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OVERVIEW OF MONTHLY PERFORMANCE - DECEMBER 2010

MARKET OVERVIEW

The Merrill Lynch High Yield Master II Constrained Index gained 1.75% for the
month of December 2010. Capital fled more conservative asset classes such as
investment grade credit, which fell 1.01%, and for US government bonds, the
10-year Treasury lost 3.94% and its yield rose 50 basis points (bps). The equity
markets were up strongly with the S&P 500 climbing 6.68%, the small cap Russell
2000 gaining 7.94% and the MSCI EAFE soaring 8.10%.

Investors put aside their concerns about risks to the global economy and dumped
government bonds and conservative fixed income to load up on inflation hedges
and investments that will benefit from economic growth. Commodities were up
across the spectrum with noteworthy strength in crude oil, gold, silver, copper,
corn wheat, soybeans, and lumber. International concerns about the European
sovereign crisis and fears of Chinese inflation that dampened markets in
November were cast aside. Some of the more significant pieces of news during the
month were that the ECB announced that it will double its capital to fight the
debt crisis and China raised interest rates and increased bank reserve
requirements to cool inflation pressures. In the US, retail sales before the
holidays were up 5.5% from the previous year, vacancy rates in shopping malls
declined for the second consecutive quarter to 8.7%, and auto sales were up 11%
in December. ADP reported a larger than expected gain in private sector
employment of 297,000 for December relative to an expectation of 100,000. The
markets are looking ahead in response to these and many other indicators of
growth.

December was a strong finish to a strong year for high yield. High yield bonds
performed well in spite of the increase in Treasury rates. Spreads compressed 81
bps partly due to higher Treasury rates and partly due to price appreciation.
CCC and below rated bonds outperformed higher quality bonds by a significant
margin, up 3.64% versus BB rated bonds, which were up 1.02%. As we have
mentioned previously, the outperformance of the lowest quality tier is typical
in rallies, and while it may not continue, we have seen it hold true over the
past two years. The recently ended year, 2010, is the second consecutive record
year for high yield new issuance and it finished with the strongest December
ever. December issuance was a record month in spite of the typical seasonal
slowdown in which no new deals came to market in the second half of the month.
The top performing sectors in December were technology, real estate and
insurance and the laggards were utilities, energy and healthcare.

PERFORMANCE

The First Trust High Income Long/Short Fund returned 2.86% on an NAV basis and
-4.41% on a price basis for the month of December 2010. As noted above, the
Merrill Lynch High Yield Master II Constrained Index gained 1.75% for the month
of December 2010. The positive NAV performance was the result of an above market
beta and overweights in financials and gaming. We continue to be comfortable
with our positioning and there have been no material adjustments in terms of
beta or sector allocations in the past month.

INVESTMENT STRATEGY

As we have mentioned, we expect that the US economy will continue to recover in
2011, albeit at a more modest pace than otherwise might be expected as a result
of the depth and severity of the downturn. We continue to maintain our
expectation of 2.5 to 3.0% US GDP growth and our primary concern is the risk of
much faster growth. Consensus opinion has become more bullish, with recent
forecasts above 3%. Faster growth could prompt the Fed to raise rates earlier
than expected to quell inflation fears.

We expect that 2011 will be another good year for high yield, and believe high
yield remains attractive on a valuation basis. In the current environment, we
see no fundamental reason why high yield spreads should not continue to tighten
over the course of the year ahead. There is significant room for further spread
tightening beyond the current levels of 541. While some of this spread
tightening may only absorb the impact of rising rates, there is still room for
price appreciation. Additionally, in the current interest rate environment, we
think the yield on high yield still remains attractive. In our view, default
rates should remain low due to healthy corporate balance sheets, record
corporate profits, and a strong new issue market. Bloomberg recently reported
(December 7, 2010) that both JPMorgan and Goldman Sachs are currently
recommending high yield bonds and that JPMorgan is forecasting a total return
for 2011 of 9.8%. Although it is consistent with our view, our estimates are
somewhat more conservative.

We believe that the threats to the performance of the markets and high yield are
mostly exogenous. The economic data increasingly support our macro economic
outlook, and we are comfortable with our underlying assumptions in that regard.
As for exogenous threats, the most worrisome would be a sustained episode of
extreme currency volatility, which might arise from any number of factors, many
of which have been the focus of ongoing political debate in both the US and
Europe. Second would be a severe economic contraction in China, generated by
central bank action designed to rein in the economy and real estate speculation.
Finally, there remain the familiar geopolitical concerns, including North and
South Korea, Israel, Iran, Pakistan, a terrorist attack in the US, etc. Of
course, it is difficult to manage to these possibilities. All things considered,
we reiterate that we believe that 2011 will be another good year for high yield.





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