Vivaldi Merger Arbitrage Fund

36 Pages·2016·1.3 MB·English

by  Elizabeth Zarnick

Vivaldi Merger Arbitrage Fund
Class A Shares
(Ticker Symbol: VARAX)
Class I Shares
(Ticker Symbol: VARBX)

ANNUAL REPORT
September 30, 2016
Vivaldi Merger Arbitrage Fund
A series of Investment Managers Series Trust II

Table of Contents

Shareholder Letter ........................................................................................................................................ 1
Fund Performance ........................................................................................................................................ 8
Schedule of Investments ............................................................................................................................. 10
Statement of Assets and Liabilities ............................................................................................................. 14
Statement of Operations ............................................................................................................................ 15
Statement of Changes in Net Assets ........................................................................................................... 16
Financial Highlights ..................................................................................................................................... 17
Notes to Financial Statements .................................................................................................................... 19
Report of Independent Registered Public Accounting Firm ....................................................................... 27
Supplemental Information .......................................................................................................................... 28
Expense Example ........................................................................................................................................ 30

This report and the financial statements contained herein are provided for the general information of the
shareholders of the Vivaldi Merger Arbitrage Fund. This report is not authorized for distribution to
prospective investors in the Fund unless preceded or accompanied by an effective prospectus.

www.vivaldifunds.com
Vivaldi Merger Arbitrage Fund
Annual Letter to Shareholders

Dear Investors:

For the fiscal year ending September 30, 2016, the Vivaldi Merger Arbitrage Fund (“the Fund”) Class A Shares,
VARAX, returned +2.66% at NAV and Class I Shares, VARBX, returned +3.06%, net of fees. Fund performance was
positive in three of four quarters during the fiscal year, with only the final quarter detracting marginally from
performance. During the fiscal year under review, the S&P 500 Index finished up +15.43% and the Barclays
Aggregate Bond Index returned +5.19%. Please reference the chart below for the Fund’s historical returns since
inception. (Exhibit: A 1)

VARBX Historical Returns (Apr 2000 – Sept 2016)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD*
2016 0.00% 0.88% 1.46% -0.38% 0.87% 0.00% -0.76% -1.15% 0.10% 0.98%

2015 0.80% 1.04% 0.35% 0.46% 0.48% -2.12% 1.74% 0.49% -0.14% 0.02% 0.60% 1.43% 5.22%
2014 0.08% 0.31% 0.25% -3.89% 1.94% 1.30% 2.66% 1.81% -0.51% -1.08% 2.03% -0.02% 4.81%
2013 0.33% 0.29% 0.74% 0.18% 0.11% 0.15% 0.69% 0.18% 0.86% 0.80% 0.31% 0.78% 5.55%
2012 0.44% 0.24% 0.30% 0.17% 0.24% 0.43% 0.09% 0.44% 0.13% -3.37% 1.62% 1.69% 2.36%
2011 0.45% 0.61% 0.03% 0.32% 0.55% 0.49% 0.20% -0.24% -0.20% 0.75% 0.05% -0.02% 3.03%
2010 0.29% 0.96% 1.41% 0.41% 0.02% 0.26% 0.60% 2.32% 0.18% 0.19% 0.22% 0.26% 7.33%
2009 0.31% 0.24% 0.69% 0.40% 0.02% 1.34% 1.90% 1.24% 0.70% 0.73% 1.35% 0.68% 10.02%
2008 -0.14% 0.79% 1.16% 2.00% 1.55% 0.32% 1.20% 2.62% 1.05% 1.72% 0.24% 0.59% 13.88%
2007 3.54% 0.81% 0.84% 0.94% 2.14% -0.29% 2.48% 2.52% 0.66% 1.72% 2.06% 1.40% 20.46%
2006 3.90% 1.61% 1.11% 0.82% 0.16% 1.96% 0.73% -0.23% 1.39% 2.41% 2.36% 1.02% 18.58%
2005 0.50% 1.12% 1.48% -0.45% 2.10% 0.66% 1.80% 1.00% 0.57% 0.30% 1.74% 2.38% 13.99%
2004 1.17% 1.17% 2.11% 0.78% 1.16% 1.05% -1.10% 0.01% -3.82% 1.50% 1.00% 1.87% 6.97%
2003 0.58% 0.58% 0.35% 1.19% 0.01% 0.16% 0.29% -0.03% 1.11% 1.17% 0.58% 1.75% 8.00%
2002 0.21% 0.51% 1.00% 0.02% 1.14% 0.93% 0.23% 0.33% 0.84% 0.01% 0.21% 0.49% 6.07%
2001 2.68% 1.75% -5.20% -1.70% 3.80% 1.40% 0.82% 2.68% 1.75% 1.17% 1.40% 2.52% 13.52%
2000 --- --- --- 1.30% 4.97% 7.70% 6.30% 1.28% 9.92% 3.85% 3.97% 4.20% 52.5%

*Cumulative Return

Performance quoted represents past performance and does not guarantee future results. Performance shown
includes the performance of the unregistered Predecessor Fund (Incepted 4/1/2000) which converted its assets and
performance into the Vivaldi Merger Arbitrage Fund on 10/01/2015. Investment return and principal value will
fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance
may be lower or higher than that shown here. The performance history is net of all fees and reflects the impact of
the Contractual Waiver Agreement. If the Contractual Waiver Agreement were not in place, the Fund’s
performance would be reduced. Performance data current to the most recent month-end is available at (877) 779-
1999.

1 Source: UMB Fund Services

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Vivaldi Merger Arbitrage Fund
Annual Letter to Shareholders

Market Perspective
Despite the broader gains during the trailing twelve months, markets sustained several bouts of volatility. The fourth
quarter 2015 was characterized by a whip-saw move to close out what was already a very choppy 2015. The first
quarter of 2016 produced a similar pattern: a sizeable and rapid equity market drawdown followed by an even more
rapid snap-back rally. While the S&P 500 Total Return Index finished the quarter up modestly, this came only after
the index had fallen by more than 10% at one point in the middle of February. In the second quarter of 2016, the
culprit behind the market volatility was the United Kingdom’s referendum on its European Union membership
(dubbed “Brexit”). This was a classic example of a binary event that shocked markets when an ascending vote to
leave the EU unexpectedly won. The immediate effect was a multi-day sell off across global equities as well as a
rapid shift in global fixed income and currency markets. Domestic U.S. markets were somewhat insulated from
direct contagion, but even the S&P 500 saw a greater than 5% decline in just two trading days. What happened next,
however, was an equally rapid snap-back rally as the market began to highlight the fact that any tangible fallout
from Brexit was likely to take months, if not years, to actually come to pass. Shortly thereafter, U.S. equity and credit
benchmarks made fresh highs on the year, a sentiment that continued through the balance of the fiscal year. There
was, however, a notable back-up in interest rates in the U.S. at the very tail end of the fiscal year, a development
that has many market participants watching the next Federal Reserve meeting very closely.

We often discuss the challenges that
whipsaws present for market participants,
and these “v-shaped” market moves have
only become more pronounced in the last
year. Additionally, with equities and fixed
income appearing either fully or fairly
priced, we feel it becomes increasingly
important to invest in and source
strategies without directional equity or
fixed income exposure. We believe the
Fund return has less to do with market
returns and more to do with the return Past performance does not guarantee future results.
opportunity presented by the natural deal
spread that emerges in the market after the announcement of a merger or acquisition. The strategy has exhibited a
low correlation to broader benchmarks, as performance is based on the ability to evaluate deals rather than the
direction of the market (Exhibit: B)2.

Interest Rate Outlook
In meetings and conference calls, many clients ask us our opinion of
interest rates, the pace of rate hikes, and what effect those potential
hikes could have on our strategy. As the U.S. becomes the first major
economy in the world to materially move off the zero-bound for
rates, we have spent a great deal of time analyzing this issue. One of
the most important shifts in recent months has been the increased
acceptance by markets that the Federal Reserve is highly likely to
raise interest rates before the end of the year, with that probability

2 Source: Bloomberg

2
Vivaldi Merger Arbitrage Fund
Annual Letter to Shareholders

now at approximately 70% in the Fed Funds Futures market (Exhibit: C)3. Given this likelihood, we would stress that,
unlike many other investment strategies, rising interest rates are good news for our approach. Merger arbitrage
spreads, the profit earned on being invested in any given transaction, take into account the prevailing “risk-free
rate”. Fundamentally, an investor will demand that the annualized spread on a merger transaction be at some
premium over the risk-free rate. We would never shoulder the risk of a merger spread without expecting to make
some additional return over the risk-free rate. Accordingly, all else being equal, the higher the risk-free rate is, the
wider merger arbitrage spreads will be. When spreads are wider, the absolute profit potential of the Fund increases.

M&A Environment
The investable universe of announced merger transactions was robust over the fiscal year period and offered
healthy opportunities for profit. Deal flow was record breaking in 2015, and 2016 has been consistent with that
trend. This strong M&A environment has helped offset the headwind of nominally low interest rates. Accordingly,
the Fund has continued to selectively add positions to the portfolio. The table below shows the North American
M&A Environment versus the deals we have added to the Fund for the year-to-date period. We would note, the
chart does not include data from the fourth quarter 2015 (Exhibit: D)4.

Deal Volume Deal Count Number of New Mergers
(total transactional value in $ bn) (# of announced deals) Added to VARBX

January 2016 47.1 12 3
February 71 26 6
March 42 19 7
April 68.4 23 12
May 113.9 25 8
June 90.3 24 10
July 53.3 23 8
August 55.1 32 11
September 87.1 25 8

The business environment remains conducive to deal activity, and accordingly, we continue to believe that we
should see a steady flow of mergers for the foreseeable future. This is being driven in part by corporate cash hoards
which continue to pile up on balance sheets. Those cash balances put management under more pressure to engage
in potential merger transactions, as large U.S. companies have conservatively accumulated hundreds of billions of
dollars in cash instead of investing in growth through capital expenditures. Additionally, in the current slow growth
and low interest rate environment, deal-making remains one of the more direct ways a management team can
continue to grow their top and bottom line. CEOs recognize that they cannot solely rely on organic growth in today’s
market, and thus, they are pursuing collaborative strategies and acquiring growth to improve their financial
performance. As long as companies remain under pressure from investors to outperform a generally weak economic
environment, we expect deal flow to remain vibrant. We are encouraged by this active deal backdrop as we look to
continue to deploy capital into attractive M&A spreads.

3 Source: UMB Fund Services
4 Source: Bloomberg

3
Vivaldi Merger Arbitrage Fund
Annual Letter to Shareholders

Current Positioning (as of 9/30/16)
The Fund continued to be balanced from a sector exposure perspective. At the end of the fiscal year, the largest long
sector tilts within the portfolio were to Information Technology (15.2%) and Health Care (7.9%). Exposure to
Consumer Discretionary also crept up to a 7.8% net long tilt. Similarly, the Fund remained balanced from a market-
cap exposure perspective. Median deal size finished the month at $1.4 billion, with ten of the nineteen deals in the
portfolio falling in the mid-cap ($1-10 billion) range. We have been short-dating our portfolio to include those deals
that will close this year. This is in no way an anchor on performance; however, our focus is to try and minimize short-
term volatility and realize gains before calendar year-end. The charts below show the top holdings, top sector
exposure, and payment types within the portfolio at the end of the 12-month period under review (Exhibit: E)5.

Top Contributor
Time Warner Cable (TWC) / Charter
TWC / CHTR - P&L Attribution (% NAV)
Communications (CHTR) – Time Warner
(10/22/2015 - 5/18/2016)
Cable and Charter Communications 0.90%
announced their cash & stock merger on 0.80%
0.76%
0.70%
May 26, 2016 with a transaction value of
0.60%
USD 79.3B. Based on a deep dive 0.50%
research process we became 0.40%
0.30%
comfortable that this was a solid deal
0.20%
and initiated a position in October 2015. 0.10%
Many market participants were 0.00%
-0.10%
concerned about anti-trust risk in the
-0.20%
deal, but our research convinced us
otherwise. We took a patient approach
as we recognized that the deal approval
would take time, which provided us the
opportunity to generate alpha by trading around the position. While the attribution chart (Exhibit: F)6 shows a
gradual closing of the merger spread, this deal was a good example of how our fundamental approach can
potentially allow us to generate outsized returns in deals with misperceived risk. As you can see from the chart
below (Exhibit: G)7, the arbitrage spread did have some volatility to it over the life of the deal. After allowing the
transaction to season for five months and continuing our fundamental work, we became comfortable with the deal
risks and began to build a position. Over the life of the merger, we actively traded this transaction, taking advantage
of changes in the spread, ultimately pressing the position into a core portfolio holding in the final 90 days of the
deal’s life. As you can see, we were buyers as the spread narrowed and the spread de-risked. It is not uncommon to
see us build conviction in a transaction and actively trade the deal around during its life.

5 Source: Bloomberg & UMB Fund Services
6 Source: Lightkeeper
7 Source: Bloomberg, Enfusion Integrata

4
Vivaldi Merger Arbitrage Fund
Annual Letter to Shareholders

Gross Spread
(10/21/2015 - 5/18/2016)
$25.0
$20.0
$15.0
$10.0
$5.0
$0.0

The green points in the chart above denote the date of our buys, and the orange points denote the date of our sells.

Top Detractor
Lam Research (LRCX) / KLA-Tencor (KLAC) – On October 5, 2016, Lam Research (LRCX) announced it was terminating
its bid to acquire KLA-Tencor (KLA) after facing opposition from U.S. regulators. The two companies announced in
August 2016 that they would not be able to meet their planned October 20th walk-away date for the transaction
after discussions with the DOJ and regulatory authorities in China, Korea and Japan. The previously mentioned
factors attributed to discontinuation of a consent decree by the DOJ, and ultimately, the termination of the deal.
LRCX/KLAC was recently our largest position, a 12.3% holding on the long side. However, in the last week before the
deal termination, we reduced KLAC to a 2.9% holding to mitigate some of the downside risk to the overall portfolio
in the event of a deal break outcome.
LRCX / KLAC - P&L Contribution (% NAV)
(12/21/2015 - 10/5/2016)
0.20%
0.00%
-0.20%
-0.40%
-0.60%
-0.80%
-1.00%
-0.99%
-1.20% -1.20%
-1.32%
-1.40%
5 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
/ / / / / / / / / / / / / / / / / / / / / / / / / / /
1 1 2 3 3 4 5 7 8 9 9 0 1 2 3 3 4 5 6 7 8 8 9 0 0 1 2
2 / 1 2 / 1 2 / 1 2 / 2 / 1 2 / 1 2 / 1 2 / 1 3 1 2 /
/ 1 / / 2 / / 3 / / 4 / 5 / / 6 / / 7 / / 8 / / / / 0
2 1 1 2 2 3 3 4 5 5 6 6 7 7 8 8 9 9 1
1

5
Vivaldi Merger Arbitrage Fund
Annual Letter to Shareholders

The net outcome for the position was a loss of -1.2% (Exhibit: H)8. This was one of the worst realized losses the Fund
has ever weathered in one position, but a post mortem revealed no process failures in our research process or our
risk management.

As always, we thank you for your continued support and intend to work hard to maintain it.

Kind Regards,

Michael Peck, CFA Brian R. Murphy
President, Co-Chief Investment Officer Senior Analyst
[email protected] [email protected]

The views were those of the Portfolio Fund Managers as of September 30, 2016, and may not reflect their views on
the date this material is first published or anytime thereafter. These views are intended to assist the shareholders of
the Fund in understanding their investments in the Fund and do not constitute investment advice. This material may
contain discussions about investments that may or may not be held by the Fund as of the date of this material. All
current and future holdings are subject to risk and to change.

Mutual fund investing involves risk. Principal loss is possible. Investments in companies that are the subject of a
publicly announced transaction carry the risk that the proposed or expected transaction may not be completed or
may be completed on less favorable terms than originally expected, which may lower the Fund's performance.
Investments in foreign securities involve greater volatility and political, economic, and currency risks and difference
in accounting methods. Investments in small and medium sized companies involve additional risks such as limited
liquidity or greater volatility. Derivatives involve special risks including correlation, counterparty, liquidity,
operational, accounting and tax risks. These risks, in certain cases, may be greater than the risks presented by more
traditional investments. The Fund may make short sales of securities, which involves the risk that losses may exceed
the original amount invested. The Fund may use leverage which may exaggerate the effect of any securities or the
Net Asset Value of the Fund, and money borrowed will be subjected to interest costs. In the case of an investment in
a potential acquisition target, if the proposed merger, exchange offer or cash tender offer appears likely not to be
consummated, in fact is not consummated, or is delayed, the market price of the security to be tendered or
exchanged will usually decline sharply, resulting in a loss to the Fund. If a put or call option purchased by the Fund
expires without being sold or exercised, the Fund will lose the premium it paid for the option. The risk involved in
writing a covered call option is the lack of liquidity for the option. The Fund is non-diversified, meaning it may
concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to
individual stock volatility than a diversified fund. For a complete description of risks please read the prospectus.

8 Source: Lightkeeper

6
Vivaldi Merger Arbitrage Fund
Annual Letter to Shareholders

On 10/01/2015 the Highland Capital Management Institutional Fund, LLC, a Delaware limited liability company
which commenced operations on April 1, 2000 (the "Predecessor Fund"), converted into the Vivaldi Merger
Arbitrage Fund (1940 Act registered fund) pursuant to which the Predecessor Fund transferred substantially all of its
assets into the Fund. The Fund's objectives, policies, guidelines and restrictions are, in all material respects,
substantially the same as those of the Predecessor Fund. The Predecessor Fund was not registered under the 1940
Act and, therefore, was not subject to certain restrictions imposed by the 1940 Act on registered investment
companies and by the Internal Revenue Code of 1986, as amended, on regulated investment companies, such as the
Fund. Please review the prospectus for additional details.

The Fund's investment objectives, risks, charges, and expenses must be considered carefully before investing. The
summary or statutory prospectus contains this and other important information about the investment company,
and it may be obtained by calling [phone] or visiting vivaldifunds.com. Read it carefully before investing.
Vivaldi Asset Management, LLC is the Advisor to the Vivaldi Merger Arbitrage Fund which is distributed by IMST
Distributors, LLC.

INDEX DEFINITIONS
• S&P 500 Index - The S&P 500 Index includes a representative sample of 500 leading companies
in leading industries of the U.S. economy.
• Barclays U.S. Aggregate Bond - The index is market capitalization weighted and includes
Treasury securities, Government agency bonds, Mortgage backed bonds and Corporate bonds. It
excludes Municipal bonds and Treasury Inflation-Protected securities because of tax treatment.

GLOSSARY
• Alpha - The excess returns of a fund relative to the return of a benchmark index is the fund's
alpha.
• Basis Points (bps) - one hundredth of one percent, used chiefly in expressing differences of
interest rates.
• Beta - represents the systematic risk of a portfolio and measures its sensitivity to a benchmark.
• Correlation - represents the systematic risk of a portfolio and measures its sensitivity to a
benchmark.
• Max Drawdown - is the maximum loss from a peak to a trough of a portfolio, before a new peak
is attained and is an indicator of downside risk over a specified period.
• Sharpe Ratio - a measure that uses standard deviation and excess return to determine reward
per unit of risk. The greater a fund’s Sharpe ratio, the better its risk-adjusted performance has
been.
• Standard Deviation – the measure of how closely two securities perform in relation to one
another.

7
Vivaldi Merger Arbitrage Fund
FUND PERFORMANCE at September 30, 2016 (Unaudited)
Performance of a $500,000 Investment
$1,400,000
$1,200,000
$1,063,035
$1,000,000 $1,005,683
$800,000 $798,246
$600,000
$400,000
$200,000
$0
Vivaldi Merger Arbitrage Fund - Class I Bloomberg Barclays US Aggregate Bond Index S&P 500 Index

This graph compares a hypothetical $500,000 investment in the Fund’s Class I shares (the Class with the largest net
assets) with a similar investment in the Bloomberg Barclays US Aggregate Bond Index (formerly Barclays Capital US
Aggregate Bond Index) and the S&P 500 Index during the periods shown. Results include the reinvestment of all
dividends and capital gains. Class A shares performance may vary.
The Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond
market. The S&P 500 Index is a market-weighted index composed of 500 large capitalization companies. These
indices do not reflect expenses, fees or sales charge, which would lower performance. The indices are unmanaged
and they are not available for investment.

Since Inception
Average Annual Total Returns as of September 30, 2016 1 Year 5 Years 10 Years Inception Date
Before deducting maximum sales charge
Class A¹ 2.64% 3.64% 7.55% 10.90% 04/01/00
Class I² 3.04% 3.93% 7.83% 11.19% 04/01/00
After deducting maximum sales charge
Class A¹ -3.26% 2.42% 6.92% 10.51% 04/01/00
Bloomberg Barclays US Aggregate Bond Index 5.19% 3.08% 4.79% 5.42% 04/01/00
S&P 500 Index 15.43% 16.37% 7.24% 4.27% 04/01/00

1 Maximum sales charge for Class A shares is 5.75%.
2 Class I shares do not have any initial or deferred sales charge.

The performance data quoted here represents past performance and past performance is not a guarantee of future
results. Performance shown includes the performance of the unregistered Predecessor Fund (incepted 4/01/2000)
which converted its assets and performance into the Vivaldi Merger Arbitrage Fund on 10/01/2015. Investment
return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less
than their original cost. Current performance may be lower or higher than the performance information quoted.
The most recent month end performance may be obtained by calling [phone].

8