  

(63,521,192

)

 

TOTAL INCREASE (DECREASE) IN NET ASSETS

  

(367,105,524

)

  

(25,282,055

)

 

NET ASSETS

 

Beginning of year

  

1,747,281,222

   

1,772,563,277

  

End of year

 

$

1,380,175,698

  

$

1,747,281,222

  

See Notes to Financial Statements.

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



  Statement of Changes in Net Assets

  Water Island Diversified
Event-Driven Fund
 
  Year Ended
May 31, 2020
 Year Ended
May 31, 2019
 

FROM OPERATIONS

 

Net investment income (loss)

 

$

212,973

  

$

1,185,159

  

Net realized gains (losses) from:

 

Unaffiliated investments

  

8,182,595

   

2,456,816

  

Purchased option contracts

  

(621,405

)

  

(1,475,621

)

 

Swap contracts

  

1,324,551

   

347,357

  

Securities sold short

  

(2,345,694

)

  

(413,048

)

 

Written option contracts

  

181,455

   

872,256

  

Forward currency contracts

  

86,167

   

918,981

  

Foreign currency transactions

  

19,249

   

37,222

  

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

269,869

   

(1,942,929

)

 

Affiliated investments

  

   

  

Securities sold short

  

(1,701,864

)

  

963,822

  

Foreign currency transactions

  

26

   

(302

)

 

Purchased option contracts

  

26,088

   

19,748

  

Written option contracts

  

(4,956

)

  

(107,896

)

 

Swap contracts

  

   

  

Forward currency contracts

  

(29,486

)

  

(556,649

)

 

Net increase (decrease) in net assets resulting from operations

  

5,599,568

   

2,304,916

  

FROM DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

 

Distributions, Class R

  

(57,935

)

  

(546,554

)

 

Distributions, Class I

  

(460,278

)

  

(1,734,805

)

 

Distributions, Class C

  

   

(5,311

)

 

Distributions, Class A

  

(1,743

)

  

(13,015

)

 

Decrease in net assets from distributions to shareholders

  

(519,956

)

  

(2,299,685

)

 

FROM CAPITAL SHARE TRANSACTIONS (NOTE 7):

 

Proceeds from shares sold

  

58,223,304

   

18,462,931

  

Shares issued in reinvestment of distributions

  

469,438

   

1,993,650

  

Payments for shares redeemed

  

(81,019,387

)

  

(45,994,464

)

 

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

  

(22,326,645

)

  

(25,537,883

)

 

TOTAL INCREASE (DECREASE) IN NET ASSETS

  

(17,247,033

)

  

(25,532,652

)

 

NET ASSETS

 

Beginning of year

  

124,726,442

   

150,259,094

  

End of year

 

$

107,479,409

  

$

124,726,442

  

Annual Report | May 31, 2020
67



The Arbitrage Funds

  Water Island Credit
Opportunities Fund
 
  Year Ended
May 31, 2020
 Year Ended
May 31, 2019
 

FROM OPERATIONS

 

Net investment income (loss)

 

$

1,562,938

  

$

1,857,606

  

Net realized gains (losses) from:

 

Unaffiliated investments

  

175,502

   

(136,053

)

 

Purchased option contracts

  

130,754

   

(2,246

)

 

Swap contracts

  

(113,022

)

  

  

Securities sold short

  

511,864

   

154,774

  

Written option contracts

  

21,926

   

65,984

  

Forward currency contracts

  

   

73,267

  

Foreign currency transactions

  

(106

)

  

(2,445

)

 

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

(98,597

)

  

(653,777

)

 

Securities sold short

  

(873,080

)

  

163,621

  

Foreign currency transactions

  

   

384

  

Purchased option contracts

  

243,824

   

19,075

  

Written option contracts

  

(9,147

)

  

(26,152

)

 

Swap contracts

  

   

  

Forward currency contracts

  

   

(55,745

)

 

Net increase (decrease) in net assets resulting from operations

  

1,552,856

   

1,458,293

  

FROM DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

 

Distributions, Class R

  

(233,649

)

  

(223,168

)

 

Distributions, Class I

  

(1,648,549

)

  

(1,623,472

)

 

Distributions, Class C

  

(10,320

)

  

(12,522

)

 

Distributions, Class A

  

(7,297

)

  

(4,639

)

 

Decrease in net assets from distributions to shareholders

  

(1,899,815

)

  

(1,863,801

)

 

FROM CAPITAL SHARE TRANSACTIONS (NOTE 7):

 

Proceeds from shares sold

  

25,851,224

   

31,563,229

  

Shares issued in reinvestment of distributions

  

1,887,360

   

1,841,724

  

Payments for shares redeemed

  

(24,332,391

)

  

(21,303,781

)

 

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

  

3,406,193

   

12,101,172

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

  

3,059,234

   

11,695,664

  

NET ASSETS

 

Beginning of year

  

58,229,042

   

46,533,378

  

End of year

 

$

61,288,276

  

$

58,229,042

  

See Notes to Financial Statements.

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



  Statement of Changes in Net Assets

  

Water Island Long/Short Fund

 
  Year Ended
May 31, 2020
 Year Ended
May 31, 2019
 

FROM OPERATIONS

 

Net investment income (loss)

 

$

59,555

  

$

2,601

  

Net realized gains (losses) from:

 

Unaffiliated investments

  

20,869

   

200,171

  

Purchased option contracts

  

(51,982

)

  

(60,947

)

 

Swap contracts

  

(5,921

)

  

(11,587

)

 

Securities sold short

  

48,669

   

(132,947

)

 

Written option contracts

  

14,261

   

17,583

  

Forward currency contracts

  

2,966

   

11,557

  

Foreign currency transactions

  

(331

)

  

(193

)

 

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

  

118,152

   

(86,799

)

 

Securities sold short

  

(64,266

)

  

45,404

  

Foreign currency transactions

  

1

   

(1

)

 

Purchased option contracts

  

(8,504

)

  

11,438

  

Written option contracts

  

8,092

   

(1,628

)

 

Swap contracts

  

   

  

Forward currency contracts

  

184

   

(5,741

)

 

Net increase (decrease) in net assets resulting from operations

  

141,745

   

(11,089

)

 

FROM DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:

 

Distributions, Class R

  

(176

)

  

(206

)

 

Distributions, Class I

  

(36,186

)

  

(43,718

)

 

Distributions, Class C

  

   

(206

)

 

Distributions, Class A

  

   

(206

)

 

Decrease in net assets from distributions to shareholders

  

(36,362

)

  

(44,336

)

 

FROM CAPITAL SHARE TRANSACTIONS (NOTE 7):

 

Proceeds from shares sold

  

70,694

   

366,929

  

Shares issued in reinvestment of distributions

  

36,362

   

44,336

  

Payments for shares redeemed

  

(666,226

)

  

(189,524

)

 

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

  

(559,170

)

  

221,741

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

  

(453,787

)

  

166,316

  

NET ASSETS

 

Beginning of year

  

2,374,156

   

2,207,840

  

End of year

 

$

1,920,369

  

$

2,374,156

  

Annual Report | May 31, 2020
69



Arbitrage Fund – Class R  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

12.92

  

$

12.65

  

$

13.06

  

$

12.78

  

$

12.97

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

(0.05

)

  

(0.03

)(c)

  

0.05

   

(0.13

)(b)

  

(0.06

)

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

0.44

   

0.52

   

(0.01

)(c)

  

0.53

(d)

  

0.17

  

Total from investment operations

  

0.39

   

0.49

   

0.04

   

0.40

   

0.11

  

Less distributions

 

From net investment income

  

   

(0.06

)

  

(0.09

)

  

   

  

From net realized gains

  

(0.27

)

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

 

Total distributions

  

(0.27

)

  

(0.22

)

  

(0.45

)

  

(0.12

)

  

(0.30

)

 
Proceeds from redemption
fees collected
  

   

   

0.00

(e)

  

0.00

(e)

  

0.00

(e)

 

Net asset value, end of period

 

$

13.04

  

$

12.92

  

$

12.65

  

$

13.06

  

$

12.78

  

Total return(f)

  

3.07

%

  

3.89

%

  

0.31

%

  

3.17

%

  

0.87

%

 
Net assets, end of period
(in 000s)
 

$

98,715

  

$

163,349

  

$

222,309

  

$

340,353

  

$

433,936

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(g)

  

1.66

%

  

1.94

%

  

1.91

%

  

1.87

%(b)

  

1.88

%

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

1.63

%

  

1.93

%

  

1.90

%

  

1.87

%(b)

  

1.88

%

 

Net investment income (loss)

  

(0.36

%)

  

(0.20

%)(c)

  

0.41

%

  

(1.00

%)(b)

  

(0.51

%)

 

Portfolio turnover rate

  

273

%

  

419

%

  

362

%

  

363

%

  

321

%

 

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

(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 0.15%, 0.46%, 0.42%, 0.36% and 0.34% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.01%, 0.00%, 0.01%, 0.03% and 0.07% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, 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%, 1.47%, 1.48% and 1.47% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
70



Arbitrage Fund – Class I  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

13.32

  

$

13.03

  

$

13.46

  

$

13.13

  

$

13.28

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

(0.02

)

  

0.01

   

0.05

   

(0.10

)(b)

  

(0.03

)

 
Net realized and unrealized
gains on investments and
foreign currencies
  

0.45

   

0.54

   

0.01

   

0.55

(c)

  

0.18

  

Total from investment operations

  

0.43

   

0.55

   

0.06

   

0.45

   

0.15

  

Less distributions

 

From net investment income

  

(0.01

)

  

(0.10

)

  

(0.13

)

  

   

  

From net realized gains

  

(0.27

)

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

 

Total distributions

  

(0.28

)

  

(0.26

)

  

(0.49

)

  

(0.12

)

  

(0.30

)

 
Proceeds from redemption
fees collected
  

   

   

0.00

(d)

  

0.00

(d)

  

0.00

(d)

 

Net asset value, end of period

 

$

13.47

  

$

13.32

  

$

13.03

  

$

13.46

  

$

13.13

  

Total return(e)

  

3.27

%

  

4.21

%

  

0.50

%

  

3.47

%

  

1.16

%

 
Net assets, end of period
(in 000s)
 

$

1,243,838

  

$

1,546,542

  

$

1,510,598

  

$

1,492,094

  

$

1,395,178

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(f)

  

1.41

%

  

1.69

%

  

1.66

%

  

1.62

%(b)

  

1.63

%

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

1.38

%

  

1.68

%

  

1.65

%

  

1.62

%(b)

  

1.63

%

 

Net investment income (loss)

  

(0.13

%)

  

0.06

%

  

0.35

%

  

(0.76

%)(b)

  

(0.24

%)

 

Portfolio turnover rate

  

273

%

  

419

%

  

362

%

  

363

%

  

321

%

 

(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 0.15%, 0.46%, 0.42%, 0.36% and 0.34% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.01%, 0.00%, 0.01%, 0.03% and 0.07% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, 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%, 1.22%, 1.23% and 1.22% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

Annual Report | May 31, 2020
71



Arbitrage Fund – Class C  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

12.34

  

$

12.12

  

$

12.54

  

$

12.37

  

$

12.65

  
Income (loss) from
investment operations
 

Net investment loss(a)

  

(0.14

)

  

(0.12

)(b)

  

(0.07

)(b)

  

(0.22

)(c)

  

(0.16

)

 
Net realized and unrealized
gains on investments and
foreign currencies
  

0.41

   

0.50

   

0.01

   

0.51

(d)

  

0.18

  

Total from investment operations

  

0.27

   

0.38

   

(0.06

)

  

0.29

   

0.02

  

Less distributions

 

From net investment income

  

   

   

(0.00

)(e)

  

   

  

From net realized gains

  

(0.27

)

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

 

Total distributions

  

(0.27

)

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

 
Proceeds from redemption
fees collected
  

   

   

   

   

  

Net asset value, end of period

 

$

12.34

  

$

12.34

  

$

12.12

  

$

12.54

  

$

12.37

  

Total return(f)(g)

  

2.24

%

  

3.11

%

  

(0.45

%)

  

2.38

%

  

0.18

%

 
Net assets, end of period
(in 000s)
 

$

19,860

  

$

19,050

  

$

22,917

  

$

26,900

  

$

30,814

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(h)

  

2.41

%

  

2.69

%

  

2.66

%

  

2.62

%(c)

  

2.63

%

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

2.38

%

  

2.68

%

  

2.65

%

  

2.62

%(c)

  

2.63

%

 

Net investment loss

  

(1.16

%)

  

(0.94

%)(b)

  

(0.56

%)

  

(1.76

%)(c)

  

(1.28

%)

 

Portfolio turnover rate

  

273

%

  

419

%

  

362

%

  

363

%

  

321

%

 

(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 0.15%, 0.46%, 0.42%, 0.36% and 0.34% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.01%, 0.00%, 0.01%, 0.03% and 0.07% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, 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%, 2.22%, 2.23% and 2.22% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
72



Arbitrage Fund – Class A  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

12.90

  

$

12.63

  

$

13.07

  

$

12.79

  

$

12.97

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

(0.05

)

  

(0.02

)(d)

  

(b)

  

(0.13

)(c)

  

(0.07

)

 
Net realized and unrealized
gains on investments and
foreign currencies
  

0.43

   

0.52

   

0.02

   

0.53

(e)

  

0.19

  

Total from investment operations

  

0.38

   

0.50

   

0.02

   

0.40

   

0.12

  

Less distributions

 

From net investment income

  

   

(0.07

)

  

(0.10

)

  

   

  

From net realized gains

  

(0.27

)

  

(0.16

)

  

(0.36

)

  

(0.12

)

  

(0.30

)

 

Total distributions

  

(0.27

)

  

(0.23

)

  

(0.46

)

  

(0.12

)

  

(0.30

)

 
Proceeds from redemption
fees collected
  

   

   

   

   

  

Net asset value, end of period

 

$

13.01

  

$

12.90

  

$

12.63

  

$

13.07

  

$

12.79

  

Total return(f)(g)

  

3.00

%

  

3.94

%

  

0.21

%

  

3.17

%

  

0.95

%

 
Net assets, end of period
(in 000s)
 

$

17,762

  

$

18,341

  

$

16,740

  

$

10,012

  

$

8,421

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(h)

  

1.66

%

  

1.94

%

  

1.91

%

  

1.87

%(c)

  

1.87

%

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

1.63

%

  

1.93

%

  

1.90

%

  

1.87

%(c)

  

1.87

%

 

Net investment loss

  

(0.40

%)

  

(0.19

%)(d)

  

(0.01

%)

  

(1.02

%)(c)

  

(0.56

%)

 

Portfolio turnover rate

  

273

%

  

419

%

  

362

%

  

363

%

  

321

%

 

(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.

(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 0.15%, 0.46%, 0.42%, 0.36% and 0.33% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.01%, 0.00%, 0.01%, 0.03% and 0.07% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, 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%, 1.47%, 1.48% and 1.47% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

Annual Report | May 31, 2020
73



Water Island Diversified 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,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.47

  

$

9.46

  

$

9.34

  

$

8.98

  

$

9.73

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

0.01

   

0.07

   

0.06

   

(0.04

)(b)

  

(0.02

)

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

0.51

   

0.08

   

0.09

   

0.40

(c)

  

(0.53

)

 

Total from investment operations

  

0.52

   

0.15

   

0.15

   

0.36

   

(0.55

)

 

Less distributions

 

From net investment income

  

(0.02

)

  

(0.14

)

  

(0.03

)

  

   

(0.20

)

 

From net realized gains

  

   

   

   

   

(0.00

)(d)

 

Total distributions

  

(0.02

)

  

(0.14

)

  

(0.03

)

  

   

(0.20

)

 
Proceeds from redemption
fees collected
  

   

   

0.00

(d)

  

0.00

(d)

  

0.00

(d)

 

Net asset value, end of period

 

$

9.97

  

$

9.47

  

$

9.46

  

$

9.34

  

$

8.98

  

Total return(e)

  

5.49

%

  

1.60

%

  

1.56

%

  

4.01

%

  

(5.55

%)

 
Net assets, end of period
(in 000s)
 

$

7,694

  

$

30,423

  

$

45,383

  

$

70,277

  

$

80,114

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(f)

  

2.11

%

  

2.58

%

  

2.59

%

  

2.56

%(b)

  

2.62

%

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

1.83

%

  

2.18

%

  

2.16

%

  

2.26

%

  

2.46

%

 

Net investment income (loss)

  

0.09

%

  

0.70

%

  

0.58

%

  

(0.45

%)(b)

  

(0.27

%)

 

Portfolio turnover rate

  

397

%

  

504

%

  

421

%

  

409

%

  

350

%

 

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

(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 0.13%, 0.46%, 0.44%, 0.53% and 0.58% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.01%, 0.03%, 0.03%, 0.04% and 0.19% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, 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, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

www.arbitragefunds.com | 1-800-295-4485
74



Water Island Diversified 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,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.54

  

$

9.53

  

$

9.43

  

$

9.04

  

$

9.81

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

0.02

   

0.09

   

0.04

   

(0.02

)(b)

  

(0.02

)

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

0.53

   

0.09

   

0.12

   

0.41

(c)

  

(0.51

)

 

Total from investment operations

  

0.55

   

0.18

   

0.16

   

0.39

   

(0.53

)

 

Less distributions

 

From net investment income

  

(0.04

)

  

(0.17

)

  

(0.06

)

  

   

(0.24

)

 

From net realized gains

  

   

   

   

   

(0.00

)(d)

 

Total distributions

  

(0.04

)

  

(0.17

)

  

(0.06

)

  

   

(0.24

)

 
Proceeds from redemption
fees collected
  

   

   

0.00

(d)

  

0.00

(d)

  

0.00

(d)

 

Net asset value, end of period

 

$

10.05

  

$

9.54

  

$

9.53

  

$

9.43

  

$

9.04

  

Total return(e)

  

5.83

%

  

1.88

%

  

1.69

%

  

4.31

%

  

(5.27

%)

 
Net assets, end of period
(in 000s)
 

$

99,069

  

$

92,710

  

$

103,001

  

$

68,272

  

$

95,155

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(f)

  

1.86

%

  

2.33

%

  

2.34

%

  

2.31

%(b)

  

2.37

%

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

1.58

%

  

1.93

%

  

1.91

%

  

2.01

%

  

2.21

%

 

Net investment income (loss)

  

0.20

%

  

0.92

%

  

0.46

%

  

(0.22

%)(b)

  

(0.26

%)

 

Portfolio turnover rate

  

397

%

  

504

%

  

421

%

  

409

%

  

350

%

 

(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 0.13%, 0.46%, 0.44%, 0.53% and 0.58% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.01%, 0.03%, 0.03%, 0.04% and 0.19% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

(g)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 1.44%, 1.44%, 1.44%, 1.44% and 1.44% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

Annual Report | May 31, 2020
75



Water Island Diversified Event-Driven Fund – Class C  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.29

  

$

9.26

  

$

9.19

  

$

8.91

  

$

9.62

  
Income (loss) from
investment operations
 

Net investment loss(a)

  

(0.08

)(d)

  

(0.01

)

  

(0.03

)(b)

  

(0.11

)(c)

  

(0.09

)

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

0.52

   

0.09

   

0.10

   

0.39

(e)

  

(0.50

)

 

Total from investment operations

  

0.44

   

0.08

   

0.07

   

0.28

   

(0.59

)

 

Less distributions

 

From net investment income

  

   

(0.05

)

  

   

   

(0.12

)

 

From net realized gains

  

   

   

   

   

(0.00

)(f)

 

Total distributions

  

   

(0.05

)

  

   

   

(0.12

)

 

Net asset value, end of period

 

$

9.73

  

$

9.29

  

$

9.26

  

$

9.19

  

$

8.91

  

Total return(g)(h)

  

4.74

%

  

0.91

%

  

0.76

%

  

3.14

%

  

(6.14

%)

 
Net assets, end of period
(in 000s)
 

$

369

  

$

794

  

$

1,175

  

$

1,567

  

$

2,538

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(i)

  

2.86

%

  

3.33

%

  

3.34

%

  

3.31

%(c)

  

3.37

%

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

2.58

%

  

2.93

%

  

2.91

%

  

3.01

%

  

3.21

%

 

Net investment loss

  

(0.89

%)

  

(0.06

%)

  

(0.34

%)

  

(1.26

%)(c)

  

(0.95

%)

 

Portfolio turnover rate

  

397

%

  

504

%

  

421

%

  

409

%

  

350

%

 

(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 0.01% 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 class specific expenses.

(e)  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.

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

(g)  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.

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

(i)  Dividend expense totaled 0.13%, 0.46%, 0.44%, 0.53% and 0.59% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.01%, 0.03%, 0.03%, 0.04% and 0.18% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

(j)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 2.44%, 2.44%, 2.44%, 2.44% and 2.44% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

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76



Water Island Diversified Event-Driven Fund – Class A  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.46

  

$

9.46

  

$

9.35

  

$

8.98

  

$

9.73

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

(0.00

)(d)

  

0.06

   

0.04

   

(0.05

)(b)

  

(0.03

)

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

0.53

   

0.08

   

0.10

   

0.42

(c)

  

(0.52

)

 

Total from investment operations

  

0.53

   

0.14

   

0.14

   

0.37

   

(0.55

)

 

Less distributions

 

From net investment income

  

(0.02

)

  

(0.14

)

  

(0.03

)

  

   

(0.20

)

 

From net realized gains

  

   

   

   

   

(0.00

)(d)

 

Total distributions

  

(0.02

)

  

(0.14

)

  

(0.03

)

  

   

(0.20

)

 
Proceeds from redemption
fees collected
  

   

   

   

   

  

Net asset value, end of period

 

$

9.97

  

$

9.46

  

$

9.46

  

$

9.35

  

$

8.98

  

Total return(e)(f)

  

5.62

%

  

1.56

%

  

1.49

%

  

4.12

%

  

(5.54

%)

 
Net assets, end of period
(in 000s)
 

$

347

  

$

799

  

$

701

  

$

810

  

$

2,062

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(g)

  

2.11

%

  

2.58

%

  

2.59

%

  

2.56

%(b)

  

2.63

%

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

1.83

%

  

2.18

%

  

2.16

%

  

2.26

%

  

2.47

%

 

Net investment income (loss)

  

0.02

%

  

0.65

%

  

0.41

%

  

(0.53

%)(b)

  

(0.28

%)

 

Portfolio turnover rate

  

397

%

  

504

%

  

421

%

  

409

%

  

350

%

 

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

(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)  Dividend expense totaled 0.13%, 0.46%, 0.44%, 0.53% and 0.59% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.01%, 0.03%, 0.03%, 0.04% and 0.19% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

(h)  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, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

Annual Report | May 31, 2020
77



Water Island Credit Opportunities Fund – Class R  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.70

  

$

9.77

  

$

9.67

  

$

9.69

  

$

9.95

  
Income (loss) from
investment operations
 

Net investment income(a)

  

0.24

   

0.31

   

0.20

   

0.23

(b)

  

0.25

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

(0.01

)

  

(0.07

)

  

0.12

   

0.01

   

(0.24

)

 

Total from investment operations

  

0.23

   

0.24

   

0.32

   

0.24

   

0.01

  

Less distributions

 

From net investment income

  

(0.29

)

  

(0.31

)

  

(0.22

)

  

(0.26

)

  

(0.27

)

 

Total distributions

  

(0.29

)

  

(0.31

)

  

(0.22

)

  

(0.26

)

  

(0.27

)

 
Proceeds from redemption
fees collected
  

   

   

   

0.00

(c)

  

  

Net asset value, end of period

 

$

9.64

  

$

9.70

  

$

9.77

  

$

9.67

  

$

9.69

  

Total return(d)

  

2.46

%

  

2.55

%

  

3.21

%

  

2.58

%

  

0.10

%

 
Net assets, end of period
(in 000s)
 

$

3,673

  

$

7,845

  

$

9,533

  

$

11,935

  

$

12,426

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(e)

  

1.96

%

  

2.10

%(f)

  

2.27

%

  

1.96

%(b)

  

1.92

%

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

1.35

%

  

1.59

%(f)

  

1.95

%

  

1.66

%

  

1.67

%

 

Net investment income

  

2.48

%

  

3.18

%(f)

  

2.09

%

  

2.34

%(b)

  

2.62

%

 

Portfolio turnover rate

  

175

%

  

221

%

  

314

%

  

211

%

  

181

%

 

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

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

(d)  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.

(e)  Dividend expense totaled 0.07%, 0.29%, 0.42%, 0.16% and 0.03% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.05%, 0.01%, 0.03%, 0.00% and 0.14% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

(f)  Effective August 6, 2018, the investment adviser reduced the advisory fee paid by the Fund and agreed to increase the expense reimbursements it provides to the Fund by contractually limiting the Fund's total expenses (other than certain expenses noted in the Notes to Financial Statements) to 1.23% for Class R shares. Prior to August 6, 2018, the expense limitation had been 1.50%

(g)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 1.23%, 1.29%, 1.50%, 1.50% and 1.50% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

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78



Water Island Credit Opportunities Fund – Class I  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.65

  

$

9.73

  

$

9.65

  

$

9.67

  

$

9.93

  
Income (loss) from
investment operations
 

Net investment income(a)

  

0.26

   

0.34

   

0.23

   

0.25

(b)

  

0.27

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

0.01

(c)

  

(0.08

)

  

0.11

   

0.02

   

(0.24

)

 

Total from investment operations

  

0.27

   

0.26

   

0.34

   

0.27

   

0.03

  

Less distributions

 

From net investment income

  

(0.32

)

  

(0.34

)

  

(0.26

)

  

(0.29

)

  

(0.29

)

 

Total distributions

  

(0.32

)

  

(0.34

)

  

(0.26

)

  

(0.29

)

  

(0.29

)

 
Proceeds from redemption
fees collected
  

   

   

   

   

  

Net asset value, end of period

 

$

9.60

  

$

9.65

  

$

9.73

  

$

9.65

  

$

9.67

  

Total return(d)

  

2.82

%

  

2.70

%

  

3.61

%

  

2.78

%

  

0.30

%

 
Net assets, end of period
(in 000s)
 

$

56,869

  

$

49,795

  

$

36,207

  

$

44,159

  

$

41,992

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(e)

  

1.71

%

  

1.85

%(f)

  

2.02

%

  

1.71

%(b)

  

1.68

%

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

1.10

%

  

1.32

%(f)

  

1.70

%

  

1.41

%

  

1.43

%

 

Net investment income

  

2.73

%

  

3.51

%(f)

  

2.34

%

  

2.62

%(b)

  

2.84

%

 

Portfolio turnover rate

  

175

%

  

221

%

  

314

%

  

211

%

  

181

%

 

(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)  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.

(e)  Dividend expense totaled 0.07%, 0.29%, 0.42% 0.16% and 0.04% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.05%, 0.01%, 0.03%, 0.00% and 0.14% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

(f)  Effective August 6, 2018, the investment adviser reduced the advisory fee paid by the Fund and agreed to increase the expense reimbursements it provides to the Fund by contractually limiting the Fund's total expenses (other than certain expenses noted in the Notes to Financial Statements) to 0.98% for Class I shares. Prior to August 6, 2018, the expense limitation had been 1.25%

(g)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 0.98%, 1.02%, 1.25%, 1.25% and 1.25% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

Annual Report | May 31, 2020
79



Water Island Credit Opportunities Fund – Class C  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.67

  

$

9.74

  

$

9.62

  

$

9.61

  

$

9.89

  
Income (loss) from
investment operations
 

Net investment income(a)

  

0.16

   

0.24

   

0.13

   

0.16

(b)

  

0.18

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

0.00

(c)

  

(0.07

)

  

0.11

   

0.02

   

(0.25

)

 

Total from investment operations

  

0.16

   

0.17

   

0.24

   

0.18

   

(0.07

)

 

Less distributions

 

From net investment income

  

(0.22

)

  

(0.24

)

  

(0.12

)

  

(0.17

)

  

(0.21

)

 

Total distributions

  

(0.22

)

  

(0.24

)

  

(0.12

)

  

(0.17

)

  

(0.21

)

 

Net asset value, end of period

 

$

9.61

  

$

9.67

  

$

9.74

  

$

9.62

  

$

9.61

  

Total return(d)(e)

  

1.70

%

  

1.79

%

  

2.53

%

  

1.83

%

  

(0.72

%)

 
Net assets, end of period
(in 000s)
 

$

659

  

$

468

  

$

640

  

$

1,053

  

$

1,220

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(f)

  

2.71

%

  

2.86

%(g)

  

3.02

%

  

2.71

%(b)

  

2.68

%

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

2.10

%

  

2.34

%(g)

  

2.70

%

  

2.41

%

  

2.43

%

 

Net investment income

  

1.65

%

  

2.46

%(g)

  

1.38

%

  

1.69

%(b)

  

1.92

%

 

Portfolio turnover rate

  

175

%

  

221

%

  

314

%

  

211

%

  

181

%

 

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

(d)  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.

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

(f)  Dividend expense totaled 0.07%, 0.29%, 0.42%, 0.16% and 0.04% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.05%, 0.01%, 0.03%, 0.00% and 0.14% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

(g)  Effective August 6, 2018, the investment adviser reduced the advisory fee paid by the Fund and agreed to increase the expense reimbursements it provides to the Fund by contractually limiting the Fund's total expenses (other than certain expenses noted in the Notes to Financial Statements) to 1.98% for Class C shares. Prior to August 6, 2018, the expense limitation had been 2.25%.

(h)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 1.98%, 2.04%, 2.25%, 2.25% and 2.25% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

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



Water Island Credit Opportunities Fund – Class A  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.65

  

$

9.73

  

$

9.66

  

$

9.67

  

$

9.93

  
Income (loss) from
investment operations
 

Net investment income(a)

  

0.23

   

0.31

   

0.17

   

0.23

(b)

  

0.25

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

0.01

(c)

  

(0.08

)

  

0.14

   

0.02

   

(0.25

)

 

Total from investment operations

  

0.24

   

0.23

   

0.31

   

0.25

   

  

Less distributions

 

From net investment income

  

(0.29

)

  

(0.31

)

  

(0.24

)

  

(0.26

)

  

(0.26

)

 

Total distributions

  

(0.29

)

  

(0.31

)

  

(0.24

)

  

(0.26

)

  

(0.26

)

 

Net asset value, end of period

 

$

9.60

  

$

9.65

  

$

9.73

  

$

9.66

  

$

9.67

  

Total return(d)(e)

  

2.56

%

  

2.45

%

  

3.10

%

  

2.58

%

  

0.02

%

 
Net assets, end of period
(in 000s)
 

$

88

  

$

121

  

$

153

  

$

107

  

$

104

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(f)

  

1.96

%

  

2.10

%(g)

  

2.27

%

  

1.96

%(b)

  

1.91

%

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

1.35

%

  

1.58

%(g)

  

1.95

%

  

1.66

%

  

1.66

%

 

Net investment income

  

2.37

%

  

3.24

%(g)

  

1.81

%

  

2.35

%(b)

  

2.62

%

 

Portfolio turnover rate

  

175

%

  

221

%

  

314

%

  

211

%

  

181

%

 

(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)  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.

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

(f)  Dividend expense totaled 0.07%, 0.29%, 0.42%, 0.16% and 0.02% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.05%, 0.01%, 0.03%, 0.00% and 0.14% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

(g)  Effective August 6, 2018, the investment adviser reduced the advisory fee paid by the Fund and agreed to increase the expense reimbursements it provides to the Fund by contractually limiting the Fund's total expenses (other than certain expenses noted in the Notes to Financial Statements) to 1.23% for Class A shares. Prior to August 6, 2018, the expense limitation had been 1.50%

(h)  Excluding dividend and interest expenses, the Fund's net expenses after advisory fees waived and expenses reimbursed would have been 1.23%, 1.28%, 1.50%, 1.50% and 1.50% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

Annual Report | May 31, 2020
81



Water Island Long/Short Fund – Class R  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.88

  

$

10.12

  

$

9.99

  

$

9.31

  

$

10.12

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

0.28

   

(0.01

)(c)

  

(0.05

)

  

(0.20

)(b)

  

(0.03

)

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

0.46

   

(0.03

)

  

0.18

   

0.88

   

(0.69

)

 

Total from investment operations

  

0.74

   

(0.04

)

  

0.13

   

0.68

   

(0.72

)

 

Less distributions

 

From net investment income

  

(0.03

)

  

   

   

   

  

From net realized gains

  

(0.14

)

  

(0.20

)

  

   

   

(0.09

)

 

Total distributions

  

(0.17

)

  

(0.20

)

  

   

   

(0.09

)

 

Net asset value, end of period

 

$

10.45

  

$

9.88

  

$

10.12

  

$

9.99

  

$

9.31

  

Total return(d)

  

7.58

%

  

(0.29

%)

  

1.30

%

  

7.30

%

  

(7.12

%)

 
Net assets, end of period
(in 000s)
 

$

11

  

$

10

  

$

10

  

$

10

  

$

9

  
RATIOS TO AVERAGE
NET ASSETS:
 

Gross expenses(e)

  

12.79

%

  

11.69

%

  

12.52

%

  

15.85

%(b)

  

20.24

%

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

1.92

%

  

2.43

%

  

2.35

%

  

2.66

%

  

2.62

%

 

Net investment income (loss)

  

2.81

%

  

(0.15

%)

  

(0.47

%)

  

(2.14

%)(b)

  

(0.34

%)

 

Portfolio turnover rate

  

577

%

  

528

%

  

520

%

  

449

%

  

416

%

 

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

(b)  Includes a non-recurring refund by the custodian for overbilling of prior years' out-of-pocket fees. This amounted to $0.01 per share and 0.08% 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)  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.

(e)  Dividend expense totaled 0.22%, 0.74%, 0.66%, 0.84% and 0.70% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively. Interest rebate expense and line of credit interest expense totaled 0.01%, 0.00%, 0.00%, 0.13% and 0.23% of average net assets for the years ended May 31, 2020, 2019, 2018, 2017 and 2016, respectively.

(f)  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, 2020, 2019, 2018, 2017 and 2016, respectively.

See Notes to Financial Statements.

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82



Water Island Long/Short Fund – Class I  Financial Highlights

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

  

Year Ended May 31,

 
  

2020

 

2019

 

2018

 

2017

 

2016

 
Net asset value,
beginning of period
 

$

9.88

  

$

10.12

  

$

9.99

  

$

9.31

  

$

10.12

  
Income (loss) from
investment operations
 

Net investment income (loss)(a)

  

0.30

   

0.01

   

(0.02

)

  

(0.18

)(b)

  

(0.04

)

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

0.47

   

(0.05

)

  

0.15

   

0.86

   

(0.68

)

 

Total from investment operations

  

0.77

   

(0.04

)

  

0.13

   

0.68

   

(0.72

)

 

Less distributions

 

From net investment income

  

(0.06

)