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Home > Cases > First Trust Funds > First Trust Strategic High Income Funds: Important Developments

First Trust Funds

First Trust Strategic High Income Funds: Important Developments

Investors who purchased shares of three closed-end mutual funds offered by First Trust Portfolios L.P. are learning that because of decisions made by the Funds' management their investments were exposed to high concentrations of risky mortgage-backed securities, including illiquid collateralized debt obligations (CDOs).

Collectively known as the “First Trust Funds,“ the specific funds include the First Trust Strategic High Income Fund (FHI), the Strategic High Income Fund II (FHY), and the Strategic High Income Fund III (FHO). Many investors who bought into these funds did so under the assumption that they were conservative, long-term investments. Instead, investors have found their portfolios saddled with risky debt instruments.

In 2007, the underlying assets in the First Trust Funds began to plummet in value, dropping on average more than 40% and putting the Funds near the bottom of the mutual fund sector. The First Trust Strategic High Income Fund, in fact, has lost 60% of its value. As a result, investors are now lodging complaints, as well as class-action lawsuits, against the investment advisor of the First Trust Funds - First Trust Advisors L.P. - along with its affiliate First Trust Portfolios L.P.

Among the claims cited by investors:

  • The management of the First Trust Funds did not provide investors with accurate and factual information regarding the portfolio composition of the Funds. Because of those misstatements, shares were traded at artificially inflated prices.
  • The Funds' advisors failed to disclose the true nature of risks associated with the First Trust
  • Funds and purposefully omitted such information from product prospectuses and regulatory filings
    • .
  • No effective risk-management controls were put in place to minimize the risk of losses from mortgage delinquencies, which affected a large part of the First Trust Funds portfolios.
  • Management misstated the extent to which the First Trust Funds were exposed to mortgage-backed assets - and, in particular, CDOs - therefore putting investors at a much higher investing risk.

First Trust Advisors L.P. and its affiliate, First Trust Portfolios L.P., are privately held companies that provide various investment services, including asset management, financial advisory services, and municipal and corporate investment banking. As of Sept. 30, 2008, the companies' collective assets under management or supervision included more than $25 billion through closed-end funds, unit investment trusts, mutual funds, separate managed accounts and exchange-traded funds.

If you have lost money in the First Trust Strategic High Income Fund, the Strategic High Income Fund II or the Strategic High Income Fund III because of what you believe to be faulty or inaccurate information provided by First Trust Advisors L.P., we encourage you to contact us directly to discuss your situation.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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