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MARKET OVERVIEW

The Merrill Lynch High Yield Master II Constrained Index, the benchmark for the
Fund, gained 3.90% for the first quarter of 2011. In spite of the global
pressures which emerged over the recent months, strong performance prevailed in
the first quarter, with higher risk assets leading the market. The S&P 500 was
up 5.92%, the MSCI EAFE up 3.36%, and the small cap Russell 2000 gained 7.94%.
Conversely, investment grade credit was only up 0.89%, and the 10-year US
Treasury was down 0.14%.

During the first quarter, the global markets overcame a number of macro
challenges. It began in January with the overthrow of Tunisia's government,
followed by the end of the Mubarak regime in Egypt and unrest in many states in
Northern Africa and the Middle East, including the current civil war in Libya.
This unrest and the Libyan civil war caused oil prices to spike to over $100 per
barrel for the first time since October 2008, despite the fact that the oil
output from Libya is relatively insubstantial. In March, a devastating
earthquake and resulting tsunami occurred in Japan and the country is still
facing concerns about radiation contamination from the crippled Fukushima
Daiichi nuclear reactor. China continues to fight inflationary pressures, with
its central bank raising reserve requirements three times this year and hiking
interest rates several times. Toward the end of the quarter, concerns about
European sovereign debt resurfaced as S&P downgraded Portugal, Moody's
downgraded several Spanish banks, and Ireland's fourth quarter GDP fell
unexpectedly.

Despite this bad news, the financial markets recovered. Investors seem confident
that the recovery is on track. Corporate health continues to be strong and
earnings predominantly showed growth above expectations. Unemployment declined
and by the beginning of April, the jobless rate in the U.S. fell to 8.8%. This
trend is continuing around the globe, as the OECD reported that unemployment
fell in January among developed nations for the second month in a row. US GDP
was revised upward to 3.1% for the fourth quarter. Economic activity in the U.S.
manufacturing sector, as measured by the Institute for Supply Management (ISM),
has showed expansion for 20 consecutive months, although the growth rate has
slowed. In March, the Fed announced that it believes that the economy is "on a
firmer footing" and that it expects that higher energy prices will have only a
temporary impact on inflation. The Fed also affirmed its plans to continue
buying Treasuries through June as part of its quantitative easing policy.

The high yield markets completed the first quarter with solid performance. CCC
and below rated bonds continued to lead the rally in high yield, outperforming
BB rated bonds by 184 bps for the quarter. As a result of the rally, spreads
declined 64 bps to 477 bps with the average yield to worst (YTW) for the market
now at 7.02%. Retail high yield mutual funds received almost $8.6 billion in net
contributions for the quarter, although there were net outflows from high yield
debt funds in March, the first month in quite some time. New supply has
responded to increasing demand from investors. New issuance in the first quarter
was a robust $89.6 billion, which was the second largest quarterly volume on
record. According to JPMorgan, the high yield default rate remains low at 0.8%,
well below the long-term average of 4.3%. The leading industries for the quarter
were insurance, banking and technology. The lagging industries were automotive,
consumer non-cyclicals, and consumer cyclicals.


PERFORMANCE

The First Trust High Income Long/Short Fund returned gained 4.33% on an NAV
basis for the first quarter of 2011, outperforming the benchmark. As noted
above, the Merrill Lynch High Yield Master II Constrained Index gained 3.90% for
the first quarter. Our exposure to financials contributed to performance in the
first quarter. Exposure to automakers and airlines were a drag on performance
during the period. We were generally overweighted in these sectors in the past
quarter. 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
quarter.


INVESTMENT STRATEGY

In spite of global concerns, we believe that probabilities favor a continuing
global economic recovery. As for the tragedy in Japan, in the near term GDP in
the region will obviously be affected, currencies may fluctuate more than usual,
and supply chains may be impacted. However, we believe that in the long run,
massive government stimulus and eventual reconstruction will help offset these
problems. Japan is 8.7% of global output, and while this episode may slow the
global recovery, it will not likely reverse it. As for Libya and the oil
situation, while the price increase is a potential drag on economic growth, we
are not overly concerned about supply. Global oil inventories are currently not
particularly low and available global capacity is more than sufficient to
compensate for the current disruption in Libya.

For now, we will continue to monitor the situation in Japan and the turmoil in
the Middle East, but we believe that neither threat will be enough to knock the
economic recovery off track. Sustained global growth is no longer in question.
Corporate issuers are healthy and have the strongest balance sheets we have seen
in the last few economic cycles. A slow growth recovery is conducive to
attractive high yield returns because such conditions are not likely to give
rise to higher credit costs, nor to stimulate a further back-up in Treasury
yields. Therefore, we remain comfortable with our positive outlook for high
yield and our beta-neutral relative positioning.




This document is for informational purposes only and does not constitute, and is
not intended to constitute, the giving of advice or the making of a
recommendation. The portfolio is actively managed and all expressions of opinion
are subject to change without notice and are not intended to be a guarantee of
future events. Performance is expressed in US Dollars. Benchmarks and indices do
not incur management or other operating fees and investors cannot invest
directly in the index. Past performance is not indicative of future results