Form N-CSR ARBITRAGE FUNDS For: May 31

Annual Report

May 31, 2022

Arbitrage Fund

Water Island Event-Driven Fund

Water Island Credit Opportunities Fund

TABLE OF CONTENTS

The Arbitrage Funds  Shareholder Letter

May 31, 2022 (Unaudited)

Dear Fellow Shareholders,

As we near the midway point of calendar year 2022, we reflect on a difficult trailing 12-month period not just for broader capital markets but also for event-driven strategies. After reaching all-time highs at the start of 2022, the S&P 500 index – a popular proxy for the stock market – embarked on a downturn that has officially entered bear market territory as of this writing. The Bloomberg U.S. Aggregate Bond index, which is reflective of the broad investment grade bond market, was down nearly 9% for our fiscal year ended May 31, extending a drawdown that began in 2020 and is now the largest bond market drawdown in more than 40 years. There has been no shortage of pressures driving the volatility: a pandemic that has now entered its third year; malfunctioning supply chains; runaway inflation; rapidly rising interest rates; recession fears; domestic discord and imminent midterm elections in the US; and geopolitical tensions and the Russia/Ukraine conflict have all played a part.

More pertinent to our event-driven strategies, volatility began to spike at the start of the fiscal year in June 2021, when the Department of Justice (DOJ) sued to block the merger of insurance brokers Willis Towers Watson Plc and Aon – a large, widely held deal that had already acquired necessary regulatory approvals in all jurisdictions but the US. In the ensuing 11 months, competition regulation has remained at the forefront of merger arbitrage investors' minds, as the Biden administration takes an increasingly strict view of antitrust. The DOJ, Federal Trade Commission (FTC), Federal Communications Commission (FCC), and Committee on Foreign Investment in the United States (CFIUS) are just a handful of a stable of global regulators – including the pro-consumer European Commission and the unpredictable State Administration for Market Regulation in China – whose views often must be properly assessed to predict deal success, and with US regulators now straying from historical precedent at times, deal spreads have been experiencing atypical spikes in volatility.

Despite this volatility, we continue to expect the vast majority of pending mergers and acquisitions (M&A) to reach a successful conclusion (as over 90% of announced M&A has done, historically, according to Dealogic data). Thus, we believe these spread movements will be limited to mere mark-to-market losses, to be reversed once deals overcome their respective hurdles to completion and spreads narrow to zero. Moreover, with volatility extending throughout the credit and equity markets, we continue to believe merger arbitrage and other hard catalyst merger-related investments remain the appropriate area toward which to direct our focus. We intend to introduce select soft catalyst opportunities – which tend to be more sensitive to broader market moves – to the portfolio only with appropriate risk mitigation strategies in place.

Although we have begun to see some blips in the rapid pace of newly announced M&A which characterized deal flow for nearly two years straight (and set a record of more than $5 trillion in activity for calendar year 2021), we believe the pause to be momentary. Looking further ahead, we anticipate M&A will remain an important avenue for corporations to drive growth. We have no doubt dealmakers will adapt to model rising interest rates and high inflation into their valuations, fueling deal flow even if we enter a broader economic downturn. We also believe acquirers will continue to engage in M&A as a path to shore up weakened supply chains, diminished workforces, and inadequate technology infrastructure – common themes of the past year. Strategic acquirers in a position of strength can often find their best opportunities to deliver strong return on investment when valuations are dislocated, and deals with a strong strategic rationale can create long term value for shareholders. Lest we forget financial buyers, private equity (PE) acquisition activity – which now comprises nearly half of global deal value – should continue, as PE shops still have more than $2 trillion in dry powder on the books, waiting to be deployed.

The Arbitrage Funds  Shareholder Letter (continued)

May 31, 2022 (Unaudited)

That said, while the total volume of recent deal flow based on number of deals announced is in line with pre-pandemic levels, we are beginning to see a shift in the composition of M&A activity. A drop in mega deals (i.e., transactions valued over $10 billion), which may become scarce in the current regulatory environment, has caused the total value of announced deals to decrease. This can be healthy for the strategy. A top-heavy M&A landscape can lead to crowded positions. An increase in smaller deals, however, reflects a broad opportunity set. We consider the mid cap space in particular to be a sweet spot, as deals of this size are large enough to build sizable positions but typically less susceptible to regulatory pressures.

As event-driven investors, our objective remains to generate returns sourced from the outcomes of idiosyncratic corporate events, rather than from the overall direction of broader credit or equity markets. We believe market volatility will remain heightened in the year ahead, but we are optimistic about the prospects for our strategies. Volatility can present opportunities to trade around positions and find attractive entry points. Furthermore, the risk-free interest rate is a fundamental building block of a deal spread, and rising interest rates have historically provided a tailwind to merger arbitrage returns. In this favorable environment, our goal, as always, remains to implement strong risk mitigation strategies as we seek to deliver non-correlated return streams with as little volatility as possible. We 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

Bloomberg U.S. Aggregate Bond Index: 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.

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.

Dry Powder: Cash reserves available to be deployed for investment.

Risk-Free Rate: The theoretical rate of return of an investment with zero risk (frequently represented by interest rates on short-term Treasury Bills in the United States).

Spread (also: "merger spread," "deal spread," or "merger arbitrage 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, which forms the rate of return in a merger arbitrage investment.

S&P 500 Index: An index of the publicly listed stocks of the largest US companies, commonly used as a representation of the performance of the broad domestic stock market.

Arbitrage Fund  Manager Commentary

May 31, 2022 (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 Fund Class I (ARBNX) returned -3.62% for the fiscal year ended May 31, 2022. Investments in Europe contributed to returns, while the Americas region was the primary detractor and Asia-Pacific detracted slightly. Health care and real estate were the top performing sectors, while financials and information technology detracted the most from returns.

The Fund may utilize derivatives for several purposes, primarily to implement position-level hedges, portfolio-level hedges, or currency hedges. During the fiscal year, the Fund's investments in derivative instruments contributed to returns. Derivative performance was in line with expectations given prevailing market conditions over the period.

The Fund's top performing deal for the period was our position in the merger of US-based semiconductor manufacturers Xilinx and Advanced Micro Devices. In October 2020, Xilinx agreed to be acquired by Advanced Micro Devices for $35.7 billion in stock. This transaction experienced ongoing volatility in the deal spread, in large part due to its lengthy timeline stemming from continued delays in receiving regulatory approval from China (a required condition to complete the deal, where antitrust reviews are a notoriously opaque process). The companies ultimately received approval from China in February 2022 and the merger subsequently closed successfully, leading to gains for the Fund.

The second-best performer was our position in RR Donnelley & Sons (RR Donnelley), a US-based provider of printing and related services to publishing, financial, merchandising, and other industries. In October 2021, the company reached an agreement with Chatham Asset Management (Chatham), a US-based investment advisory firm, whereby Chatham would acquire

Arbitrage Fund  Manager Commentary (continued)

May 31, 2022 (Unaudited)

the remaining 85% stake of RR Donnelley it did not already own for $464 million in cash. RR Donnelley subsequently received competing bids from private equity firm Atlas Holdings and an undisclosed interloper, spurring Chatham to increase its offer no fewer than four times. The undisclosed interloper, later revealed to be Ireland-based business communications company Paragon Group, attempted to make one final bid but was unable to secure the financing required. RR Donnelley's board officially recommended Chatham's superior offer in February 2022 and shareholders accepted the deal, which closed just two days later as the lengthy timeline meant the waiting period for antitrust review had already passed. The bidding war and subsequent closure led to gains for the Fund.

Conversely, the top detractor in the portfolio for the period was our position in the failed merger Willis Towers Watson Plc (Willis Towers) and Aon. In March 2020, Willis Towers, a UK-based provider of insurance brokerage services, agreed to be acquired by Aon, a US-based peer, for $30.3 billion in stock. The companies had already agreed to remedies with competition regulators in all required jurisdictions but one – the United States – when, following a second request from US regulators, the Department of Justice (DOJ) sued to block the merger in June 2021. While many expected the companies to not only fight the DOJ in court, but ultimately emerge victorious, in July they announced their intent to instead abandon the planned merger. After the deal broke, the spread on this position traded through what we believed to be fair value on a standalone basis, as many event-driven investors sought to unwind their exposure at the same time. Rather than follow suit, we opted to maintain our exposure and take advantage of the volatility by trading around our position. In the aftermath of the deal break, multiple activist investors have initiated positions in Willis Towers and gained board seats, and we continue to unwind our exposure on strength as they seek to implement constructive changes at the company or even push for another sale.

The Fund's second-worst performer was our position in terminated acquisition of Momentive Global, Inc. (Momentive) by Zendesk, Inc. (Zendesk). In October 2021, Zendesk – a US-based developer of software for customer support and customer communications – agreed to acquire Momentive – a US-based developer of software for conducting web-based surveys – for $4.1 billion in stock, after an activist investor in Momentive pushed for a sale process. In January, however, yet another activist investor – this time at Zendesk – began to push Zendesk's board of directors and management to reject the acquisition, believing the company should instead be put up for sale itself. The very next month, Zendesk management rejected an offer from a private equity consortium that would have valued the company at $17 billion – yet Zendesk shareholders appear to have agreed with the activist, as they overwhelmingly rejected the Momentive deal mere days later. Subsequent share price volatility has led to mark-to-market losses for the Fund; however, we are maintaining our Momentive exposure as not only has its activist reemerged, but the proxy background of the Zendesk merger indicated there were at least two other interested parties who put forth bids for the company before Zendesk won the initial sale process. We believe there is more left to this story.

Arbitrage Fund  Portfolio Information

May 31, 2022 (Unaudited)

Performance^ (annualized returns as of May 31, 2022)

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. This table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

^ After sales charge.

* 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 One Year return includes load.

** 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.

The Total Annual Fund Operating Expenses for Class R, Class I, Class C and Class A are 1.74%, 1.49%, 2.49% and 1.74%, 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 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.

Arbitrage Fund  Portfolio Information (continued)

May 31, 2022 (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 over ten years. 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.

Arbitrage Fund  Portfolio of Investments

May 31, 2022

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

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, 2022, the aggregate fair market value of those securities was $233,694,280, representing 14.67% of net assets.

^(c)  Restricted securities (including private placements) - The Fund may own investment securities that have other legal or contractual limitations. At the end of the period, the value of restricted securities (excluding 144A issues) amounted to $4,708,684 or 0.30% 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, 2022, these securities had a total value of $50,022,701 or 3.14% of net assets.

^(e)  Security fair valued using significant unobservable inputs and classified as a Level 3 security. As of May 31, 2022, the total fair market value of these securities was $70,383,841, representing 4.42% of net assets.

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

^(g)  Affiliated investment.

^(h)  Represents a holding that is a direct investment into a private company and is not a listed or publicly traded entity.

⁽ⁱ⁾  Less than 0.005% of net assets.

^(j)  Rate shown is the 7-day effective yield as of May 31, 2022.

^(k)  Includes cash held as collateral for short sales.

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

EQUITY SWAP CONTRACTS

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

OUTSTANDING FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

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

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

Abbreviations:

AB - Aktiebolag is the Swedish term for a limited company.

ADR - American Depositary Receipt

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.

CAD - Canadian dollar

CHF - Swiss franc

CVR - Contingent Value Rights

EUR - Euro

EURIBOR - Euro Interbank Offered Rate

GBP - British pound

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022

JIBAR - Johannesburg Interbank Agreed Rate

LLC - Limited Liability Company

Ltd. - Limited

NOK - Norwegian krone

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

NZD - New Zealand dollar

Oyj - Osakeyhtio is the Finnish equivalent of a public limited company.

Plc - Public Limited Company

REIT - Real Estate Investment Trust

SA - Generally designates corporations in various countries, mostly those employing civil law. This translates literally in all languages mentioned as anonymous company.

SABOR - South African Benchmark Overnight Rate

SEK - Swedish krona

SONIA - Sterling OverNight Index Average

SpA - Societa per Azione

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, 2022:

See Notes to Financial Statements.

Arbitrage Fund  Portfolio of Investments (continued)

May 31, 2022