Highland Funds I NCSRS Certified semi-annual shareholder report (management investment company)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-21866

HIGHLAND FUNDS I


		(Exact name of registrant as specified in charter)

		200 Crescent Court Suite 700 Dallas, Texas 75201
		(Address of principal executive offices)(Zip code)

		Highland Capital Management Fund Advisors, L.P. 200 Crescent Court Suite 700 Dallas, Texas 75201
		(Name and Address of Agent for Service)

Registrant’s telephone number, including area code: (877) 665-1287

Date of fiscal year end: June 30

Date of reporting period: December 31, 2015

Item 1: Reports to Stockholders.

A copy of the Reports to Shareholders transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), is attached herewith.

LOGO

Highland Funds I

Highland Long/Short Equity Fund

Highland Long/Short Healthcare Fund

Highland Floating Rate Opportunities Fund

Highland Opportunistic Credit Fund

Semi-Annual Report

December 31, 2015

Highland Funds I

Highland Long/Short Equity Fund

Highland Long/Short Healthcare Fund

Highland Floating Rate Opportunities Fund

Highland Opportunistic Credit Fund

TABLE OF CONTENTS


Fund Profile			1
Financial Statements			5
Investment Portfolio			6
Statements of Assets and Liabilities			22
Statements of Operations			24
Statements of Changes in Net Assets			25
Statement of Cash Flows			33
Financial Highlights			37
Notes to Financial Statements			49
Additional Information			73
Disclosure of Fund Expenses			73
Important Information About This Report

Economic and market conditions change frequently.

There is no assurance that the trends described in this report will continue or commence.

A prospectus must precede or accompany this report. Please read the prospectus carefully before you invest.

FUND PROFILE (unaudited)


		Highland Long/Short Equity Fund

Objective

Highland Long/Short Equity Fund seeks consistent, above average total returns primarily through capital appreciation, while also attempting to preserve capital and mitigate risk through hedging activities.

Net Assets as of December 31, 2015

$888.1 million

Portfolio Data as of December 31, 2015

The information below provides a snapshot of Highland Long/Short Equity Fund at the end of the reporting period. Highland Long/Short Equity Fund is actively managed and the composition of its portfolio will change over time.


Sectors as of 12/31/2015 (%)⁽¹⁾⁽²⁾	Long Exposure		Short Exposure			Net Exposure
Consumer Discretionary		17.0		(4.5	)		12.5
Consumer Staples		3.9		(2.3	)		1.6
Energy		3.9		(1.0	)		2.9
Financial		16.8		(4.2	)		12.6
Healthcare		5.8		(0.7	)		5.1
Industrials		3.9		(3.6	)		0.3
Information Technology		26.9		(4.7	)		22.2
Materials		2		(1.2	)		0.8
Telecommunication Services		1.2		—			1.2
Utilities		—		(0.3	)		(0.3	)


Top 5 Holdings as of 12/31/2015 (%)⁽¹⁾⁽²⁾ Long Securities		Short Securities
CIT Group, Inc.	4.4	Cognizant Technology Solutions Corp., Class A	(1.4	)
CDK Global, Inc.	3.8	Texas Instruments, Inc.	(1.3	)
Alphabet, Inc., Class C	3.5	Martin Marietta Materials, Inc.	(1.2	)
Norwegian Cruise Line Holdings, Ltd.	3.1	Polaris Industries, Inc.	(1.2	)
Kraft Heinz Co. (The)	2.6	Expeditors International of Washington, Inc.	(1.2	)

The Fund’s investment activities, such as short sales, which theoretically involve unlimited loss potential, involve a significant degree of risk. The Fund is non-diversified and may invest a larger portion of its assets in the securities of fewer issuers than if the Fund were diversified.

Please refer to Note 9, Disclosure of Significant Risks and Contingencies, for more information.

⁽¹⁾	Long and short sectors and securities are calculated as a percentage of total net assets.

⁽²⁾	Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending.


Semi-Annual Report						1

FUND PROFILE (unaudited)


		Highland Long/Short Healthcare Fund

Objective

Highland Long/Short Healthcare Fund seeks long-term capital appreciation.

Net Assets as of December 31, 2015

$599.9 million

Portfolio Data as of December 31, 2015

The information below provides a snapshot of Highland Long/Short Healthcare Fund at the end of the reporting period. Highland Long/Short Healthcare Fund is actively managed and the composition of its portfolio will change over time.


Sectors as of 12/31/2015 (%)⁽¹⁾⁽²⁾	Long Exposure		Short Exposure			Net Exposure
Consumer Discretionary		0.3		—			0.3
Consumer Staples		—		(1.5	)		(1.5	)
Financial		0.4		(1.9	)		(1.5	)
Healthcare: Biotechnology		26.1		(17.3	)		8.8
Healthcare Distributors		1.3		—			1.3
Healthcare Equipment		14.0		(7.9	)		6.1
Healthcare Facilities		9.2		(1.2	)		8.0
Healthcare Services		1.9		(1.1	)		0.8
Healthcare Supplies		3.4		(1.7	)		1.7
Healthcare Technology		1.8		—			1.8
Life Sciences Tools & Services		2.1		(7.9	)		(5.8	)
Managed Healthcare		6.3		(0.5	)		5.8
Pharmaceuticals		33.0		(8.7	)		24.3
Industrials		—		(0.4	)		(0.4	)


Top 5 Holdings as of 12/31/2015 (%)⁽¹⁾⁽²⁾ Long Securities		Short Securities
Bristol-Myers Squibb Co.	5.7	Zimmer Holdings, Inc.	(3.5	)
Pfizer, Inc.	5.0	Stryker Corp.	(2.3	)
Johnson & Johnson	4.9	Amgen, Inc.	(2.1	)
Aetna, Inc.	4.5	St Jude Medical, Inc.	(2.1	)
Regeneron Pharmaceuticals, Inc.	4.3	Incyte Corp., Ltd.	(1.8	)

The Fund’s performance largely depends on the healthcare industry and is susceptible to economic, political and regulatory risks.

Please refer to Note 9, Disclosure of Significant Risks and Contingencies, for more information.

⁽¹⁾	Long and short sectors and securities are calculated as a percentage of total net assets.

⁽²⁾	Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending.


2						Semi-Annual Report

FUND PROFILE (unaudited)


		Highland Floating Rate Opportunities Fund

Objective

Highland Floating Rate Opportunities Fund seeks to provide a high level of current income, consistent with preservation of capital.

Net Assets as of December 31, 2015

$591.1 million

Portfolio Data as of December 31, 2015

The information below provides a snapshot of Highland Floating Rate Opportunities Fund at the end of the reporting period. Highland Floating Rate Opportunities Fund is actively managed and the composition of its portfolio will change over time.

Floating rate loan investments present special financial risks. Defaults on the loans, nonpayment and prepayment of principal could affect the valuation of the portfolio’s holdings. Short sales theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. The Fund’s ability to invest in high-yield debt securities (or junk securities) generally subjects the Fund to greater risk. The use of leverage involves certain risks, such as greater volatility of the NAV of the Fund’s shares and the nonpayment of dividends.


Quality Breakdown as of 12/31/2015 (%)⁽¹⁾⁽²⁾
BBB			5.7
BB			33.1
B			42.4
CCC			4.1
D			0.7
Not Rated			14.0


Top 5 Sectors as of 12/31/2015 (%)⁽²⁾
Media & Telecommunications	18.1
Financial	15.2	⁽³⁾
Service	15.0
Utility	8.6
Healthcare	8.2


Top 10 Holdings as of 12/31/2015 (%)⁽²⁾
Metro-Goldwyn-Mayer, Inc. (Common Stocks)			6.5
CCS Medical, Inc., (U.S. Senior Loans)			4.2
Weight Watchers International, Inc. 4.00%, 04/02/20 (U.S. Senior Loans)			3.5
Texas Competitive Electric Holdings Co. LLC 4.73%, 10/10/17 (U.S. Senior Loans)			2.4
Media General, Inc. (Common Stocks)			2.4
JC Penney Corp., Inc. 6.00%, 05/22/2018 (U.S. Senior Loans)			1.7
Scientific Games International, Inc. 6.00%, 10/18/20 (U.S. Senior Loans)			1.7
iHeartCommunications, Inc. 7.17%, 01/30/19 (U.S. Senior Loans)			1.6
Spin Holdco, Inc. 4.25%, 11/14/19 (U.S. Senior Loans)			1.6
Doncasters U.S. Finance LLC 4.50%, 04/09/20 (U.S. Senior Loans)			1.4

The Fund is non-diversified and may invest a larger portion of its assets in the securities of fewer issuers than if the Fund were diversified.

Please refer to Note 9, Disclosure of Significant Risks and Contingencies, for more information.

⁽¹⁾

Quality is calculated as a percentage of total senior loans, collateralized loan obligations and corporate bonds & notes. Sectors and holdings are calculated as a percentage of total net assets. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not that of the Fund itself. Credit quality ratings assigned by a rating agency are subjective opinions, not statements of fact, and are subject to change, including daily. The ratings assigned by credit rating agencies are but one of the considerations that the Fund’s investment adviser incorporates into its credit analysis process, along with such other issuer-specific factors as cash flows, capital structure and leverage ratios, ability to de-leverage through free cash flow, quality of management, market positioning and access to capital, as well as such security-specific factors as the terms of the security (e.g., interest rate, and time to maturity) and the amount of any collateral. Quality Ratings are subject to change.

⁽²⁾	Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending.

⁽³⁾	Includes Collateralized Loan Obligations.


Semi-Annual Report						3

FUND PROFILE (unaudited)


		Highland Opportunistic Credit Fund

Objective

Highland Opportunistic Credit Fund (the “Fund”) seeks to achieve high total returns while minimizing losses.

Net Assets as of December 31, 2015

$51.6 million

Portfolio Data as of December 31, 2015

The information below provides a snapshot of Highland Opportunistic Credit Fund at the end of the reporting period. Highland Opportunistic Credit Fund is actively managed and the composition of its portfolio will change over time.


Quality Breakdown as of 12/31/2015 (%)⁽¹⁾
BB			20.9
B			45.4
CCC			12.3
Not Rated			21.4


Top 5 Sectors as of 12/31/2015 (%)⁽²⁾
Financial	26.6	⁽³⁾
Utility	26.3
Energy	19.3
Media & Telecommunications	9.9
Information Technology	9.6


Top 10 Holdings as of 12/31/2015 (%)⁽²⁾
Texas Competitive Electric Holdings Co. LLC (U.S. Senior Loans)			9.2
Momentive Performance Materials, Inc., 4.69%, 04/24/22 (Corporate Bonds & Notes)			6.3
Entegra TC LLC 9.25%, 10/02/2020 (U.S. Senior Loans)			6.2
Ocean Rig UDW, Inc., 7.25%, 04/01/19 (Corporate Bonds & Notes)			5.5
iHeartCommunications, Inc., 7.17%, 01/30/2019 (U.S. Senior Loans)			5.5
Weight Watchers International, Inc., 4.00%, 04/02/2020 (U.S. Senior Loans)			5.0
Evergreen Skills Lux S.a.r.l., 04/28/2021 (Foreign Denominated or Domiciled Senior Loans)			4.5
Toys ‘R’ Us-Delaware, Inc. 9.75%, 04/24/2020 (U.S. Senior Loans)			4.1
Scientific Games International, Inc., 10.00% 12/01/22 (U.S. Senior Loans)			4.1
Euramax International, Inc. (U.S. Senior Loans)			4.0

The Fund is non-diversified and may invest a larger portion of its assets in the securities of fewer issuers than if the Fund were diversified.

Please refer to Note 9, Disclosure of Significant Risks and Contingencies, for more information.

⁽¹⁾

⁽²⁾	Excludes the Fund’s investment in an investment company purchased with cash collateral from securities lending.

⁽³⁾	Includes Collateralized Loan Obligations


4						Semi-Annual Report

FINANCIAL STATEMENTS


December 31, 2015

A guide to understanding each Fund’s financial statements


Investment Portfolio		The Investment Portfolio details each of the Fund’s holdings and their market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification.

Statement of Assets and Liabilities		This statement details each Fund’s assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all of a Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and non-investment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that share class by the number of shares outstanding in that class as of the last day of the reporting period.

Statement of Operations		This statement reports income earned by each Fund and the expenses incurred by each Fund during the reporting period. The Statement of Operations also shows any net gain or loss a Fund realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents a Fund’s net increase or decrease in net assets from operations.

Statement of Changes in Net Assets		This statement details how each Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and distribution reinvestments) during the reporting period. The Statement of Changes in Net Assets also details changes in the number of shares outstanding.

Statement of Cash Flows		This statement reports net cash and foreign currency, excluding restricted cash, provided or used by operating, investing and financing activities and the net effect of those flows on cash and foreign currency during the period.

Financial Highlights		The Financial Highlights demonstrate how each Fund’s net asset value per share was affected by the Fund’s operating results. The Financial Highlights also disclose the classes’ performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets).

Notes to Financial Statements		These notes disclose the organizational background of the Funds, certain of their significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies.


Semi-Annual Report						5

INVESTMENT PORTFOLIO (unaudited)


As of December 31, 2015		Highland Long/Short Equity Fund



Shares			Value ($)

	Common Stocks - 81.4%

	CONSUMER DISCRETIONARY - 17.0%
	31,815	Amazon.com, Inc. (a)(b)		21,503,440
	14,800	AutoZone, Inc. (a)(b)		10,980,268
	343,678	Burlington Stores, Inc. (a)(b)		14,743,786
	782,051	ClubCorp Holdings, Inc. (a)		14,288,072
	227,199	Dollar General Corp. (a)		16,328,792
	244,354	J Alexander’s Holdings, Inc. (b)		2,668,346
	281,000	Kohl’s Corp. (c)		13,384,030
	173,600	Lowe’s Cos., Inc.		13,200,544
	350,000	Mattel, Inc. (c)		9,509,500
	471,534	Norwegian Cruise Line Holdings, Ltd. (b)		27,631,892
	157,840	Sally Beauty Holdings, Inc. (b)		4,402,158
	73,491	Sonic Corp.		2,374,494

				151,015,322


	CONSUMER STAPLES - 3.9%
	282,000	Fresh Market, Inc. (The) (b)		6,604,440
	317,480	Kraft Heinz Co. (The) (a)		23,099,845
	109,788	Pinnacle Foods, Inc. (a)		4,661,598

				34,365,883


	ENERGY - 3.9%
	540,000	Parsley Energy, Inc., Class A (b)		9,963,000
	150,300	Pioneer Natural Resources Co.		18,844,614
	238,172	RSP Permian, Inc. (b)		5,809,015

				34,616,629


	FINANCIAL - 16.8%
	983,523	CIT Group, Inc.		39,045,863
	518,266	E*TRADE Financial Corp. (a)(b)		15,361,404
	505,590	EverBank Financial Corp.		8,079,328
	205,960	Extra Space Storage, Inc., REIT (a)		18,167,732
	830,758	FNFV Group (a)(b)		9,329,412
	143,105	McGraw Hill Financial, Inc. (a)		14,107,291
	326,115	Morgan Stanley		10,373,718
	199,388	Ryman Hospitality Properties, REIT (a)		10,296,396
	477,600	Santander Consumer USA Holdings, Inc. (b)		7,569,960
	554,755	Synchrony Financial (b)		16,870,100

				149,201,204


	HEALTHCARE - 5.8%
	65,700	Allergan PLC (b)		20,531,250
	947,300	Boston Scientific Corp. (b)		17,468,212
	89,600	Medtronic PLC		6,892,032
	118,856	Mylan NV (b)		6,426,544

				51,318,038


	INDUSTRIALS - 3.9%
	200,100	Danaher Corp.		18,585,288
	186,159	KLX, Inc. (a)(b)		5,731,836
	333,199	Pendrell Corp. (b)		166,966
	383,800	XPO Logistics, Inc. (b)		10,458,550

				34,942,640


	INFORMATION TECHNOLOGY - 26.9%
	182,900	Alibaba Group Holding, Ltd. ADR (b)		14,864,283
	40,800	Alphabet, Inc., Class C (b)		30,962,304



Shares			Value ($)

	INFORMATION TECHNOLOGY (continued)
	81,600	Apple, Inc.		8,589,216
	45,000	Avago Technologies Ltd.		6,581,866
	709,120	CDK Global, Inc.		33,661,926
	393,200	Ciena Corp. (a)(b)		8,135,308
	89,000	F5 Networks, Inc. (b)		8,629,440
	206,588	Facebook, Inc., Class A (b)		21,621,500
	300,537	Hortonworks, Inc. (b)(c)		6,581,760
	35,000	Mellanox Technologies, Ltd. (b)		1,486,272
	180,363	NXP Semiconductor NV (a)(b)		15,195,583
	67,300	Palo Alto Networks, Inc. (b)		11,854,222
	286,725	Sabre Corp.		8,019,698
	174,160	Salesforce.com, Inc. (b)		13,654,144
	124,300	SanDisk Corp.		9,445,557
	76,200	ServiceNow, Inc. (a)(b)		6,595,872
	108,000	Splunk, Inc. (b)		6,351,480
	307,109	Super Micro Computer, Inc. (b)(c)		7,527,242
	239,500	Visa, Inc., Class A (c)		18,573,225

				238,330,898


	MATERIALS - 2.0%
	186,453	Vulcan Materials Co.		17,707,442


	TELECOMMUNICATION SERVICES - 1.2%
	103,541	SBA Communications Corp., Class A (a)(b)		10,879,053

		Total Common Stocks (Cost $735,804,425)		722,377,109


Contracts

	Purchased Call Options (d) - 0.0%
	450	athenahealth, Inc. Strike price $165.00, expires 01/15/2016		104,625
	500	athenahealth, Inc. Strike price $170.00, expires 01/15/2016		53,750
	1,250	Netflix, Inc. Strike price $130.00, expires 01/15/2016		32,500
	750	SPDR S&P 500 ETF Trust Strike price $210.00, expires 01/15/2016		23,250
	2,325	SPDR S&P 500 ETF Trust Strike price $213.00, expires 01/15/2016		18,600
	1,250	SPDR S&P 500 ETF Trust Strike price $214.00, expires 01/15/2016		7,500
	4,500	Walt Disney Co. (The) Strike price $120.00, expires 01/15/2016		4,500

		Total Purchased Call Options (Cost $2,750,131)		244,725


	Purchased Put Options (d) - 0.1%
	100	Amazon.com, Inc. Strike price $645.00, expires 01/15/2016		38,700
	1,000	Royal Caribbean Cruises, Ltd. Strike price $90.00, expires 01/15/2016		19,500
	1,000	SPDR S&P 500 ETF Trust Strike price $198.00, expires 02/09/2016		270,227

		Total Purchased Put Options (Cost $649,219)		328,427


6						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Long/Short Equity Fund



Shares			Value ($)

	Registered Investment Companies (e) - 3.7%
	33,116,569	State Street Navigator Prime Securities Lending Portfolio		33,116,569

		Total Registered Investment Companies (Cost $33,116,569)		33,116,569


	Cash Equivalents - 17.3%
	153,944,508	State Street Institutional Liquid Reserves Fund		153,944,508

		Total Cash Equivalents (Cost $153,944,508)		153,944,508

	Total Investments - 102.5%			910,011,338

	(Cost $926,264,852)

	Securities Sold Short (f) - (24.4)%

	Exchange-Traded Funds - (1.9)%
	55,000	Consumer Discretionary Select Sector SPDR Fund, ETF		(4,298,250	)
	73,803	Market Vectors Semiconductor, ETF		(3,932,224	)
	201,600	SPDR S&P Retail, ETF		(8,717,184	)

		Total Exchange-Traded Funds (Proceeds $17,338,793)		(16,947,658	)


	Common Stocks - (22.5)%

	CONSUMER DISCRETIONARY - (4.5)%
	29,300	Advance Auto Parts, Inc.		(4,409,943	)
	69,738	Dollar Tree, Inc. (g)		(5,385,168	)
	123,149	Polaris Industries, Inc.		(10,584,657	)
	82,000	Royal Caribbean Cruises, Ltd.		(8,299,220	)
	180,065	Steven Madden, Ltd. (g)		(5,441,564	)
	76,800	Tempur Sealy International, Inc. (g)		(5,411,328	)

				(39,531,880	)


	CONSUMER STAPLES - (2.3)%
	94,969	Blue Buffalo Pet Products, Inc. (g)		(1,776,870	)
	172,300	Energizer Holdings, Inc.		(5,868,538	)
	185,000	Flowers Foods, Inc.		(3,975,650	)
	112,600	WhiteWave Foods Co. (The) (g)		(4,381,266	)
	144,400	Whole Foods Market, Inc.		(4,837,400	)

				(20,839,724	)


	ENERGY - (1.0)%
	205,000	Ensco PLC, Class A		(3,154,950	)
	337,717	Laredo Petroleum Holdings, Inc. (g)		(2,698,359	)
	253,843	Marathon Oil Corp.		(3,195,883	)

				(9,049,192	)


	FINANCIAL - (4.2)%
	69,500	American Tower Corp., REIT		(6,738,025	)
	125,750	Bank of the Ozarks, Inc.		(6,219,595	)
	63,500	Comerica, Inc.		(2,656,205	)
	44,835	Cullen/Frost Bankers, Inc.		(2,690,100	)
	58,740	East West Bancorp, Inc.		(2,441,234	)
	408,350	Huntington Bancshares, Inc.		(4,516,351	)
	100,000	LendingClub Corp. (g)		(1,105,000	)
	45,000	Moody’s Corp.		(4,515,300	)
	115,555	Pebblebrook Hotel Trust, REIT		(3,237,851	)



Shares			Value ($)

	FINANCIAL (continued)
	14,690	Prosperity Bancshares, Inc.		(703,064	)
	50,700	Texas Capital Bancshares, Inc. (g)		(2,505,594	)

				(37,328,319	)


	HEALTHCARE - (0.7)%
	82,500	MEDNAX, Inc. (g)		(5,911,950	)


	INDUSTRIALS - (3.6)%
	228,950	Expeditors International of Washington, Inc.		(10,325,645	)
	30,200	FedEx Corp.		(4,499,498	)
	141,600	Sensata Technologies Holding NV (g)		(6,522,096	)
	59,300	United Technologies Corp.		(5,696,951	)
	189,500	USG Corp. (g)		(4,602,955	)

				(31,647,145	)


	INFORMATION TECHNOLOGY - (4.7)%
	58,000	ARM Holdings PLC, ADR		(2,633,105	)
	39,383	Check Point Software Technologies, Ltd. (g)		(3,204,989	)
	200,000	Cognizant Technology Solutions Corp., Class A (g)		(12,004,000	)
	261,700	Corning, Inc.		(4,783,876	)
	71,800	Qualys, Inc. (g)		(2,375,862	)
	203,721	Texas Instruments, Inc.		(11,165,948	)
	102,300	Twitter, Inc. (g)		(2,367,222	)
	39,000	WEX, Inc. (g)		(3,447,600	)

				(41,982,602	)


	MATERIALS - (1.2)%
	78,300	Martin Marietta Materials, Inc.		(10,694,214	)


	UTILITIES - (0.3)%
	107,388	TECO Energy, Inc.		(2,861,890	)

		Total Common Stocks (Cost $204,032,665)		(199,846,916	)

		Total Securities Sold Short (Proceeds $221,371,458)		(216,794,574	)

	Other Assets & Liabilities, Net - 21.9%			194,834,413

	Net Assets - 100.0%			888,051,177

(a)	All or part of this security is pledged as collateral for short sales and written options contracts. The market value of the securities pledged as collateral was $167,233,722.

(b)	Non-income producing security.

(c)	Securities (or a portion of securities) on loan. As of December 31, 2015, the market value of securities loaned was $32,269,623. The loaned securities were secured with cash collateral of $33,116,569. Collateral is calculated based on prior day’s prices. See Note 4.

(d)	Options are shown at market value.

(e)	Represents investments of cash collateral received in connection with securities lending.

(f)	As of December 31, 2015, $213,842,531 in cash was segregated or on deposit with the brokers to cover investments sold short and is included in “Other Assets & Liabilities, Net.”

(g)	No dividend payable on security sold short.


See accompanying Notes to Financial Statements.						7

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Long/Short Equity Fund

Glossary:


ADR		American Depositary Receipt
ETF		Exchange-Traded Fund
GSI		Goldman Sachs International
GSSI		Goldman Sachs Sector Index
GSS2DPOS		Data Processing Outsourcing Services
GSS2FDPR		Food Products 2
GSS2HOTL		Hotels & Leisure excluding Restaurants
GSS2INBK		Investment Bank/Dividend Cap Market
GSSIAPLS		Application Software 2
GSSIINSS		International Soft Services
GSSITHSP		Tech Hardware Storage 2
PLC		Public Limited Company
REIT		Real Estate Investment Trust
SPDR		Standard & Poor’s Depositary Receipt

The Fund had the following swap contracts open at December 31, 2015:


Description	Underlying Basket		Counter- party		Expiration Date		Notional Amount			Value			Upfront Premiums Paid (Received)		Unrealized Appreciation (Depreciation)
Short Equity Index TRS		GSSIINSS		GSI		October 24, 2016	$	(8,475,080	)	$	(8,547,274	)	$	0	$	(72,194	)
Short Equity Index TRS		GSSITHSP		GSI		October 31, 2016		(4,659,589	)		(4,241,556	)		0		418,033
Short Equity Index TRS		GSSIAPLS		GSI		October 31, 2016		(9,265,967	)		(9,142,804	)		0		123,163
Short Equity Index TRS		GSS2HOTL		GSI		November 3, 2016		(6,359,281	)		(6,352,500	)		0		6,781
Short Equity Index TRS		GSS2FDPR		GSI		November 10, 2016		(9,161,421	)		(9,139,320	)		0		22,101
Short Equity Index TRS		GSS2DPOS		GSI		November 21, 2016		(9,254,448	)		(8,910,719	)		0		343,729
Short Equity Index TRS		GSS2INBK		GSI		November 21, 2016		(9,390,959	)		(9,129,210	)		0		261,749

Total Swap Contracts															$	1,103,362

Written options contracts outstanding as of December 31, 2015 were as follows:


Description	Exercise Price		Expiration Date		Number of Contracts		Notional Value		Premium		Value
WRITTEN CALL OPTIONS:
Netflix, Inc.	$	145.00		January 2016		300	$	4,350,000	$	45,086	$	(3,000	)
WRITTEN PUT OPTIONS:
SPDR S&P 500 ETF Trust	$	195.00		January 2016		1,000		19,500,000		183,767		(58,000	)

Total Written Options Contracts									$	228,853	$	(61,000	)

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

Remaining Contractual Maturity of the Agreements


	Overnight and Continuous		Total
Securities Lending Transactions¹
Common Stock	$	33,116,569	$	33,116,569
Total Borrowings	$	33,116,569	$	33,116,569
Gross amount of recognized liabilities for securities lending transactions			$	33,116,569

¹	Amounts represent the payable for cash collateral received on securities on loan. This will generally be in “Overnight and Continuous” column as the securities are typically callable on demand.


8						Semi-Annual Report

INVESTMENT PORTFOLIO (unaudited)


As of December 31, 2015		Highland Long/Short Healthcare Fund



Principal Amount ($)			Value ($)

	U.S. Senior Loans (a) - 0.4%

	HEALTHCARE - 0.4%

	Healthcare Facilities - 0.4%
	2,233,592	Surgery Center Holdings, Inc. Second Lien Term Loan 8.50%, 11/03/2021		2,121,912

		Total U.S. Senior Loans (Cost $2,214,945)		2,121,912


	Corporate Bonds & Notes (b) - 1.3%

	HEALTHCARE - 1.3%

	Healthcare Services - 1.3%
	11,500,000	Crimson Merger Sub, Inc. 6.63%, 05/15/2022		7,906,250

		Total Corporate Bonds & Notes (Cost $10,059,650)		7,906,250


	Foreign Corporate Bonds & Notes (b) - 1.3%

	HEALTHCARE - 1.3%

	Pharmaceuticals - 1.3%
	9,000,000	Valeant Pharmaceuticals International, Inc. 6.13%, 04/15/2025		8,055,000

		Total Foreign Corporate Bonds & Notes (Cost $7,440,247)		8,055,000


Shares

	Common Stocks - 93.9%

	CONSUMER DISCRETIONARY - 0.3%
	74,500	Service Corp. International		1,938,490


	HEALTHCARE - 93.6%

	Biotechnology - 23.6%
	177,592	Amicus Therapeutics, Inc. (c)		1,722,642
	171,832	Baxalta, Inc.		6,706,603
	184,981	Celgene Corp. (c)		22,153,324
	218,394	Coherus Biosciences, Inc. (c)(d)		5,014,326
	420,898	EPIRUS Biopharmaceuticals, Inc. (c)		1,300,575
	397,329	FibroGen, Inc. (c)		12,106,615
	241,463	Insys Therapeutics, Inc. (c)(d)		6,913,086
	1,273,470	Minerva Neurosciences, Inc. (c)(d)(e)		7,729,963
	35,296	Neurocrine Biosciences, Inc. (c)		1,996,695
	216,421	Otonomy, Inc. (c)(d)		6,005,683
	236,572	Portola Pharmaceuticals, Inc. (c)		12,171,629
	336,157	ProQR Therapeutics NV (c)		2,917,843
	267,713	Radius Health, Inc. (c)(d)		16,475,058
	47,240	Regeneron Pharmaceuticals, Inc. (c)		25,645,179
	146,815	Sage Therapeutics, Inc. (c)(d)		8,559,314
	111,770	Sarepta Therapeutics, Inc. (c)(d)		4,312,087

				141,730,622


	Healthcare Distributors - 1.3%
	40,000	McKesson Corp.		7,889,200


	Healthcare Equipment - 14.0%
	374,796	Abbott Laboratories		16,832,088
	46,862	ABIOMED, Inc. (c)		4,230,701



Shares			Value ($)

	Healthcare Equipment (continued)
	421,187	Amedica Corp. (c)(d)		50,037
	463,064	Boston Scientific Corp. (c)		8,538,900
	57,980	DexCom, Inc. (c)		4,748,562
	115,552	Edwards Lifesciences Corp. (c)		9,126,297
	170,245	Medtronic PLC		13,095,245
	1,046,011	NEOVASC, Inc. (c)		4,707,050
	179,610	NuVasive, Inc. (c)		9,718,697
	167,919	STERIS plc		12,651,018

				83,698,595


	Healthcare Facilities - 8.8%
	65,365	Amsurg Corp. (c)		4,967,740
	406,464	Brookdale Senior Living, Inc. (c)		7,503,326
	107,433	Capital Senior Living Corp. (c)		2,241,052
	180,178	HCA Holdings, Inc. (c)		12,185,438
	90,000	Kindred Healthcare, Inc.		1,071,900
	122,449	Surgical Care Affiliates, Inc. (c)		4,874,695
	244,581	Tenet Healthcare Corp. (c)		7,410,804
	36,010	Universal Health Services, Inc., Class B		4,302,835
	154,200	VCA, Inc. (c)(f)		8,481,000

				53,038,790


	Healthcare Services - 0.6%
	58,870	Accretive Health, Inc. (c)		188,384
	74,874	Amedisys, Inc. (c)(d)		2,944,046
	3,982,699	CNS Response, Inc. (c)(g)		238,962

				3,371,392


	Healthcare Supplies - 3.4%
	764,050	LDR Holding Corp. (c)		19,185,296
	1,332,000	Shandong Weigao Group Medical Polymer Co., Ltd., Class H		922,929

				20,108,225


	Healthcare Technology - 1.8%
	56,053	athenahealth, Inc. (c)(d)		9,022,851
	1,084,267	Streamline Health Solutions, Inc. (c)(e)		1,528,817

				10,551,668


	Life Sciences Tools & Services - 2.1%
	258,370	Fluidigm Corp. (c)(d)		2,792,980
	118,051	ICON PLC (c)		9,172,562
	63,000	NanoString Technologies, Inc. (c)(d)		926,730

				12,892,272


	Managed Healthcare - 6.3%
	247,426	Aetna, Inc.		26,751,699
	169,367	Centene Corp. (c)		11,146,042

				37,897,741


	Pharmaceuticals - 31.7%
	95,532	Agile Therapeutics, Inc. (c)		932,392
	40,678	Allergan PLC (c)		12,711,875	��
	500,667	Bristol-Myers Squibb Co.		34,440,883
	39,024	Cempra, Inc. (c)(d)(f)		1,214,817
	217,997	Eli Lilly & Co.		18,368,427
	893,465	Endocyte, Inc. (c)(d)		3,582,795
	104,424	GW Pharmaceuticals PLC ADR (c)		7,251,203
	750,000	HLS Therapeutics Inc. (c)(g)		6,727,500


See accompanying Notes to Financial Statements.						9

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Long/Short Healthcare Fund



Shares			Value ($)

	Common Stocks (continued)

	Pharmaceuticals (continued)
	699,167	Horizon Pharma PLC (c)		15,150,949
	50,000	Intra-Cellular Therapies, Inc. (c)(f)		2,689,500
	285,272	Johnson & Johnson		29,303,140
	934,927	Pfizer, Inc. (f)		30,179,443
	233,042	Teva Pharmaceutical Industries, Ltd., ADR		15,296,877
	120,855	Valeant Pharmaceuticals International, Inc. (c)		12,284,911

				190,134,712

				561,313,217

		Total Common Stocks (Cost $581,647,644)		563,251,707


	Master Limited Partnerships (g) - 0.0%

	HEALTHCARE - 0.0%

	Healthcare Equipment - 0.0%
	1,068,076	Genesys Ventures IA, LP		69,852

		Total Master Limited Partnerships (Cost $—)		69,852


Units

	Rights (c) - 0.0%

	HEALTHCARE - 0.0%
	69,326	Wright Medical Group NV		70,712

		Total Rights (Cost $188,242)		70,712


	Warrants (c) - 1.1%

	HEALTHCARE - 1.1%

	Biotechnology - 1.1%
	94,204	Discovery Laboratories, Inc., expires 02/16/2016		60
	1,717,910	Galena Biopharma Inc., expires 03/18/2020		1,645,485
	121,816	MediciNova, Inc., expires 03/24/2016		33,841
	1,155,015	Minerva Neurosciences, Inc., expires 03/18/2017		2,103,501
	898,876	Ocata Therapeutics, Inc., expires 12/22/2020		2,975,279
	271,081	Threshold Pharmaceuticals, Inc., expires 03/11/2016		1,675

				6,759,841


	Life Sciences Tools & Services - 0.0%
	40,000	Pluristem Therapeutics, Inc. expires 01/27/2016		3
	30,000	pSivida Corp., expires 01/19/2016		7,921

				7,924



Units			Value ($)

	Pharmaceuticals - 0.0%
	37,955	ADVENTRX Pharmaceuticals, Inc., expires 01/07/2016		—
	521,727	Neostem, Inc., expires 07/19/2016		86

				86

				6,767,851

		Total Warrants (Cost $153,365)		6,767,851


Contracts

	Purchased Call Options (h) - 1.4%

	HEALTHCARE - 1.4%

	Biotechnology - 1.4%
	6,432	Sarepta Therapeutics, Inc., Strikes price $30.00, expires 02/19/16		8,458,080


	Pharmaceuticals - 0.0%
	2,644	Air Methods Corp., Strike price $45.00, expires 01/15/16		79,320

				8,537,400

		Total Purchased Call Options (Cost $7,017,612)		8,537,400


	Purchased Put Options (h) - 0.4%

	FINANCIAL - 0.4%
	9,302	iShares Russell 2000 Index Fund, ETF, Strikes price $113.50, expires 01/22/16		2,223,178

		Total Purchased Put Options (Cost $1,883,279)		2,223,178


Shares

	Registered Investment Companies (i) - 6.1%
	36,667,006	State Street Navigator Prime Securities Lending Portfolio		36,667,006

		Total Registered Investment Companies (Cost $36,667,006)		36,667,006


	Cash Equivalents - 1.2%
	6,923,883	State Street Institutional Liquid Reserves Fund		6,923,883

		Total Cash Equivalents (Cost $6,923,883)		6,923,883

	Total Investments - 107.1%			642,594,751

	(Cost $654,195,873)


10						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Long/Short Healthcare Fund



Shares			Value ($)

	Securities Sold Short (j) - (50.0)%

	Common Stocks - (48.8)%

	CONSUMER STAPLES - (1.4)%
	101,256	Walgreens Boots Alliance, Inc.		(8,622,455	)


	FINANCIAL - (1.9)%
	100,731	Ventas, Inc., REIT		(5,684,250	)
	79,655	Welltower, Inc., REIT		(5,418,930	)

				(11,103,180	)


	HEALTHCARE - (45.1)%

	Biotechnology - (16.1)%
	197,537	Acorda Therapeutics, Inc. (k)		(8,450,633	)
	93,328	Agios Pharmaceuticals, Inc. (k)		(6,058,854	)
	76,953	Amgen, Inc.		(12,491,780	)
	57,081	Axovant Sciences, Ltd. (k)		(1,029,170	)
	74,124	BioMarin Pharmaceutical, Inc. (k)		(7,765,230	)
	138,066	Bluebird Bio, Inc. (k)		(8,866,599	)
	241,761	Cellectis SA ADR (k)		(7,501,844	)
	37,116	Galapagos NV (k)		(2,288,513	)
	100,115	Incyte Corp., Ltd. (k)		(10,857,472	)
	93,246	Juno Therapeutics, Inc. (k)		(4,100,027	)
	74,597	Kite Pharma, Inc. (k)		(4,596,667	)
	96,127	NantKwest, Inc. (k)		(1,665,881	)
	404,784	Natera, Inc. (k)		(4,371,667	)
	129,271	Seattle Genetics, Inc. (k)		(5,801,682	)
	78,203	Spark Therapeutics, Inc. (k)		(3,543,378	)
	138,402	TESARO, Inc. (k)		(7,241,193	)

				(96,630,590	)


	Healthcare Equipment - (7.9)%
	201,777	St Jude Medical, Inc.		(12,463,765	)
	151,051	Stryker Corp.		(14,038,680	)
	206,046	Zimmer Holdings, Inc.		(21,138,259	)

				(47,640,704	)


	Healthcare Facilities - (1.2)%
	89,891	Genesis Healthcare, Inc. (k)		(311,922	)
	589,401	Select Medical Holdings Corp.		(7,019,766	)

				(7,331,688	)


	Healthcare Services - (1.1)%
	45,974	Amedisys, Inc. (k)		(1,807,698	)
	34,075	Chemed Corp.		(5,104,435	)

				(6,912,133	)


	Healthcare Supplies - (1.7)%
	133,337	Haemonetics Corp. (k)		(4,298,785	)
	102,626	Neogen Corp. (k)		(5,800,421	)

				(10,099,206	)


	Life Sciences Tools & Services - (7.9)%
	98,001	Albany Molecular Research, Inc. (k)		(1,945,320	)
	83,791	Cambrex Corp. (k)		(3,945,718	)
	30,000	Illumina, Inc. (k)		(5,758,350	)
	297,339	Luminex Corp. (k)		(6,360,081	)
	25,196	Mettler-Toledo International, Inc. (k)		(8,544,719	)
	118,633	PAREXEL International Corp. (k)		(8,081,280	)



Shares			Value ($)

	Life Sciences Tools & Services (continued)
	116,130	PRA Health Sciences, Inc. (k)		(5,257,205	)
	105,154	Quintiles Transnational Holdings, Inc. (k)		(7,219,874	)

				(47,112,547	)


	Managed Healthcare - (0.5)%
	20,000	Anthem, Inc.		(2,788,800	)


	Pharmaceuticals - (8.7)%
	83,614	AbbVie, Inc.		(4,953,293	)
	145,485	Endo International PLC (k)		(8,906,592	)
	62,614	Jazz Pharmaceuticals PLC (k)		(8,801,024	)
	167,599	Medicines Co. (The) (k)		(6,258,147	)
	126,347	Merck & Co., Inc.		(6,673,649	)
	210,933	Roche Holding AG ADR		(7,270,860	)
	192,513	Zoetis, Inc.		(9,225,223	)

				(52,088,788	)

				(270,604,456	)


	INDUSTRIALS - (0.4)%
	51,956	Advisory Board Co. (The) (k)		(2,577,537	)

		Total Common Stocks (Proceeds $279,463,159)		(292,907,628	)


	Exchange-Traded Funds - (1.2)%
	21,939	iShares Nasdaq Biotechnology Index Fund, ETF		(7,422,622	)

		Total Exchange-Traded Funds (Proceeds $7,250,105)		(7,422,622	)

		Total Securities Sold Short (Proceeds $286,713,264)		(300,330,250	)

	Other Assets & Liabilities, Net - 42.9%			257,602,347

	Net Assets - 100.0%			599,866,848

(a)

Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Fund invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at December 31, 2015. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

(b)	Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At December 31, 2015, these securities amounted to $15,961,250 or 2.7% of net assets.

(c)	Non-income producing security.

(d)	Securities (or a portion of securities) on loan. As of December 31, 2015, the market value of securities loaned was $35,276,071. The loaned securities were secured with cash collateral of $36,667,006. Collateral is calculated based on prior day’s prices. See Note 4.


See accompanying Notes to Financial Statements.						11

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Long/Short Healthcare Fund

(e)	Affiliated issuer. Assets with a total aggregate market value of $9,258,780, or 1.5% of net assets, were affiliated with the Fund as of December 31, 2015.

(f)	All or part of this security is pledged as collateral for short sales and written options contracts. The market value of the securities pledged as collateral was $163,332,457.

(g)

Represents fair value as determined by the Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate value of $7,036,314, or 1.2% of net assets, were fair valued under the Fund’s valuation procedures as of December 31, 2015.

(h)	Options are shown at market value.

(i)	Represents investments of cash collateral received in connection with securities lending.

(j)	As of December 31, 2015, $356,786,895 in cash was segregated or on deposit with the brokers to cover investments sold short and is included in “Other Assets & Liabilities, Net.”

(k)	No dividend payable on security sold short.

Glossary:


ADR		American Depositary Receipt
ETF		Exchange-Traded Fund
PLC		Public Limited Company
REIT		Real Estate Investment Trust

Written Options:

Written options contracts outstanding as of December 31, 2015 were as follows:


Description	Exercise Price		Expiration Date		Number of Contracts		Notional Value		Premium		Value
WRITTEN CALL OPTIONS:
Sarepta Therapeutics, Inc.	$	40.00		February 2016		3,369	$	13,476,000	$	1,237,906	$	(2,863,650	)

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

Remaining Contractual Maturity of the Agreements


	Overnight and Continuous		Total
Securities Lending Transactions¹
Common Stock	$	36,667,006	$	36,667,006
Total Borrowings	$	36,667,006	$	36,667,006
Gross amount of recognized liabilities for securities lending transactions			$	36,667,006

¹	Amounts represent the payable for cash collateral received on securities on loan. This will generally be in “Overnight and Continuous” column as the securities are typically callable on demand.


12						Semi-Annual Report

INVESTMENT PORTFOLIO (unaudited)


As of December 31, 2015		Highland Floating Rate Opportunities Fund



Principal Amount ($)			Value ($)

	U.S. Senior Loans (a) - 66.7%

	CHEMICALS - 3.0%
	5,118,651	Axalta Coating Systems US Holdings, Inc. Term Loan 3.75%, 02/01/2020		5,079,570
	2,008,455	MacDermid, Inc. Tranche B First Lien Term Loan 5.50%, 06/07/2020		1,951,977
	787,500	Term Loan B-2 5.50%, 06/07/2020		763,733
	4,375,000	Minerals Technologies, Inc. Term Loan 4.75%, 05/09/2021		4,331,250
	5,528,443	Univar, Inc. Term Loan 4.25%, 07/01/2022		5,364,110

				17,490,640


	CONSUMER PRODUCTS - 1.4%
	1,596,000	KIK Custom Products, Inc. Term Loan B 6.00%, 08/26/2022		1,554,105
	8,143,035	SRAM LLC Term Loan B 4.02%, 04/10/2020		6,779,076

				8,333,181


	ENERGY - 2.3%
	8,788,693	Azure Midstream Energy LLC Term Loan B 7.50%, 11/15/2018		5,229,272
	9,666,718	Chief Exploration & Development LLC Second Lien Term Loan 7.50%, 05/12/2021		6,605,607
	5,449,240	Fieldwood Energy LLC Second Lien Term Loan 8.38%, 09/30/2020		869,154
	1,410,614	Seadrill Partners Finco LLC Additional Initial Term Loan 02/21/2021 (b)		594,807

				13,298,840


	FINANCIAL - 1.8%
	3,529,412	LPL Holdings, Inc. Incremental Term Loan B 4.75%, 11/20/2022		3,533,824
	7,165,664	National Financial Partners Corp. Term Loan B 4.50%, 07/01/2020		6,902,899

				10,436,723


	FOOD & DRUG - 0.1%
	666,667	B&G Foods, Inc. Term Loan B 3.75%, 11/02/2022		667,290



Principal Amount ($)			Value ($)

	FOREST PRODUCTS & CONTAINERS - 2.0%
	7,504,077	BWAY Holding Co., Inc. Initial Term Loan B 5.50%, 08/14/2020		7,236,782
	4,567,901	Signode Industrial Group US, Inc. Initial Term Loan B 3.75%, 05/01/2021		4,415,630

				11,652,412


	GAMING & LEISURE - 3.7%
	49,138,954	Ginn-LA CS Borrower LLC First Lien Tranche B Term Loan (c)		1,228,474
	22,925,890	First Lien Tranche A Credit-Linked Deposit (c)		573,147
	7,000,000	Second Lien Term Loan (c)(d)		—
	11,259,663	LLV Holdco LLC Exit Revolving Loan 5.00%, 02/28/2017 (d)(e)		5,388,875
	4,077,869	LTF Merger Sub, Inc. 4.25%, 06/10/2022		3,986,137
	960,976	RHP Hotel Properties, LP Tranche B Term Loan 3.50%, 01/15/2021		959,654
	10,709,076	Scientific Games International, Inc. Initial Term Loan B-1 6.00%, 10/18/2020		9,831,307

				21,967,594


	HEALTHCARE - 7.6%
	1,447,273	Air Medical Group Holdings, Inc. 4.50%, 04/28/2022		1,404,766
	31,146,760	CCS Medical, Inc. First Lien Term Loan (c)(d)(e)		24,792,821
	1,151,169	Hill-Rom Holdings, Inc. 3.50%, 09/08/2022		1,153,016
	5,219,237	Kinetic Concepts, Inc. Dollar Term Loan E-1 4.50%, 05/04/2018		5,047,420
	6,578,071	Onex Carestream Finance LP Second Lien Term Loan 9.50%, 12/07/2019		5,870,928
	1,861,327	Surgery Center Holdings, Inc. Second Lien Term Loan 8.50%, 11/03/2021		1,768,260
	5,364,865	Valeant Pharmaceuticals International, Inc. Tranche B Term Loan F-1 4.00%, 04/01/2022		5,173,742

				45,210,953


	HOUSING - 2.1%
	5,273,094	Builders FirstSource, Inc. 6.00%, 07/31/2022		5,226,954
	8,000,000	EH/Transeastern LLC/TE TOUSA Term Loan (c)(d)		4,000,000
	6,747,727	LBREP/L-SunCal Master I LLC First Lien Term Loan B (c)(d)		—
	4,352,766	Nevada Land Group LLC First Lien Initial Term Loan (c)		3,166,638
	2,621,497	Second Lien Initial Term Loan (c)(d)		—

				12,393,592


See accompanying Notes to Financial Statements.						13

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Floating Rate Opportunities Fund



Principal Amount ($)			Value ($)

	U.S. Senior Loans (continued)

	INFORMATION TECHNOLOGY - 5.8%
	7,000,000	Avago Technologies Cayman Ltd. 11/06/2022 (b)		6,939,310
	4,955,576	Avaya, Inc. Term Loan B7 6.25%, 05/29/2020		3,477,154
	5,248,502	Replacement Term Loan B-6 6.50%, 03/30/2018		3,993,244
	2,612,435	Dell International LLC Term Loan B-2 4.00%, 04/29/2020		2,596,564
	6,613,272	Kronos, Inc. First Lien Incremental Term Loan 4.50%, 10/30/2019		6,522,373
	4,913,372	Second Lien Term Loan 9.75%, 04/30/2020		4,907,230
	1,995,000	Sophia, L.P. Term Loan B 4.75%, 09/30/2022		1,975,050
	3,505,911	SS&C Technologies, Inc. Term Loan B-1 4.01%, 07/08/2022		3,486,559
	515,950	Term Loan B-2 4.02%, 07/08/2022		513,102

				34,410,586


	MANUFACTURING - 1.8%
	8,256,074	Doncasters U.S. Finance LLC Term Loan B 4.50%, 04/09/2020		8,029,032
	2,703,448	Second Lien Term Loan 9.50%, 10/09/2020		2,608,828

				10,637,860


	MEDIA & TELECOMMUNICATIONS - 9.2%
	7,282,598	Cumulus Media Holdings, Inc. Term Loan 4.25%, 12/23/2020		5,571,188
	2,251,261	Endurance Business Media, Inc. Term Loan (c)(d)(e)		—
	13,571,429	iHeartCommunications, Inc. Tranche D Term Loan 7.17%, 01/30/2019		9,548,518
	2,000,000	Level 3 Financing, Inc. Tranche B-III Term Loan 4.00%, 08/01/2019		1,999,740
	5,000,000	Tranche B Term Loan 4.00%, 01/15/2020		4,992,400
	705,882	Term Loan B-2 3.50%, 05/31/2022		696,176
	2,000,000	Match Group Inc. Term Loan B 5.50%, 11/16/2022		1,980,000
	4,673,778	Media General, Inc. Term Loan B 4.00%, 07/31/2020		4,627,040
	6,970,588	Mediacom Illinois LLC Tranche G Term Loan 3.50%, 06/30/2021		6,927,022



Principal Amount ($)			Value ($)

	MEDIA & TELECOMMUNICATIONS (continued)
	3,000,000	Metro-Goldwyn-Mayer, Inc. Second Lien Term Loan 5.13%, 06/26/2020 (f)		2,992,500
	2,162,162	T-Mobile USA, Inc. Term Loan B 3.50%, 11/09/2022		2,164,865
	3,223,000	TWCC Holding Corp. Second Lien Term Loan 7.00%, 06/26/2020		3,217,972
	4,402,661	Extended Term Loan 5.75%, 02/11/2020		4,405,016
	5,116,321	Univision Communications, Inc. Incremental Term Loan C-3 4.00%, 03/01/2020		5,014,915

				54,137,352


	METALS & MINERALS - 0.8%
	10,644,426	Arch Coal, Inc. Term Loan B 6.25%, 05/16/2018		4,798,880


	RETAIL - 5.0%
	3,185,990	Academy, Ltd. 5.00%, 07/01/2022		3,081,777
	6,590,948	Albertson’s LLC Term Loan B-4 5.50%, 08/25/2021		6,546,493
	3,885,012	Dollar Tree, Inc. Term Loan B2 4.25%, 07/06/2022		3,869,239
	10,357,692	JC Penney Corp., Inc. First Lien Term Loan 6.00%, 05/22/2018		10,202,326
	7,001,502	Men’s Wearhouse, Inc. (The) Term Loan 5.00%, 06/18/2021		5,968,780

				29,668,615


	SERVICE - 13.8%
	4,143,755	Acosta Holdco, Inc. Tranche B-2 Term Loan 4.25%, 09/26/2021		3,952,852
	4,356,163	ADS Waste Holdings, Inc. Tranche B-2 Initial Term Loan 3.75%, 10/09/2019		4,228,201
	5,928,720	Advantage Sales & Marketing, Inc. First Lien Term Loan 4.25%, 07/23/2021		5,717,924
	3,840,000	Second Lien Term Loan 7.50%, 07/25/2022		3,464,218
	3,764,151	AlixPartners LLP 4.50%, 07/28/2022		3,742,996
	8,467,525	EnergySolutions LLC Term Loan 6.75%, 05/29/2020		7,536,097
	5,500,000	First Data Corp. Dollar Term Loan 3.92%, 03/24/2018		5,437,740


14						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Floating Rate Opportunities Fund



Principal Amount ($)			Value ($)

	U.S. Senior Loans (continued)

	SERVICE (continued)
	1,000,000	Term Loan 3.92%, 09/24/2018		988,020
	2,000,000	Term Loan 4.17%, 07/08/2022		1,974,250
	7,735,294	Maxim Crane Works, LP Second Lien Term Loan 10.25%, 11/26/2018		7,657,941
	5,265,226	ServiceMaster Co. (The) Initial Term Loan B 4.25%, 07/01/2021		5,217,839
	9,714,613	Spin Holdco, Inc. First Lien Initial Term Loan B 4.25%, 11/14/2019		9,357,601
	1,317,113	WASH Multifamily Laundry Systems, LLC First Lien Term Loan 4.25%, 05/14/2022		1,286,655
	265,924	Second Lien Term Loan 8.00%, 05/14/2023		251,963
	230,665	First Lien Term Loan 4.25%, 05/14/2022		225,331
	46,576	Second Lien Term Loan 8.00%, 05/12/2023		44,130
	27,642,858	Weight Watchers International, Inc. Tranche B-2 Initial Term Loan 4.00%, 04/02/2020		20,685,980

				81,769,738


	TRANSPORTATION - 0.5%
	3,005,038	Dealer Tire LLC Initial Term Loan B 5.50%, 12/22/2021		3,012,550
	26,954	JHT Holdings, Inc. Second Lien Term Loan 12.50%, 04/30/2016 (d)		26,819

				3,039,369


	UTILITY - 5.8%
	4,975,000	Calpine Corp. Term Loan B 3.50%, 05/27/2022		4,757,344
	3,509,767	Entegra TC LLC Third Lien Term Loan 9.25%, 10/02/2020		3,474,670
	2,500,000	Granite Acquisition, Inc. Second Lien Term Loan B 8.25%, 12/19/2022		1,950,000
	13,000,000	Texas Competitive Electric Holdings Co. LLC Non-Extended Term Loan 4.73%, 06/30/2016		3,956,940
	46,127,210	Extended Term Loan 4.73%, 10/10/2017		14,460,880
	5,515,800	TPF II Power LLC Term Loan B 5.50%, 10/02/2021		5,419,273

				34,019,107

		Total U.S. Senior Loans (Cost $563,381,055)		393,932,732



Principal Amount			Value ($)

	Foreign Denominated or Domiciled Senior Loans (a) - 5.6%

	CANADA - 0.4%
	USD
	2,233,854	Valeant Pharmaceuticals International, Inc. Tranche B Term Loan E-1 3.75%, 08/05/2020		2,148,968


	GERMANY - 0.0%
	EUR
	334,902	Schieder Mobel Holding GmbH Delayed Draw Term Loan (c)(d)		285,404


	LUXEMBOURG - 2.8%
	USD
	4,761,905	Endo Luxembourg Finance Co. I S.a r.l. Term Loan B 3.75%, 09/26/2022		4,708,333
	4,616,883	Evergreen Skills Lux S.a.r.l. First Lien Initial Term Loan 5.75%, 04/28/2021		3,624,253
	8,125,797	Travelport Finance S.a.r.l. Initial Term Loan B 5.75%, 09/02/2021		7,972,179

				16,304,765


	MARSHALL ISLANDS - 2.4%
	USD
	8,142,363	Drillships Financing Holding, Inc. Term Loan B-1 6.00%, 03/31/2021		3,307,835
	15,429,688	Drillships Ocean Ventures, Inc. Term Loan B 5.50%, 07/25/2021		7,367,676
	3,801,605	OSG International, Inc. Exit Term Loan B 5.75%, 08/05/2019		3,697,060

				14,372,571


	UNITED KINGDOM - 0.0%
	GBP
	1,026,066	Henson No. 4, Ltd. Term Loan Facility B (c)(d)		20,042
	1,038,898	Term Loan Facility C (c)(d)		19,881

				39,923

		Total Foreign Denominated or Domiciled Senior Loans (Cost $48,853,436)		33,151,631


Principal Amount ($)

	Collateralized Loan Obligations (g)(h) - 12.6%
	2,000,000	Acis CLO, Ltd. Series 2014-5A, Class D 4.67%, 11/01/2026 (n)		1,725,000
	2,000,000	Series 2014-4A, Class E 5.13%, 05/01/2026 (n)		1,400,000
	750,000	Series 2014-4A, Class D 3.43%, 05/01/2026 (n)		583,125


See accompanying Notes to Financial Statements.						15

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Floating Rate Opportunities Fund



Principal Amount ($)			Value ($)

	Collateralized Loan Obligations (continued)
	3,000,000	Series 2014-3A, Class D 3.45%, 02/01/2026 (n)		2,474,475
	3,000,000	Series 2013-1A, Class E 5.92%, 04/18/2024 (n)		2,287,950
	2,500,000	Allegro CLO, Ltd. Series 2014-1A, Class E 7.07%, 01/21/2027		1,954,250
	1,500,000	Anchorage Capital CLO 7, Ltd. Series 2015-7A, Class E1 5.40%, 10/15/2027		1,200,000
	1,000,000	Apidos CLO Series 2013-12A, Class F 5.22%, 04/15/2025		778,300
	1,000,000	Apidos CLO XXI Series 2015-21A, Class E 6.73%, 07/18/2027		736,500
	2,000,000	Arrowpoint CLO, Ltd. Series 2015-4A, Class E 7.22%, 04/18/2027		1,790,000
	3,200,000	Catamaran CLO, Ltd. Series 2012-1A, Class E 5.82%, 12/20/2023		2,746,384
	2,000,000	Cathedral Lake CLO, Ltd. Series 2015-2A, Class D 3.93%, 07/15/2027		1,735,000
	1,000,000	Cent CDO, Ltd. Series 2007-14A, Class D 1.62%, 04/15/2021		894,600
	2,000,000	CFIP CLO, Ltd. Series 2014-1A, Class E 5.07%, 04/13/2025		1,460,000
	1,000,000	CIFC Funding, Ltd. Series 2014-4A, Class F 5.92%, 10/17/2026		625,000
	3,000,000	Eastland CLO, Ltd. Series 2007-1A, Class C 1.83%, 05/01/2022 (n)		2,553,660
	1,500,000	Figueroa CLO, Ltd. Series 2014-1A, Class F 6.82%, 01/15/2027		1,044,480
	3,500,000	Flagship CLO, Ltd. Series 2014-8A, Class E 5.52%, 01/16/2026		2,380,000
	3,000,000	Series 2014-8A, Class D 4.02%, 01/16/2026		2,580,000
	2,000,000	Series 2013-7A, Class E 5.07%, 01/20/2026		1,330,000
	1,250,000	Greywolf CLO, Ltd. Series 2013-1A, Class E 5.37%, 04/15/2025		919,625
	1,500,000	Halcyon Loan Advisors Funding, Ltd. Series 2014-3A, Class E1 5.47%, 10/22/2025		892,500
	3,000,000	Harbourview CLO, Ltd. Series 7A, Class E 5.49%, 11/18/2026		2,190,000
	1,004,938	Hewett’s Island CDO, Ltd. Series 2007-1RA, Class E 7.11%, 11/12/2019 (n)		988,597



Principal Amount ($)			Value ($)
	401,789	Katonah IX CLO, Ltd. Series 2006-9A, Class B2L 3.82%, 01/25/2019		394,758
	5,000,000	KVK CLO, Ltd. Series 2015-1A, Class E 6.12%, 05/20/2027		3,850,000
	3,000,000	Series 2015-1A, Class D 4.37%, 05/20/2027		2,662,500
	2,000,000	Marea CLO, Ltd. Series 2012-1A, Class ER 6.07%, 10/15/2023		1,814,600
	2,000,000	Marlborough Street CLO, Ltd. Series 2007-1A, Class E 3.97%, 04/18/2019		1,920,000
	3,000,000	Newmark Capital Funding CLO, Ltd. Series 2013-1A, Class E 5.07%, 06/02/2025		2,190,000
	1,000,000	OZLM XII, Ltd. Series 2015-12A, Class D 5.72%, 04/30/2027		784,100
	1,525,000	Series 2015-12A, Class C 4.02%, 04/30/2027		1,371,890
	1,000,000	Saranac CLO, Ltd. Series 2014-3A, Class E 5.74%, 06/22/2025		692,500
	1,800,000	Silver Spring CLO, Ltd. Series 2014-1A, Class F 5.52%, 10/15/2026		1,012,284
	1,000,000	Sound Harbor Loan Fund, Ltd. Series 2014-1A, Class D 7.19%, 10/30/2026		821,600
	2,500,000	Series 2014-1A, Class C 4.95%, 10/30/2026		2,298,750
	1,397,789	Stratford CLO, Ltd. Series 2007-1A, Class E 4.33%, 11/01/2021 (n)		1,254,586
	5,500,000	THL Credit Wind River CLO, Ltd. Series 2014-2A, Class E 5.57%, 07/15/2026		4,350,500
	5,000,000	Series 2014-2A, Class D 4.22%, 07/15/2026		4,535,000
	3,000,000	West CLO, Ltd. Series 2014-2A, Class D 5.37%, 01/16/2027		2,205,000
	1,990,069	Westchester CLO, Ltd. Series 2007-1A, Class E 4.63%, 08/01/2022 (n)		1,796,595
	2,000,000	Series 2007-1A, Class D 2.68%, 08/01/2022 (n)		1,823,200
	2,000,000	Zais CLO, Ltd. Series 2014-2A, Class D 5.77%, 07/25/2026		1,540,800

		Total Collateralized Loan Obligations (Cost $85,357,250)		74,588,109


	Corporate Bonds & Notes - 7.5%

	CHEMICALS - 1.6%
	9,982,000	Momentive Performance Materials, Inc. 3.88%, 10/24/2021		6,937,490
	5,447,500	4.69%, 04/24/2022		2,723,750

				9,661,240


16						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Floating Rate Opportunities Fund



Principal Amount ($)			Value ($)

	Corporate Bonds & Notes (continued)

	ENERGY - 0.1%
	5,788,000	Arch Coal, Inc. 7.00%, 06/15/2019		57,880
	3,000,000	Venoco, Inc. 8.88%, 02/15/2019		465,000

				522,880


	GAMING & LEISURE - 0.7%
	5,000,000	Caesars Entertainment Operating Co., Inc. (c)		3,775,000


	HEALTHCARE - 0.9%
	7,750,000	Crimson Merger Sub, Inc. 6.63%, 05/15/2022 (g)		5,328,125


	INFORMATION TECHNOLOGY - 0.3%
	4,571,000	Avaya, Inc. 10.50%, 03/01/2021 (g)		1,576,995


	SERVICE - 1.2%
	10,000,000	Cenveo Corp. 6.00%, 08/01/2019 (g)		7,100,000


	TELECOMMUNICATIONS - 0.3%
	6,630,650	iHeartCommunications, Inc., PIK 14.00%, 02/01/2021		1,840,006


	UTILITY - 2.4%
	3,502,470	Entegra TC LLC, PIK 10.00%, 10/03/2017 (g)(h)		3,511,226
	15,600,000	Ocean Rig UDW, Inc. 7.25%, 04/01/2019 (g)(i)		6,786,000
	20,000,000	Texas Competitive Electric Holdings Co. LLC (c)		1,400,000
	8,000,000	Texas Competitive Electric Holdings Co. LLC (c)(g)		2,680,000

				14,377,226

		Total Corporate Bonds & Notes (Cost $78,730,018)		44,181,472


Shares

	Claims (j) - 0.0%

	TELECOMMUNICATIONS - 0.0%
	3,414,269	Wind Telecomunicazione SpA Trade Claim Facility 3692		192,053

		Total Claims (Cost $1,673,366)		192,053


	Common Stocks (k) - 10.2%

	ENERGY - 0.0%
	1,118,286	Value Creation, Inc.		—


	GAMING & LEISURE - 0.0%
	44	LLV Holdco LLC - Litigation Trust Units (d)(e)		—
	34,512	LLV Holdco LLC - Series A, Membership Interest (d)(e)		—



Shares			Value ($)

	GAMING & LEISURE (continued)
	436	LLV Holdco LLC - Series B, Membership Interest (d)(e)		—

				—


	HEALTHCARE - 0.0%
	207,031	CCS Medical, Inc. (d)(e)		15,734


	HOUSING - 0.9%
	1,648,350	CCD Equity Partners LLC (d)		5,109,885
	70,480	Las Vegas Land Holdings LLC (d)(e)		4,405
	8	Nevada Land Group LLC (d)(e)		—

				5,114,290


	MEDIA & TELECOMMUNICATIONS - 8.9%
	876,784	Media General, Inc. (i)		14,160,062
	501,736	Metro-Goldwyn-Mayer, Inc., Class A (f)		38,602,313

				52,762,375


	REAL ESTATE - 0.0%
	923,094	Allenby (d)(e)		1
	6,329,267	Claymore (d)(e)		6

				7


	TRANSPORTATION - 0.0%
	2,023	JHT Holdings, Inc. (d)		8,396


	UTILITY - 0.4%
	10,378	Entegra TC LLC, Class A		2,490,720
	286,159	Entegra TC LLC, Class B		1,001

				2,491,721

		Total Common Stocks (Cost $328,988,967)		60,392,523


Units

	Warrants (d)(k) - 0.0%

	GAMING & LEISURE - 0.0%
	1,834	LLV Holdco LLC - Series C, Membership Interest, expires 07/15/15		—
	2,522	LLV Holdco LLC - Series D, Membership Interest, expires 07/15/15		—
	2,819	LLV Holdco LLC - Series E, Membership Interest, expires 07/15/15		—
	3,172	LLV Holdco LLC - Series F, Membership Interest, expires 07/15/15		—
	3,594	LLV Holdco LLC - Series G, Membership Interest, expires 07/15/15		—

				—

		Total Warrants (Cost $—)		—


Shares

	Registered Investment Companies (l) - 3.5%
	20,863,083	State Street Navigator Prime Securities Lending Portfolio		20,863,083

		Total Registered Investment Companies (Cost $20,863,083)		20,863,083


See accompanying Notes to Financial Statements.						17

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Floating Rate Opportunities Fund



Shares			Value ($)

	Cash Equivalents - 1.2%
	6,907,804	State Street Institutional Liquid Reserves Fund		6,907,804

		Total Cash Equivalents (Cost $6,907,804)		6,907,804

	Total Investments - 107.3%			634,209,407

	(Cost $1,134,754,979)

Principal Amount

	Securities Sold Short (m) - (0.7)%

	Foreign Corporate Bonds (g) - (0.7)%

	CANADA - (0.7)%
	USD
	(4,000,000)	Concordia Healthcare Corp. 9.50%, 10/21/2022		(3,960,000	)

		Total Foreign Corporate Bonds (Proceeds $3,829,637)		(3,960,000	)

		Total Securities Sold Short (Proceeds $3,829,637)		(3,960,000	)

	Other Assets & Liabilities, Net - (6.6)%			(39,115,177	)

	Net Assets - 100.0%			591,134,230

(a)

(b)	All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.

(c)	The issuer is, or is in danger of being, in default of its payment obligation. Income is not being accrued.

(d)

Represents fair value as determined by the Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate value of $39,672,269, or 6.7% of net assets, were fair valued under the Fund’s valuation procedures as of December 31, 2015.

(e)	Affiliated issuer. Assets with a total aggregate market value of $30,201,842, or 5.1% of net assets, were affiliated with the Fund as of December 31, 2015.

(f)

Restricted Securities. These securities are not registered and may not be sold to the public. There are legal and/or contractual restrictions on resale. The Fund does not have the right to demand that such securities be registered. The values of these securities are determined by valuations provided by pricing services, brokers, dealers, market makers, or in good faith under the procedures established by the Fund’s Board of Trustees.

(g)	Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At December 31, 2015, these securities amounted to $97,610,455 or 16.5% of net assets.

(h)	Variable or floating rate security. The interest rate shown reflects the rate in effect December 31, 2015.

(i)	Securities (or a portion of securities) on loan. As of December 31, 2015, the market value of securities loaned was $21,066,138. The loaned securities were secured with cash collateral of $20,863,083. Collateral is calculated based on prior day’s prices. See Note 4.

(j)	These positions represent claims that have been filed with the United States Bankruptcy Court Southern District of New York against Lehman Commercial Paper, Inc. UK Branch.

(k)	Non-income producing security.

(l)	Represents investments of cash collateral received in connection with securities lending.

(m)	As of December 31, 2015, $13,169,662 in cash was segregated or on deposit with the brokers to cover investments sold short and is included in “Other Assets & Liabilities, Net.”

(n)	Securities of collateralized loan obligations where an affiliate of the Investment Adviser serves as collateral manager.


Currency Abbreviations:
EUR		Euro Currency
GBP		British Pound
USD		United States Dollar


Glossary:
CDO		Collateralized Debt Obligation
CLO		Collateralized Loan Obligation
PIK		Payment-in-Kind


Foreign Denominated or Domiciled Senior Loans and Foreign Corporate Bonds Industry Concentration Table: (% of Net Assets)
Energy	3.0	%
Retail	1.4	%
Financial	0.8	%
Consumer Durables	0.0	%¹
Healthcare	(0.3	%)

Total	4.9	%

¹	Less than 0.5%.

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

Remaining Contractual Maturity of the Agreements


	Overnight and Continuous		Total
Securities Lending Transactions¹
Corporate Bonds & Notes	$	13,809,348	$	13,809,348
Common Stock		7,053,735		7,053,735
Total Borrowings	$	20,863,083	$	20,863,083
Gross amount of recognized liabilities for securities lending transactions			$	20,863,083

¹	Amounts represent the payable for cash collateral received on securities on loan. This will generally be in “Overnight and Continuous” column as the securities are typically callable on demand.


18						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited)


As of December 31, 2015		Highland Opportunistic Credit Fund



Principal Amount ($)			Value ($)

	U.S. Senior Loans (a) - 50.5%

	ENERGY - 7.9%
	956,890	Azure Midstream Energy LLC Term Loan B 7.50%, 11/15/2018		569,349
	3,000,000	Chief Exploration & Development LLC Second Lien Term Loan 7.50%, 05/12/2021		2,050,005
	8,024,889	Fieldwood Energy LLC Second Lien Term Loan 8.38%, 09/30/2020		1,279,970
	394,972	Seadrill Partners Finco LLC Initial Term Loan 02/21/2021 (b)		166,546

				4,065,870


	HEALTHCARE - 2.1%
	1,116,796	Surgery Center Holdings, Inc. Second Lien Term Loan 8.50%, 11/03/2021		1,060,956


	HOUSING - 1.6%
	812,586	Builders FirstSource, Inc. Term Loan B 6.00%, 07/31/2022		805,476


	INFORMATION TECHNOLOGY - 4.2%
	1,801,305	Avaya, Inc. Term Loan B-7 05/29/2020 (b)		1,263,913
	977,481	Scientific Games International, Inc. Term Loan B-2 6.00%, 10/01/2021		894,219

				2,158,132


	MEDIA & TELECOMMUNICATIONS - 7.1%
	1,374,970	Getty Images, Inc. Initial Term Loan 4.75%, 10/18/2019		873,106
	4,000,000	iHeartCommunications, Inc. Tranche D Term Loan 7.17%, 01/30/2019		2,814,300

				3,687,406


	RETAIL - 4.1%
	2,916,151	Toys ‘R’ Us-Delaware, Inc. Term Loan B-4 9.75%, 04/24/2020		2,121,514


	SERVICE - 5.0%
	3,480,285	Weight Watchers International, Inc. Tranche B-2 Initial Term Loan 4.00%, 04/02/2020		2,604,402


	TELECOMMUNICATIONS - 1.2%
	639,942	TerreStar Corp. Term Loan A 11.00%, 02/27/2020		637,382


	TRANSPORTATION - 1.9%
	1,000,000	Quality Distribution, Inc. Second Lien Term Loan 9.50%, 07/20/2023		952,500



Principal Amount ($)			Value ($)

	UTILITY - 15.4%
	3,242,162	Entegra TC LLC Third Lien Term Loan 9.25%, 10/02/2020		3,209,740
	15,190,310	Texas Competitive Electric Holdings Co. LLC Extended Term Loan (f)		4,762,163


				7,971,903

		Total U.S. Senior Loans (Cost $38,114,840)		26,065,541


Principal Amount

	Foreign Denominated or Domiciled
	Senior Loans (a) - 7.0%

	LUXEMBOURG - 6.2%
	USD
	2,977,387	Evergreen Skills Lux S.a.r.l. First Lien Initial Term Loan 5.75%, 04/28/2021		2,337,249
	1,000,000	Second Lien Initial Term Loan 9.25%, 04/28/2022		667,500
	181,152	Travelport Finance S.a.r.l. Initial Term Loan B 5.75%, 09/02/2021		177,727

				3,182,476


	MARSHALL ISLANDS - 0.8%
	USD
	1,009,289	Drillships Financing Holding, Inc. Term Loan B-1 6.00%, 03/31/2021		410,024

		Total Foreign Denominated or Domiciled Senior Loans (Cost $4,882,053)		3,592,500


Principal Amount ($)

	Collateralized Loan Obligations (c)(d) - 24.1%
	1,500,000	A Voce CLO, Ltd. Series 2014-1A, Class D 5.12%, 07/15/2026		1,075,965
	500,000	Avery Point VI CLO, Ltd. Series 2015-6A, Class F 7.08%, 08/05/2027		362,500
	1,750,000	Betony CLO, Ltd. Series 2015-1A, Class E 5.67%, 04/15/2027		1,347,500
	1,000,000	Highland Park CDO, Ltd. Series 2006-1A, Class A2 0.79%, 11/25/2051 (k)		700,000
	1,600,000	KVK CLO, Ltd. Series 2015-1A, Class E 6.12%, 05/20/2027		1,232,000
	2,500,000	Limerock CLO II, Ltd. Series 2014-2A, Class E 4.82%, 04/18/2026		2,002,539
	1,000,000	Marea CLO, Ltd. Series 2012-1A, Class ER 6.07%, 10/15/2023		907,300


See accompanying Notes to Financial Statements.						19

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Opportunistic Credit Fund



Principal Amount ($)			Value ($)

	Collateralized Loan Obligations (continued)
	1,000,000	Race Point VIII CLO, Ltd. Series 2013-8A, Class E 5.22%, 02/20/2025		876,800
	1,000,000	Recette CLO LLC Series 2015-1A, Class F 7.86%, 10/20/2027		776,000
	2,000,000	Saranac CLO, Ltd. Series 2014-3A, Class E 5.74%, 06/22/2025		1,385,000
	1,990,069	Westchester CLO, Ltd. Series 2007-1A, Class E 4.63%, 08/01/2022 (k)		1,796,595

		Total Collateralized Loan Obligations (Cost $14,051,120)		12,462,199


	Corporate Bonds & Notes - 28.8%

	CHEMICALS - 6.3%
	6,500,000	Momentive Performance Materials, Inc. 4.69%, 04/24/2022		3,250,000


	ENERGY - 0.0%
	464	American Energy-Permian Basin LLC 7.38%, 11/01/2021 (c)		183


	HEALTHCARE EQUIPMENT & SERVICES - 4.0%
	3,000,000	Crimson Merger Sub, Inc. 6.63%, 05/15/2022 (c)		2,062,500


	RETAIL - 3.3%
	1,999,700	Guitar Center, Inc. 6.50%, 04/15/2019 (c)(e)		1,689,746


	SOFTWARE & SERVICES - 4.1%
	2,945,000	Scientific Games International, Inc. 10.00%, 12/01/2022 (e)		2,105,675


	TELECOMMUNICATION SERVICES - 2.7%
	5,060,200	iHeartCommunications, Inc., PIK 14.00%, 02/01/2021		1,404,206


	UTILITIES - 8.4%
	6,499,000	Ocean Rig UDW, Inc. 7.25%, 04/01/2019 (c)(e)		2,827,065
	3,506,000	Texas Competitive Electric Holdings Co. LLC (f)		245,420
	467,000	Texas Competitive Electric Holdings Co. LLC (f)		32,690
	15,307,000	Texas Competitive Electric Holdings Co. LLC (f)		1,071,490
	3,000,000	Texas Competitive Electric Holdings Co. LLC (f)		195,000

				4,371,665

		Total Corporate Bonds & Notes (Cost $26,435,571)		14,883,975



Principal Amount			Value ($)

	Foreign Corporate Bonds & Notes (c)(f) - 0.0%

	NETHERLANDS - 0.0%
	USD
	220,068	Celtic Pharma Phinco BV		2,201
	97,918	Celtic Pharma Phinco BV		—

		Total Foreign Corporate Bonds & Notes (Cost $212,561)		2,201


Principal Amount ($)

	Sovereign Bonds (f) - 0.0%

	SOVEREIGN BONDS - 0.0%
	4	Argentine Republic Government International Bond		5
	4	Argentine Republic Government International Bond		4

				9

		Total Sovereign Bonds (Cost $7)		9


Shares

	Common Stocks - 16.2%

	CAPITAL GOODS - 0.7%
	8,200	Nortek, Inc. (e)(g)		357,684


	CHEMICALS - 1.8%
	90,492	MPM Holdings, Inc. (g)		927,543


	COMMERCIAL & PROFESSIONAL SERVICES - 0.0%
	24,889	Pendrell Corp. (e)(g)		12,472


	ENERGY - 3.4%
	391,913	Overseas Shipholding Group, Inc., Class A (c)(g)		1,109,114
	8,750	SemGroup Corp., Class A (e)		252,525
	7,050	Targa Resources Corp.		190,773
	7,150	Williams Cos., Inc. (The) (e)		183,755

				1,736,167


	MATERIALS - 4.0%
	6,632	Euramax International, Inc. (g)(h)		2,075,293


	MEDIA - 0.9%
	6,363	Metro-Goldwyn-Mayer, Inc., Class A (g)(i)		489,553


	TELECOMMUNICATION SERVICES - 3.0%
	5,082	TerreStar Corporation (g)(i)		1,532,528


	UTILITIES - 2.4%
	3,322	Entegra TC LLC, Class A (g)		797,280
	38,625	NRG Energy, Inc. (e)		454,616

				1,251,896

		Total Common Stocks (Cost $11,778,677)		8,383,136


20						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland Opportunistic Credit Fund



Shares			Value ($)

	Preferred Stocks (c)(k) - 1.8%

	FINANCIAL - 1.8%
	1,500	Grayson CLO, Ltd.		520,275
	1,000	Westchester CLO, Ltd.		412,500

				932,775
				��
		Total Preferred Stocks (Cost $1,443,578)		932,775


	Master Limited Partnerships - 2.8%

	ENERGY - 2.8%
	43,500	Boardwalk Pipeline Partners LP		564,630
	21,700	Energy Transfer Equity LP		298,158
	21,500	Enterprise Products Partners LP		549,970

				1,412,758


	HEALTHCARE EQUIPMENT & SERVICES - 0.0%
	141,000	Genesys Ventures IA, LP		9,221

		Total Master Limited Partnerships (Cost $2,120,525)		1,421,979


Units

	Warrants (g)(h) - 0.0%

	ENERGY - 0.0%
	180,000	Kinder Morgan, Inc., expires 05/25/2017		10,818

		Total Warrants (Cost $695,412)		10,818


Shares

	Registered Investment Companies (j) - 9.5%
	4,876,554	State Street Navigator Prime Securities Lending Portfolio		4,876,554

		Total Registered Investment Companies (Cost $4,876,554)		4,876,554

	Total Investments - 140.7%			72,631,687

	(Cost $104,610,898)
	Other Assets & Liabilities, Net - (40.7)%			(21,000,659	)

	Net Assets applicable to Common Shareholders - 100.0%			51,631,028

(a)

prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

(b)	All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.

(c)	Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At December 31, 2015, these securities amounted to $21,085,783 or 40.8% of net assets.

(d)	Variable or floating rate security. The interest rate shown reflects the rate in effect December 31, 2015.

(e)	Securities (or a portion of securities) on loan. As of December 31, 2015, the market value of securities loaned was $4,799,422. The loaned securities were secured with cash collateral of $4,876,554. Collateral is calculated based on prior day’s prices. See Note 4.

(f)	The issuer is, or is in danger of being, in default of its payment obligation. Income is not being accrued.

(g)	Non-income producing security.

(h)

Represents fair value as determined by the Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate value of $2,086,111, or 4.0% of net assets, were fair valued under the Fund’s valuation procedures as of December 31, 2015.

(i)

(j)	Represents investments of cash collateral received in connection with securities lending.

(k)	Securities of collateralized loan obligations where an affiliate of the Investment Adviser serves as collateral manager.

Currency Abbreviations:


USD		United States Dollar

Glossary:


CDO		Collateralized Debt Obligation
CLO		Collateralized Loan Obligation
PIK		Payment-in-Kind

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

Remaining Contractual Maturity of the Agreements


	Overnight and Continuous		Total
Securities Lending Transactions¹
Corporate Bonds & Notes	$	1,101,992	$	1,101,992
Common Stock		3,774,562		3,774,562
Total Borrowings	$	4,876,554	$	4,876,554
Gross amount of recognized liabilities for securities lending transactions			$	4,876,554

¹	Amounts represent the payable for cash collateral received on securities on loan. This will generally be in “Overnight and Continuous” column as the securities are typically callable on demand.


See accompanying Notes to Financial Statements.						21

STATEMENTS OF ASSETS AND LIABILITIES


As of December 31, 2015 (unaudited)		Highland Funds I



	Highland Long/Short Equity Fund ($)		Highland Long/Short Healthcare Fund ($)		Highland Floating Rate Opportunities Fund ($)		Highland Opportunistic Credit Fund ($)
Assets
Unaffiliated investments, at value(a)		756,066,830		626,412,088		597,099,761		72,631,687
Affiliated investments, at value (Note 10)		—		9,258,780		30,201,842		—

Total Investments, at value		756,066,830		635,670,868		627,301,603		72,631,687
Cash equivalents		153,944,508		6,923,883		6,907,804		—
Cash		220,919		18,817		—		—
Restricted Cash — Securities Sold Short (Note 2)		213,842,531		356,786,895		13,169,662		1,829,709
Foreign currency		—		—		—		37
Swaps, at value		1,103,362		—		—		—
Receivable for:
Investments sold		52,814,672		22,371,736		33,541,847		6,766,417
Dividends and interest		582,486		584,963		6,644,236		1,615,699
Fund shares sold		21,285,668		4,750,700		2,061,845		153,439
Prepaid expenses and other assets		121,585		438,787		414,641		35,733

Total assets		1,199,982,561		1,027,546,649		690,041,638		83,032,721


Liabilities
Due to custodian		—		—		—		3,992,020
Notes payable (Note 6)		—		—		46,500,000		18,000,000
Securities sold short, at value (Notes 2 and 9)		216,794,574		300,330,250		3,960,000		—
Written options contracts, at value (Note 3)		61,000		2,863,650		—		—
Payable for:
Upon receipt of securities loaned (Note 4)		33,116,569		36,667,006		20,863,083		4,876,554
Distributions to shareholders		130,105		216,304		333,797		29,713
Investments purchased		53,160,177		61,489,372		20,881,333		3,902,738
Fund shares redeemed		6,961,543		25,228,054		5,522,955		530,202
Investment advisory and administration fees (Note 7)		897,620		677,950		269,400		24,193
Trustees’ fees		23,014		13,134		20,687		852
Distribution and shareholder service fees (Note 7)		9,889		14,952		29,623		201
Transfer agent fees		472,067		86,419		177,684		1,867
Swap payments		97,099		—		—		—
Interest expense (Note 6)		—		—		—		29,304
Commitment fee payable (Note 6)		12,619		6,890		195,743		910
Accrued expenses and other liabilities		195,108		85,820		153,103		13,139

Total liabilities		311,931,384		427,679,801		98,907,408		31,401,693

Net Assets		888,051,177		599,866,848		591,134,230		51,631,028

Unaffiliated investments, at cost		772,320,344		638,072,434		793,893,673		104,610,898
Affiliated investments, at cost (Note 10)		—		9,199,556		333,953,502		—
Cash equivalents, at cost (Note 2)		153,944,508		6,923,883		6,907,804		—
Foreign currency, at cost		—		—		—		36
Proceeds from securities sold short		221,371,458		286,713,264		3,829,637		—
Written option premiums received		228,853		1,237,906		—		—
^(a) Includes market value of securities on loan:		32,269,623		35,276,071		21,066,138		4,799,422


22						See accompanying Notes to Financial Statements.

STATEMENTS OF ASSETS AND LIABILITIES (continued)


As of December 31, 2015 (unaudited)		Highland Funds I



	Highland Long/Short Equity Fund ($)			Highland Long/Short Healthcare Fund ($)			Highland Floating Rate Opportunities Fund ($)			Highland Opportunistic Credit Fund ($)
Net Assets Consist of:
Par value (Note 1)		78,063			44,808			86,021			14,363
Paid-in capital		890,483,941			732,500,351			1,958,930,405			87,216,017
Accumulated net investment loss		(6,216,089	)		(6,875,265	)		(20,491,458	)		(790,185	)
Accumulated net realized gain (loss) from investments, securities sold short, futures contracts and foreign currency transactions		14,111,167			(98,966,537	)		(846,714,803	)		(2,827,624	)
Net unrealized appreciation (depreciation) on investments, securities sold short and foreign currency translations		(10,405,905	)		(26,836,509	)		(500,675,935	)		(31,981,543	)

Net Assets		888,051,177			599,866,848			591,134,230			51,631,028


Class A:
Net assets		75,596,363			131,974,623			170,269,652			4,783,255
Shares outstanding ($0.001 par value; unlimited shares authorized)		6,805,014			9,969,299			24,769,811			1,323,387
Net asset value per share		11.11	^(a)		13.24	^(a)		6.87	^(a)		3.74	^(a)
Max offering price per share		11.76	^(b)		14.01	^(b)		7.12	^(b)		3.88	^(b)

Class C:
Net assets		63,521,090			85,613,643			245,152,705			177,794
Shares outstanding ($0.001 par value; unlimited shares authorized)		6,083,645			6,812,066			35,675,315			48,938
Net asset value and offering price per share		10.44	^(a)		12.57	^(a)		6.87	^(a)		3.63	^(a)

Class Z
Net assets		748,933,724			382,278,582			175,711,873			46,669,979
Shares outstanding ($0.001 par value; unlimited authorization)		65,174,305			28,026,376			25,575,642			12,990,311
Net asset value, offering and redemption price per share		11.49			13.64			6.87			3.59

^(a)	Redemption price per share is equal to net asset value per share less any applicable contingent deferred sales charge (“CDSC”).

^(b)	On sales of $1,000,000 or more, there is no sales charge and therefore the offering will be lower.


See accompanying Notes to Financial Statements.						23

STATEMENTS OF OPERATIONS


For the Six Months Ended December 31, 2015 (unaudited)		Highland Funds I



	Highland Long/Short Equity Fund ($)			Highland Long/Short Healthcare Fund ($)			Highland Floating Rate Opportunities Fund ($)			Highland Opportunistic Credit Fund ($)
Investment Income
Income:
Dividends		3,078,367			1,701,329			10,318			331,503
Less: Foreign taxes withheld		(14,175	)		(820	)		—			—
Securities lending income (Note 4)		66,706			364,511			36,389			14,735
Interest from unaffiliated issuers		—			322,682			23,388,309			4,101,029
Other income		797			—			46,702			2,558

Total Income		3,131,695			2,387,702			23,481,718			4,449,825

Expenses:
Investment advisory (Note 7)		10,061,156			3,951,384			2,508,484			436,113
Administration fees (Note 7)		894,325			790,277			771,841			—
Distribution and shareholder service fees (Note 7):
Class A		136,930			330,602			330,118			11,410
Class C		310,479			477,052			1,207,150			636
Transfer agent fees		551,898			267,393			366,589			5,849
Trustees fees (Note 7)		47,921			44,954			39,949			4,883
Accounting services fees		120,657			107,045			104,090			21,899
Audit fees		68,699			52,728			62,868			11,923
Legal fees (Note 7)		175,966			83,869			361,674			21,717
Registration fees		35,707			46,198			38,376			24,884
Insurance		79,952			26,251			82,170			2,159
Reports to shareholders		59,652			31,979			60,441			13,185
Interest expense (Note 6)		26,673			—			334,566			97,628
Commitment fees-credit agreement (Note 6)		23,296			19,779			229,953			2,381
Dividends and fees on securities sold short (Note 2)		2,298,569			2,935,727			59,959			922
Other		45,435			37,418			56,347			10,421

Total operating expenses before waiver and reimbursement		14,937,315			9,202,656			6,614,575			666,010
Expenses waived or borne by the adviser and administrator		(5,589,531	)		—			(1,002,899	)		(213,080	)

Net operating expenses		9,347,784			9,202,656			5,611,676			452,930

Net investment income (loss)		(6,216,089	)		(6,814,954	)		17,870,042			3,996,895


Net Realized and Unrealized Gain (Loss) on Investments
Realized gain (loss) on:
Investments from unaffiliated issuers		(1,341,060	)		(92,150,072	)		13,213,692			140,511
Investments from affiliated issuers (Note 10)		—			(506,698	)		(3,129,411	)		—
Securities sold short (Note 2)		14,563,344			11,308,811			1,515,693			299,395
Swap contracts (Note 3)		(232,036	)		—			—			—
Written options contracts (Note 3)		8,727,132			(1,348,923	)		—			—
Futures contracts (Note 3)		2,315,184			—			—			—
Foreign currency related transactions		(125,997	)		(35,028	)		2,731			(1,483	)
Change in unrealized appreciation (depreciation) on:
Investments		(48,489,471	)		(32,939,690	)		(104,047,542	)		(27,106,203	)
Securities sold short (Note 2)		(847,489	)		(8,706,360	)		(247,245	)		—
Swaps (Note 3)		1,103,362			—			—			—
Written options (Note 3)		(373,754	)		(3,603,782	)		—			—
Futures contracts (Note 3)		(270,207	)		—			—			—
Foreign currency related translations		14,388			7,422			—			(332	)

Net realized and unrealized loss on investments		(24,956,604	)		(127,974,320	)		(92,692,082	)		(26,668,112	)

Total decrease in net assets resulting from operations		(31,172,693	)		(134,789,274	)		(74,822,040	)		(22,671,217	)


24						See accompanying Notes to Financial Statements.

STATEMENTS OF CHANGES IN NET ASSETS


		Highland Funds I



	Highland Long/Short Equity Fund

	Six Months Ended December 31, 2015 (unaudited) ($)			Year Ended June 30, 2015 ($)
Increase (Decrease) in Net Assets
Operations:
Net investment income (loss)		(6,216,089	)		(12,750,421	)
Net realized gain (loss) on investments, securities sold short, futures contracts and foreign currency transactions		23,906,567			62,343,276
Net increase (decrease) in unrealized appreciation (depreciation) on investments, securities sold short, futures contracts and foreign currency transactions		(48,863,171	)		(26,683,821	)

Net increase (decrease) from operations		(31,172,693	)		22,909,034

Distributions to shareholders from:
Net investment income
Class A		—			—
Class C		—			—
Class Z		—			—
Net realized gains
Class A		(2,927,543	)		(5,853,187	)
Class C		(2,622,346	)		(2,248,689	)
Class Z		(28,703,475	)		(29,585,095	)

Total distributions		(34,253,364	)		(37,686,971	)

Share transactions:
Proceeds from sale of shares
Class A		21,510,106			31,667,469
Class C		22,274,690			15,255,722
Class Z		229,270,752			253,530,788
Value of distributions reinvested
Class A		2,196,732			5,528,013
Class C		1,835,375			1,652,664
Class Z		19,307,282			25,625,493
Cost of shares redeemed
Class A		(19,176,394	)		(151,059,357	)
Class C		(11,115,580	)		(15,641,639	)
Class Z		(169,327,528	)		(313,132,817	)

Net increase (decrease) from shares transactions		96,775,435			(146,573,664	)

Total increase (decrease) in net assets		31,349,378			(161,351,601	)

Net Assets
Beginning of period		856,701,799			1,018,053,400

End of period		888,051,177			856,701,799

Accumulated net investment income (loss)		(6,216,089	)		—


See accompanying Notes to Financial Statements.						25

STATEMENTS OF CHANGES IN NET ASSETS (continued)


		Highland Funds I



	Highland Long/Short Equity Fund

	Six Months Ended December 31, 2015 (unaudited) $			Year Ended June 30, 2015 $
CAPITAL STOCK ACTIVITY - SHARES

Class A:
Shares sold		1,834,978			2,610,442
Issued for distribution reinvested		193,374			476,142
Shares redeemed		(1,636,913	)		(12,732,161	)

Net increase (decrease) in fund shares		391,439			(9,645,577	)


Class C:
Shares sold		2,020,870			1,332,805
Issued for distribution reinvested		171,051			149,970
Shares redeemed		(1,024,068	)		(1,371,263	)

Net increase (decrease) in fund shares		1,168,653			111,512


Class Z:
Shares sold		18,964,356			20,571,637
Issued for distribution reinvested		1,643,173			2,144,393
Shares redeemed		(14,073,536	)		(25,376,396	)

Net increase/(decrease)		6,533,993			(2,660,366	)


26						See accompanying Notes to Financial Statements.

STATEMENTS OF CHANGES IN NET ASSETS (continued)


		Highland Funds I



	Highland Long/Short Healthcare Fund

	Six Months Ended December 31, 2015 (unaudited) ($)			Year Ended June 30, 2015 ($)
Increase (Decrease) in Net Assets
Operations:
Net investment income (loss)		(6,814,954	)		(9,401,057	)
Net realized gain (loss) on investments, securities sold short, futures contracts and foreign currency transactions		(82,731,910	)		48,028,566
Net increase (decrease) in unrealized appreciation (depreciation) on investments, securities sold short, futures contracts and foreign currency transactions		(45,242,410	)		13,485,497

Net increase (decrease) from operations		(134,789,274	)		52,113,006

Distributions to shareholders from:
Net investment income
Class A		—			—
Class C		—			—
Class Z		—			—
Net realized gains
Class A		(6,880,166	)		(6,673,843	)
Class C		(4,004,462	)		(2,470,677	)
Class Z		(18,542,641	)		(6,599,458	)

Total distributions		(29,427,269	)		(15,743,978	)

Share transactions:
Proceeds from sale of shares
Class A		84,660,219			176,502,361
Class C		38,750,612			43,110,193
Class Z		250,943,965			425,849,305
Value of distributions reinvested
Class A		6,645,805			6,350,239
Class C		3,950,299			2,424,087
Class Z		16,022,635			5,013,629
Cost of shares redeemed
Class A		(100,466,636	)		(164,537,738	)
Class C		(20,511,636	)		(13,665,110	)
Class Z		(233,390,206	)		(114,138,271	)

Net increase (decrease) from shares transactions		46,605,057			366,908,695

Total increase (decrease) in net assets		(117,611,486	)		403,277,723

Net Assets
Beginning of period		717,478,334			314,200,611

End of period		599,866,848			717,478,334

Accumulated net investment income (loss)		(6,875,265	)		(60,311	)


See accompanying Notes to Financial Statements.						27

STATEMENTS OF CHANGES IN NET ASSETS (continued)


		Highland Funds I



	Highland Long/Short Healthcare Fund

	Six Months Ended December 31, 2015 (unaudited) $			Year Ended June 30, 2015 $
CAPITAL STOCK ACTIVITY - SHARES

Class A:
Shares sold		5,466,872			11,393,294
Issued for distribution reinvested		495,586			441,909
Shares redeemed		(7,058,378	)		(10,943,902	)

Net increase (decrease) in fund shares		(1,095,920	)		891,301


Class C:
Shares sold		2,609,030			2,866,647
Issued for distribution reinvested		310,071			176,169
Shares redeemed		(1,530,133	)		(926,880	)

Net increase (decrease) in fund shares		1,388,968			2,115,936


Class Z:
Shares sold		15,771,182			26,829,513
Issued for distribution reinvested		1,160,220			340,369
Shares redeemed		(16,151,410	)		(7,251,195	)

Net increase/(decrease)		779,992			19,918,687


28						See accompanying Notes to Financial Statements.

STATEMENTS OF CHANGES IN NET ASSETS (continued)


		Highland Funds I



	Highland Floating Rate Opportunities Fund

	Six Months Ended December 31, 2015 (unaudited) ($)			Year Ended June 30, 2015 ($)
Increase (Decrease) in Net Assets
Operations:
Net investment income (loss)		17,870,042			37,245,292
Net realized gain (loss) on investments, securities sold short, futures contracts and foreign currency transactions		11,602,705			(703,495	)
Net increase (decrease) in unrealized appreciation (depreciation) on investments, securities sold short, futures contracts and foreign currency transactions		(104,294,787	)		(46,159,348	)

Net increase (decrease) from operations		(74,822,040	)		(9,617,551	)

Distributions to shareholders from:
Net investment income
Class A		(4,740,998	)		(10,838,285	)
Class C		(6,444,536	)		(12,602,357	)
Class Z		(6,684,347	)		(13,964,486	)
Net realized gains
Class A		—			—
Class C		—			—
Class Z		—			—

Total distributions		(17,869,881	)		(37,405,128	)

Share transactions:
Proceeds from sale of shares
Class A		31,350,708			55,690,350
Class C		15,549,342			28,999,816
Class Z		46,376,553			235,401,939
Value of distributions reinvested
Class A		3,976,181			9,259,312
Class C		5,325,264			10,317,472
Class Z		6,363,903			12,990,466
Cost of shares redeemed
Class A		(42,133,009	)		(191,688,891	)
Class C		(47,911,247	)		(94,967,897	)
Class Z		(128,887,983	)		(289,002,440	)

Net increase (decrease) from shares transactions		(109,990,288	)		(222,999,873	)

Total increase (decrease) in net assets		(202,682,209	)		(270,022,552	)

Net Assets
Beginning of period		793,816,439			1,063,838,991

End of period		591,134,230			793,816,439

Accumulated net investment income (loss)		(20,491,458	)		(20,491,619	)


See accompanying Notes to Financial Statements.						29

STATEMENTS OF CHANGES IN NET ASSETS (continued)


		Highland Funds I



	Highland Floating Rate Opportunities Fund

	Six Months Ended December 31, 2015 (unaudited) $			Year Ended June 30, 2015 $
CAPITAL STOCK ACTIVITY - SHARES

Class A:
Shares sold		4,270,255			6,989,859
Issued for distribution reinvested		543,387			1,170,286
Shares redeemed		(5,758,763	)		(24,246,789	)

Net increase (decrease) in fund shares		(945,121	)		(16,086,644	)


Class C:
Shares sold		2,127,493			3,655,118
Issued for distribution reinvested		727,694			1,306,488
Shares redeemed		(6,604,236	)		(12,007,722	)

Net increase (decrease) in fund shares		(3,749,049	)		(7,046,116	)


Class Z:
Shares sold		6,291,374			29,662,556
Issued for distribution reinvested		868,505			1,645,504
Shares redeemed		(17,828,621	)		(36,566,001	)

Net increase/(decrease)		(10,668,742	)		(5,257,941	)


30						See accompanying Notes to Financial Statements.

STATEMENTS OF CHANGES IN NET ASSETS (continued)


		Highland Funds I



	Highland Opportunistic Credit Fund

	Six Months Ended December 31, 2015 (unaudited) ($)			Year Ended June 30, 2015 ($)
Increase (Decrease) in Net Assets
Operations:
Net investment income (loss)		3,996,895			2,303,346
Net realized gain (loss) on investments, securities sold short, futures contracts and foreign currency transactions		438,423			201,621
Net increase (decrease) in unrealized appreciation (depreciation) on investments, securities sold short, futures contracts and foreign currency transactions		(27,106,535	)		(4,981,055	)

Net increase (decrease) from operations		(22,671,217	)		(2,476,088	)

Distributions to shareholders from:
Net investment income
Class A		(370,207	)		(247,809	)
Class C		(7,087	)		(4,360	)
Class Z		(4,164,137	)		(2,306,100	)
Net realized gains
Class A		—			—
Class C		—			—
Class Z		—			—

Total distributions		(4,541,431	)		(2,558,269	)

Share transactions:
Proceeds from sale of shares
Class A		346,424			12,842,765
Class C		148,800			195,108
Class Z		5,699,561			75,900,453
Value of distributions reinvested
Class A		366,087			239,562
Class C		7,033			4,285
Class Z		3,884,303			2,169,391
Cost of shares redeemed
Class A		(1,283,055	)		(4,796,353	)
Class C		(83,585	)		(25,316	)
Class Z		(17,024,548	)		(9,016,402	)
Reorganization (Note 13)
Class Z		—			11,582,156

Net increase (decrease) from shares transactions		(7,938,980	)		89,095,649

Total increase (decrease) in net assets		(35,151,628	)		84,061,292

Net Assets
Beginning of period		86,782,656			2,721,364

End of period		51,631,028			86,782,656

Accumulated net investment income (loss)		(790,185	)		(245,649	)


See accompanying Notes to Financial Statements.						31

STATEMENTS OF CHANGES IN NET ASSETS (continued)


		Highland Funds I



	Highland Opportunistic Credit Fund

	Six Months Ended December 31, 2015 (unaudited) $			Year Ended June 30, 2015 $
CAPITAL STOCK ACTIVITY - SHARES

Class A:
Shares sold		77,982			2,294,798
Issued for distribution reinvested		85,825			44,057
Shares redeemed		(297,874	)		(881,401	)

Net increase (decrease) in fund shares		(134,067	)		1,457,454


Class C:
Shares sold		35,931			34,063
Issued for distribution reinvested		1,597			788
Shares redeemed		(18,803	)		(4,638	)

Net increase (decrease) in fund shares		18,725			30,213


Class Z:
Shares sold		1,287,602			15,699,757
Issued for distribution reinvested		919,465			399,849
Shares redeemed		(4,106,509	)		(1,648,031	)
Subscriptions from Reorganization (Note 13)		—			438,178

Net increase/(decrease)		(1,899,442	)		14,889,753


32						See accompanying Notes to Financial Statements.

STATEMENT OF CASH FLOWS


For the Six Months Ended December 31, 2015 (unaudited)		Highland Long/Short Equity Fund


	($)
Cash Flows Provided by (Used for) Operating Activities:
Net decrease in net assets resulting from operations		(31,172,693	)

Adjustments to Reconcile Net Investment Income to Net Cash Used for Operating Activities
Operating Activities:
Purchases of investment securities from unaffiliated issuers		(1,361,338,224	)
Proceeds from disposition investment securities from unaffiliated issues		1,334,863,060
Purchases of purchased options		(2,199,893	)
Purchases of short-term portfolio investments, net		(168,561,309	)
Purchases of securities sold short		(1,033,116,210	)
Proceeds of securities sold short		1,025,850,975
Decrease in restricted cash		1,278,416
Net premium received on open written options contracts		8,482,002
Net realized loss on Investments from unaffiliated issuers		1,341,060
Net realized gain on securities sold short, written options contracts and foreign currency transactions		(23,164,479	)
Net change in unrealized appreciation/ (depreciation) on investments, securities sold short, written options contracts and translation on assets and liabilities denominated in foreign currency		48,592,964
Increase in receivable for investments sold		(1,308,395	)
Decrease in receivable for dividends and interest		101,265
Increase in other assets		(68,316	)
Increase in payable upon receipt of securities on loan		14,616,801
Increase in payable for investments purchased		13,694,917
Increase in payable for swap payment		97,099
Decrease in payable for variation margin		(33,967	)
Increase in payables to related parties		60,316
Increase in payable for distribution and shareholder service fees		5,338
Increase in payable to transfer agent fees		172,535
Increase in payable for commitment fees		111
Decrease in accrued expenses and other liabilities		(193,336	)

Net cash flow used for operating activities		(171,999,963	)


Cash Flows Received from (Used In) Financing Activities:
Distributions paid in cash		(11,073,838	)
Payments on shares redeemed		(193,619,369	)
Proceeds from shares sold		254,199,769

Net cash flow received from (used in) financing activities		49,506,562

Effect of exchange rate changes on cash		(111,609	)

Net Decrease in Cash		(122,605,010	)


Cash and Foreign Currency/Due to Custodian:
Beginning of year		122,825,929

End of year		220,919


Supplemental disclosure of cash flow information:
Reinvestment of distributions		23,339,389

Cash paid during the year for interest		26,673

Cash paid during the year for commitment fees		19,890


See accompanying Notes to Financial Statements.						33

STATEMENT OF CASH FLOWS


For the Six Months Ended December 31, 2015 (unaudited)		Highland Long/Short Healthcare Fund


	($)
Cash Flows Provided by (Used for) Operating Activities:
Net decrease in net assets resulting from operations		(134,789,274	)

Adjustments to Reconcile Net Investment Income to Net Cash Used for Operating Activities
Operating Activities:
Purchases of investment securities from unaffiliated issuers		(2,584,268,149	)
Proceeds from disposition investment securities from unaffiliated issues		2,558,826,203
Purchases of investment securities from affiliated issuers		(8,359,776	)
Proceeds from disposition investment securities from affiliated issues		156,884
Proceeds of purchased options		297,856
Proceeds from sales of short-term portfolio investments, net		23,344,832
Purchases of securities sold short		(1,981,042,804	)
Proceeds of securities sold short		2,100,797,922
Increase in restricted cash		(237,846,290	)
Net accretion of discount		(56,093	)
Net premium received on open written options contracts		(2,310,936	)
Net realized loss on Investments from unaffiliated issuers		92,150,072
Net realized loss on Investments in affiliated issuers		506,698
Net realized gain on securities sold short, written options contracts and foreign currency transactions		(9,924,860	)
Net change in unrealized appreciation/ (depreciation) on investments, securities sold short, written options contracts and translation on assets and liabilities denominated in foreign currency		45,242,410
Decrease in receivable for investments sold		32,606,414
Increase in receivable for dividends and interest		(306,629	)
Increase in other assets		(279,508	)
Decrease in payable upon receipt of securities on loan		(30,268,715	)
Increase in payable for investments purchased		11,868,813
Decrease in payables to related parties		(2,397	)
Increase in payable for distribution and shareholder service fees		6,947
Decrease in payable to transfer agent fees		(24,163	)
Increase in payable for commitment fees		483
Decrease in accrued expenses and other liabilities		(78,784	)

Net cash flow used for operating activities		(123,752,844	)


Cash Flows Received from (Used In) Financing Activities:
Distributions paid in cash		(2,771,061	)
Payments on shares redeemed		(331,445,480	)
Proceeds from shares sold		381,314,273

Net cash flow received from (used in) financing activities		47,097,732

Effect of exchange rate changes on cash		(27,606	)

Net Decrease in Cash		(76,682,718	)


Cash and Foreign Currency/Due to Custodian:
Beginning of year		76,701,535

End of year		18,817


Supplemental disclosure of cash flow information:
Reinvestment of distributions		26,618,739

Cash paid during the year for commitment fees		20,262


34						See accompanying Notes to Financial Statements.

STATEMENT OF CASH FLOWS


For the Six Months Ended December 31, 2015 (unaudited)		Highland Floating Rate Opportunities Fund


	($)
Cash Flows Provided by (Used for) Operating Activities:
Net decrease in net assets resulting from operations		(74,822,040	)

Adjustments to Reconcile Net Investment Income to Net Cash Provided by Operating Activities
Operating Activities:
Purchases of investment securities from unaffiliated issuers		(87,414,011	)
Proceeds from disposition investment securities from unaffiliated issues		284,569,402
Purchases of investment securities from affiliated issuers		(5,452,278	)
Proceeds from sales of short-term portfolio investments, net		27,388,679
Purchases of securities sold short		(63,793,767	)
Proceeds of securities sold short		52,938,650
Decrease in restricted cash		22,104,134
Paydowns at cost		1,576,261
Net accretion of discount		(1,839,128	)
Net realized gain on Investments from unaffiliated issuers		(13,213,692	)
Net realized loss on Investments in affiliated issuers		3,129,411
Net realized gain on securities sold short, written options contracts and foreign currency transactions		(1,518,424	)
Net change in unrealized appreciation/ (depreciation) on investments, securities sold short, written options contracts and translation on assets and liabilities denominated in foreign currency		104,294,787
Increase in receivable for investments sold		(1,233,558	)
Decrease in receivable for dividends and interest		341,522
Increase in other assets		(52,403	)
Decrease in payable upon receipt of securities on loan		(34,296,483	)
Decrease in payable for investments purchased		(81,368,380	)
Increase in payables to related parties		167,883
Increase in payable for distribution and shareholder service fees		11,390
Decrease in payable to transfer agent fees		(27,422	)
Decrease in payable for commitment fees		(7,575	)
Decrease in accrued expenses and other liabilities		(173,064	)

Net cash flow provided by operating activities		131,309,894


Cash Flows Received from (Used In) Financing Activities:
Decrease in notes payable		(5,000,000	)
Distributions paid in cash		(2,248,667	)
Payments on shares redeemed		(216,883,326	)
Proceeds from shares sold		94,103,369

Net cash flow received from (used in) financing activities		(130,028,624	)

Effect of exchange rate changes on cash		2,731

Net Increase in Cash		1,284,001


Cash and Foreign Currency/Due to Custodian:
Beginning of year		(1,284,001	)

End of year		—


Supplemental disclosure of cash flow information:
Reinvestment of distributions		15,665,348

Cash paid during the year for interest		562,265

Cash paid during the year for commitment fees		(7,575	)


See accompanying Notes to Financial Statements.						35

STATEMENT OF CASH FLOWS


For the Six Months Ended December 31, 2015 (unaudited)		Highland Opportunistic Credit Fund


	($)
Cash Flows Provided by (Used for) Operating Activities:
Net decrease in net assets resulting from operations		(22,671,217	)

Adjustments to Reconcile Net Investment Income to Net Cash Used for Operating Activities
Operating Activities:
Purchases of investment securities from unaffiliated issuers		(32,877,680	)
Proceeds from disposition investment securities from unaffiliated issues		44,269,547
Proceeds from sales of short-term portfolio investments, net		5,734,721
Purchases of securities sold short		(1,080,605	)
Proceeds of securities sold short		1,380,000
Decrease in restricted cash		(792,079	)
Net accretion of discount		(612,386	)
Net realized gain on Investments from unaffiliated issuers		(140,511	)
Net realized gain on securities sold short, written options contracts and foreign currency transactions		(297,912	)
Net change in unrealized appreciation/ (depreciation) on investments, securities sold short, written options contracts and translation on assets and liabilities denominated in foreign currency		27,106,535
Increase in receivable for investments sold		(1,242,262	)
Increase in receivable for dividends and interest		(451,634	)
Decrease in Investment advisory and administration fees receivable		29,310
Decrease in other assets		(18,825	)
Decrease in payable upon receipt of securities on loan		(5,734,721	)
Decrease in payable for investments purchased		(23,885,567	)
Increase in payables to related parties		23,899
Increase in payable for distribution and shareholder service fees		44
Increase in payable to transfer agent fees		168
Increase in payable for interest expense		29,304
Increase in payable for commitment fees		132
Decrease in accrued expenses and other liabilities		(16,633	)

Net cash flow used for operating activities		(11,248,372	)


Cash Flows Received from (Used In) Financing Activities:
Increase in notes payable		18,000,000
Distributions paid in cash		(274,894	)
Payments on shares redeemed		(17,996,701	)
Proceeds from shares sold		6,041,346

Net cash flow received from (used in) financing activities		5,769,751

Effect of exchange rate changes on cash		(1,815	)

Net Increase (Decrease) in Cash		(5,480,436	)


Cash and Foreign Currency/Due to Custodian:
Beginning of year		1,488,453

End of year		(3,991,983	)


Supplemental disclosure of cash flow information:
Reinvestment of distributions		4,257,423

Cash paid during the year for interest		126,932

Cash paid during the year for commitment fees		2,513


36						See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS


		Highland Long/Short Equity Fund, Class A

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Years Ended June 30,
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			2013			2012			2011

Net Asset Value, Beginning of Period	$	11.98		$	12.18		$	11.37		$	11.30		$	11.10		$	10.68
Income from Investment Operations:
Net investment loss^(a)		(0.10	)		(0.20	)		(0.21	)		(0.16	)		(0.22	)		(0.21	)
Redemption fees added to paid-in capital^(a)		—			—			—	^(b)		—	^(b)		—	^(b)		—	^(b)
Net realized and unrealized gain/(loss)^(a)		(0.32	)		0.48			1.97			0.53			0.48			0.93

Total from investment operations		(0.42	)		0.28			1.76			0.37			0.26			0.72
Less Distributions Declared to Shareholders:
From net realized gains		(0.45	)		(0.48	)		(0.95	)		(0.30	)		(0.06	)		(0.30	)


Total distributions declared to shareholders		(0.45	)		(0.48	)		(0.95	)		(0.30	)		(0.06	)		(0.30	)
Net Asset Value, End of Period⁽ⁱ⁾	$	11.11		$	11.98		$	12.18		$	11.37		$	11.30		$	11.10
Total Return^(c)(i)		(3.60	)%^(d)		2.45	%		15.60	%		3.38	%		2.42	%		6.62	%
Ratios to Average Net Assets^(e)/Supplemental Data:
Net assets, end of period (in 000’s)	$	75,596		$	76,813		$	195,612		$	141,351		$	265,712		$	286,581
Gross operating expenses^(f)(g)		3.59	%		3.58	%		3.75	%		3.79	%		3.66	%		3.64	%
Waiver/reimbursement		(1.25	)%		(1.25	)%		(1.25	)%		(1.25	)%		(1.25	)%		(1.25	)%
Net operating expenses^(f)(h)		2.34	%		2.33	%		2.50	%		2.54	%		2.41	%		2.39	%
Dividends and fees on securities sold short		0.51	%		0.49	%		0.56	%		0.66	%		0.53	%		0.41	%
Net operating expenses (excluding dividends and fees on securities sold short)		1.83	%		1.84	%		1.94	%		1.88	%		1.88	%		1.98	%
Net investment loss		(1.64	)%		(1.63	)%		(1.69	)%		(1.40	)%		(1.99	)%		(1.89	)%
Portfolio turnover rate		191	%^(d)		414	%		349	%		706	%		650	%		684	%

(a)	Per share data was calculated using average shares outstanding during the period.

(b)	Represents less than $0.005 per share.

(c)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Not annualized.

(e)	All ratios for the period have been annualized, unless otherwise indicated.

(f)	Includes dividends and fees on securities sold short.

(g)

Gross operating expenses (excluding interest expense and commitment fees) were 3.58% for the period ended December 31, 2015. Gross operating expenses (excluding interest expense and commitment fees) were 3.51%, 3.75%, 3.79%, 3.66% and 3.64% for the years ended June 30, 2015, 2014, 2013, 2012 and 2011, respectively.

(h)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(i)

The Net Asset Value per share and total return have been calculated based on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. These figures do not necessarily reflect the Net Asset Value per share or total return experienced by the shareholder at period end.


See accompanying Notes to Financial Statements.						37

FINANCIAL HIGHLIGHTS


		Highland Long/Short Equity Fund, Class C

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Years Ended June 30,
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			2013			2012			2011

Net Asset Value, Beginning of Period	$	11.32		$	11.62		$	10.95		$	10.96		$	10.83		$	10.48
Income from Investment Operations:
Net investment loss^(a)		(0.13	)		(0.26	)		(0.27	)		(0.22	)		(0.28	)		(0.27	)
Redemption fees added to paid-in capital^(a)		—			—			—	^(b)		—	^(b)		—	^(b)		—	^(b)
Net realized and unrealized gain/(loss)^(a)		(0.30	)		0.44			1.89			0.51			0.47			0.92

Total from investment operations		(0.43	)		0.18			1.62			0.29			0.19			0.65
Less Distributions Declared to Shareholders:
From net realized gains		(0.45	)		(0.48	)		(0.95	)		(0.30	)		(0.06	)		(0.30	)


Total distributions declared to shareholders		(0.45	)		(0.48	)		(0.95	)		(0.30	)		(0.06	)		(0.30	)
Net Asset Value, End of Period⁽ⁱ⁾	$	10.44		$	11.32		$	11.62		$	10.95		$	10.96		$	10.83
Total Return^(c)(i)		(3.90	)%^(d)		1.69	%		14.89	%		2.75	%		1.83	%		6.18	%
Ratios to Average Net Assets^(e)/Supplemental Data:
Net assets, end of period (in 000’s)	$	63,521		$	55,639		$	55,795		$	45,925		$	57,677		$	79,243
Gross operating expenses^(f)(g)		4.24	%		4.28	%		4.39	%		4.48	%		4.31	%		4.29	%
Waiver/reimbursement		(1.25	)%		(1.25	)%		(1.25	)%		(1.26	)%		(1.25	)%		(1.25	)%
Net operating expenses^(f)(h)		2.99	%		3.03	%		3.14	%		3.22	%		3.06	%		3.04	%
Dividends and fees on securities sold short		0.51	%		0.54	%		0.56	%		0.67	%		0.53	%		0.41	%
Net operating expenses (excluding dividends and fees on securities sold short)		2.48	%		2.49	%		2.58	%		2.55	%		2.53	%		2.63	%
Net investment loss		(2.29	)%		(2.27	)%		(2.35	)%		(2.02	)%		(2.64	)%		(2.54	)%
Portfolio turnover rate		191	%^(d)		414	%		349	%		706	%		650	%		684	%

(a)	Per share data was calculated using average shares outstanding during the period.

(b)	Represents less than $0.005 per share.

(c)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Not annualized.

(e)	All ratios for the period have been annualized, unless otherwise indicated.

(f)	Includes dividends and fees on securities sold short.

(g)

Gross operating expenses (excluding interest expense and commitment fees) were 4.24% for the period ended December 31, 2015. Gross operating expenses (excluding interest expense and commitment fees) were 4.21%, 4.39%, 4.48%, 4.31% and 4.29% for the years ended June 30, 2015, 2014, 2013, 2012 and 2011, respectively.

(h)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(i)


38						See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS


		Highland Long/Short Equity Fund, Class Z

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Years Ended June 30,
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			2013			2012			2011

Net Asset Value, Beginning of Period	$	12.35		$	12.51		$	11.61		$	11.50		$	11.27		$	10.81
Income from Investment Operations:
Net investment loss^(a)		(0.08	)		(0.16	)		(0.17	)		(0.11	)		(0.18	)		(0.17	)
Redemption fees added to paid-in capital^(a)		—			—			—	^(b)		—	^(b)		—	^(b)		—	^(b)
Net realized and unrealized gain/(loss)^(a)		(0.33	)		0.48			2.02			0.52			0.47			0.93

Total from investment operations		(0.41	)		0.32			1.85			0.41			0.29			0.76
Less Distributions Declared to Shareholders:
From net realized gains		(0.45	)		(0.48	)		(0.95	)		(0.30	)		(0.06	)		(0.30	)


Total distributions declared to shareholders		(0.45	)		(0.48	)		(0.95	)		(0.30	)		(0.06	)		(0.30	)
Net Asset Value, End of Period⁽ⁱ⁾	$	11.49		$	12.35		$	12.51		$	11.61		$	11.50		$	11.27
Total Return^(c)(i)		(3.41	)%^(d)		2.71	%		16.07	%		3.68	%		2.56	%		7.02	%
Ratios to Average Net Assets^(e)/Supplemental Data:
Net assets, end of period (in 000’s)	$	748,934		$	724,250		$	766,646		$	692,705		$	399,689		$	163,490
Gross operating expenses^(f)(g)		3.24	%		3.28	%		3.39	%		3.54	%		3.31	%		3.29	%
Waiver/reimbursement		(1.25	)%		(1.25	)%		(1.25	)%		(1.26	)%		(1.25	)%		(1.25	)%
Net operating expenses^(f)(h)		1.99	%		2.03	%		2.14	%		2.28	%		2.06	%		2.04	%
Dividends and fees on securities sold short		0.51	%		0.54	%		0.56	%		0.71	%		0.53	%		0.41	%
Net operating expenses (excluding dividends and fees on securities sold short)		1.48	%		1.49	%		1.58	%		1.57	%		1.53	%		1.63	%
Net investment loss		(1.29	)%		(1.27	)%		(1.34	)%		(0.96	)%		(1.64	)%		(1.54	)%
Portfolio turnover rate		191	%^(d)		414	%		349	%		706	%		650	%		684	%

(a)	Per share data was calculated using average shares outstanding during the period.

(b)	Represents less than $0.005 per share.

(c)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Not annualized.

(e)	All ratios for the period have been annualized, unless otherwise indicated.

(f)	Includes dividends and fees on securities sold short.

(g)

Gross operating expenses (excluding interest expense and commitment fees) were 3.23% for the period ended December 31, 2015. Gross operating expenses (excluding interest expense and commitment fees) were 3.21%, 3.39%, 3.54%, 3.31% and 3.29% for the years ended June 30, 2015, 2014, 2013, 2012 and 2011, respectively.

(h)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(i)


See accompanying Notes to Financial Statements.						39

FINANCIAL HIGHLIGHTS


		Highland Long/Short Healthcare Fund, Class A

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Years Ended June 30,
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			2013			2012			2011

Net Asset Value, Beginning of Period	$	16.22		$	15.07		$	11.03		$	10.87		$	13.75		$	11.19
Income from Investment Operations:
Net investment loss^(a)		(0.14	)		(0.32	)		(0.27	)		(0.26	)		(0.28	)		(0.15	)
Redemption fees added to paid-in capital		—			—			—	^(a)(b)		—	^(a)(b)		0.01	^(a)		—	^(a)(b)
Capital contributions (Note 1)		—			—			—			(0.03	)^(a)		—			—
Net realized and unrealized gain/(loss)^(a)		(2.26	)		2.15			4.31			0.45			(1.36	)		3.06

Total from investment operations		(2.40	)		1.83			4.04			0.16			(1.63	)		2.91
Less Distributions Declared to Shareholders:
From net realized gains		(0.58	)		(0.68	)		—			—			(1.25	)		(0.35	)


Total distributions declared to shareholders		(0.58	)		(0.68	)		—			—			(1.25	)		(0.35	)
Net Asset Value, End of Period⁽ⁱ⁾	$	13.24		$	16.22		$	15.07		$	11.03		$	10.87		$	13.75
Total Return^(c)(i)		(14.83	)%^(d)		12.71	%		36.63	%		1.47	%		(12.37	)%		26.63	%
Ratios to Average Net Assets^(e)/Supplemental Data:
Net assets, end of period (in 000’s)	$	131,975		$	179,486		$	153,358		$	11,652		$	29,861		$	23,767
Gross operating expenses^(f)(g)		2.47	%		2.55	%		2.55	%		3.52	%		3.30	%		3.14	%
Waiver/reimbursement		—	%		—			—			—			(0.36	)%		(1.19	)%
Net operating expenses^(f)(h)		2.47	%		2.55	%		2.55	%		3.52	%		2.94	%		1.95	%
Dividends and fees on securities sold short		0.74	%		0.77	%		0.77	%		1.03	%		1.09	%		0.53	%
Net operating expenses (excluding dividends and fees on securities sold short)		1.73	%		1.78	%		1.78	%		2.49	%		1.85	%		1.42	%
Net investment loss		(1.87	)%		(2.09	)%		(1.82	)%		(2.48	)%		(2.31	)%		(1.26	)%
Portfolio turnover rate		391	%^(d)		409	%		538	%		1,035	%		1,336	%		1,553	%

(a)	Per share data was calculated using average shares outstanding during the period.

(b)	Represents less than $0.005 per share.

(c)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Not annualized.

(e)	All ratios for the period have been annualized, unless otherwise indicated.

(f)	Includes dividends and fees on securities sold short.

(g)

Gross operating expenses (excluding interest expense and commitment fees) were 2.47% for the period ended December 31, 2015. Gross operating expenses (excluding interest expense and commitment fees) were 2.55%, 2.55%, 3.52%, 3.30% and 3.14% for the years ended June 30, 2015, 2014, 2013, 2012 and 2011, respectively.

(h)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(i)


40						See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS


		Highland Long/Short Healthcare Fund, Class C

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Years Ended June 30,
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			2013			2012			2011

Net Asset Value, Beginning of Period	$	15.48		$	14.50		$	10.68		$	10.59		$	13.54		$	11.04
Income from Investment Operations:
Net investment loss^(a)		(0.18	)		(0.42	)		(0.35	)		(0.31	)		(0.34	)		(0.23	)
Redemption fees added to paid-in capital		—			—			—	^(a)(b)		—	^(a)(b)		0.01	^(a)		—	^(a)(b)
Capital contributions (Note 1)		—			—			—			(0.03	)^(a)		—			—
Net realized and unrealized gain/(loss)^(a)		(2.15	)		2.08			4.17			0.43			(1.37	)		3.08

Total from investment operations		(2.33	)		1.66			3.82			0.09			(1.70	)		2.85
Less Distributions Declared to Shareholders:
From net realized gains		(0.58	)		(0.68	)		—			—			(1.25	)		(0.35	)


Total distributions declared to shareholders		(0.58	)		(0.68	)		—			—			(1.25	)		(0.35	)
Net Asset Value, End of Period⁽ⁱ⁾	$	12.57		$	15.48		$	14.50		$	10.68		$	10.59		$	13.54
Total Return^(c)(i)		(15.09	)%^(d)		12.02	%		35.77	%		0.85	%		(13.04	)%		26.35	%
Ratios to Average Net Assets^(e)/Supplemental Data:
Net assets, end of period (in 000’s)	$	85,614		$	83,971		$	47,964		$	5,460		$	9,181		$	6,075
Gross operating expenses^(f)(g)		3.12	%		3.29	%		3.25	%		4.20	%		3.95	%		3.79	%
Waiver/reimbursement		—			—			—			—			(0.36	)%		(1.19	)%
Net operating expenses^(f)(h)		3.12	%		3.29	%		3.25	%		4.20	%		3.59	%		2.60	%
Dividends and fees on securities sold short		0.74	%		0.84	%		0.79	%		1.07	%		1.09	%		0.53	%
Net operating expenses (excluding dividends and fees on securities sold short)		2.38	%		2.45	%		2.46	%		3.13	%		2.50	%		2.07	%
Net investment loss		(2.52	)%		(2.81	)%		(2.51	)%		(3.05	)%		(2.96	)%		(1.91	)%
Portfolio turnover rate		391	%^(d)		409	%		538	%		1,035	%		1,336	%		1,553	%

(a)	Per share data was calculated using average shares outstanding during the period.

(b)	Represents less than $0.005 per share.

(c)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Not annualized.

(e)	All ratios for the period have been annualized, unless otherwise indicated.

(f)	Includes dividends and fees on securities sold short.

(g)

Gross operating expenses (excluding interest expense and commitment fees) were 3.12% for the period ended December 31, 2015. Gross operating expenses (excluding interest expense and commitment fees) were 3.28%, 3.25%, 4.20%, 3.95% and 3.79% for the years ended June 30, 2015, 2014, 2013, 2012 and 2011, respectively.

(h)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(i)


See accompanying Notes to Financial Statements.						41

FINANCIAL HIGHLIGHTS


		Highland Long/Short Healthcare Fund, Class Z

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Years Ended June 30,
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			2013			2012			2011

Net Asset Value, Beginning of Period	$	16.66		$	15.40		$	11.23		$	11.03		$	13.88		$	11.26
Income from Investment Operations:
Net investment loss^(a)		(0.12	)		(0.30	)		(0.22	)		(0.21	)		(0.24	)		(0.11	)
Redemption fees added to paid-in capital		—			—			—	^(a)(b)		—	^(a)(b)		0.01	^(a)		—	^(a)(b)
Capital contributions (Note 1)		—			—			—			(0.03	)^(a)		—			—
Net realized and unrealized gain/(loss)^(a)		(2.32	)		2.24			4.39			0.44			(1.37	)		3.08

Total from investment operations		(2.44	)		1.94			4.17			0.20			(1.60	)		2.97
Less Distributions Declared to Shareholders:
From net realized gains		(0.58	)		(0.68	)		—			—			(1.25	)		(0.35	)


Total distributions declared to shareholders		(0.58	)		(0.68	)		—			—			(1.25	)		(0.35	)
Net Asset Value, End of Period⁽ⁱ⁾	$	13.64		$	16.66		$	15.40		$	11.23		$	11.03		$	13.88
Total Return^(c)(i)		(14.68	)%^(d)		13.16	%		37.13	%		1.81	%		(11.95	)%		26.79	%
Ratios to Average Net Assets^(e)/Supplemental Data:
Net assets, end of period (in 000’s)	$	382,279		$	454,021		$	112,879		$	13,801		$	14,210		$	13,705
Gross operating expenses^(f)(g)		2.12	%		2.41	%		2.26	%		3.24	%		2.95	%		2.79	%
Waiver/reimbursement		—			—			—			—	^(j)		(0.36	)%		(1.19	)%
Net operating expenses^(f)(h)		2.12	%		2.41	%		2.26	%		3.24	%		2.59	%		1.60	%
Dividends and fees on securities sold short		0.74	%		0.96	%		0.80	%		1.13	%		1.09	%		0.53	%
Net operating expenses (excluding dividends and fees on securities sold short)		1.38	%		1.45	%		1.46	%		2.11	%		1.50	%		1.07	%
Net investment loss		(1.52	)%		(1.90	)%		(1.51	)%		(1.95	)%		(1.96	)%		(0.91	)%
Portfolio turnover rate		391	%^(d)		409	%		538	%		1,035	%		1,336	%		1,553	%

(a)	Per share data was calculated using average shares outstanding during the period.

(b)	Represents less than $0.005 per share.

(c)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Not annualized.

(e)	All ratios for the period have been annualized, unless otherwise indicated.

(f)	Includes dividends and fees on securities sold short.

(g)

Gross operating expenses (excluding interest expense and commitment fees) were 2.12% for the period ended December 31, 2015. Gross operating expenses (excluding interest expense and commitment fees) were 2.40%, 2.26%, 3.24%, 2.95% and 2.79% for the years ended June 30, 2015, 2014, 2013, 2012 and 2011, respectively.

(h)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(i)

(j)	Represents less than 0.005%.


42						See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS


		Highland Floating Rate Opportunities Fund, Class A

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Years Ended June 30,
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			2013			2012			2011

Net Asset Value, Beginning of Period	$	7.83		$	8.20		$	7.74		$	6.85		$	6.96		$	6.55
Income from Investment Operations:
Net investment income^(a)		0.19			0.33			0.33			0.30			0.26			0.27
Redemption fees added to paid-in capital^(a)		—			—			—	^(b)		—	^(b)		—	^(b)		—
Net realized and unrealized gain/(loss)^(a)		(0.96	)		(0.36	)		0.46			0.98			(0.07	)		0.46

Total from investment operations		(0.77	)		(0.03	)		0.79			1.28			0.19			0.73
Less Distributions Declared to Shareholders:
From net investment income		(0.19	)		(0.34	)		(0.32	)		(0.30	)^(c)		(0.30	)		(0.32	)
From return of capital		—			—			(0.01	)		(0.09	)^(c)		—			—


Total distributions declared to shareholders		(0.19	)		(0.34	)		(0.33	)		(0.39	)		(0.30	)		(0.32	)
Net Asset Value, End of Period^(j)	$	6.87		$	7.83		$	8.20		$	7.74		$	6.85		$	6.96
Total Return^(d)(j)		(9.99	)%^(e)		(0.36	)%		10.43	%		19.16	%		2.52	%		11.73	%
Ratios to Average Net Assets^(f)/Supplemental Data:
Net assets, end of period (in 000’s)	$	170,270		$	201,433		$	342,776		$	249,450		$	203,684		$	264,385
Gross operating expenses^(h)		1.76	%^(g)		1.37	%^(g)		1.60	%^(g)		1.79	%		2.53	%		2.65	%
Waiver/reimbursement		(0.28	)%		0.01	%		(0.26	)%		(0.21	)%		—			—
Net operating expenses⁽ⁱ⁾		1.48	%^(g)		1.38	%^(g)		1.34	%^(g)		1.58	%		2.53	%		2.65	%
Dividends and fees on securities sold short		0.02	%		0.05	%		0.04	%		—			—			—
Net operating expenses (excluding dividends and fees on securities sold short)		1.46	%		1.33	%		1.30	%		1.58	%		2.53	%		2.65	%
Net investment income		5.02	%		4.12	%		4.15	%		4.06	%		3.91	%		3.97	%
Portfolio turnover rate		13	%^(e)		55	%		69	%		71	%		50	%		104	%

(a)	Per share data was calculated using average shares outstanding during the period.

(b)	Represents less than $0.005 per share.

(c)	Changed from previously reported amounts of $(0.32) and $(0.07), respectively. See Note 5.

(d)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(e)	Not annualized.

(f)	All ratios for the period have been annualized, unless otherwise indicated.

(g)	Includes dividends and fees on securities sold short.

(h)

Gross operating expenses (excluding interest expense and commitment fees) were 1.60% for the period ended December 31, 2015. Gross operating expenses (excluding interest expense and commitment fees) were 1.33%, 1.52%, 1.65%, 2.11% and 2.18% for the years ended June 30, 2015, 2014, 2013, 2012 and 2011, respectively.

(i)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(j)


See accompanying Notes to Financial Statements.						43

FINANCIAL HIGHLIGHTS


		Highland Floating Rate Opportunities Fund, Class C

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Years Ended June 30,
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			2013			2012			2011

Net Asset Value, Beginning of Period	$	7.83		$	8.20		$	7.74		$	6.85		$	6.96		$	6.55
Income from Investment Operations:
Net investment income^(a)		0.17			0.29			0.30			0.26			0.23			0.24
Redemption fees added to paid-in capital^(a)		—			—			—	^(b)		—	^(b)		—	^(b)		—
Net realized and unrealized gain/(loss)^(a)		(0.96	)		(0.36	)		0.45			0.98			(0.07	)		0.45

Total from investment operations		(0.79	)		(0.07	)		0.75			1.24			0.16			0.69
Less Distributions Declared to Shareholders:
From net investment income		(0.17	)		(0.30	)		(0.28	)		(0.26	)^(c)		(0.27	)		(0.28	)
From return of capital		—			—			(0.01	)		(0.09	)^(c)		—			—


Total distributions declared to shareholders		(0.17	)		(0.30	)		(0.29	)		(0.35	)		(0.27	)		(0.28	)
Net Asset Value, End of Period^(j)	$	6.87		$	7.83		$	8.20		$	7.74		$	6.85		$	6.96
Total Return^(d)(j)		(10.22	)%^(e)		(0.87	)%		9.90	%		18.58	%		2.01	%		11.16	%
Ratios to Average Net Assets^(f)/Supplemental Data:
Net assets, end of period (in 000’s)	$	245,153		$	308,710		$	380,974		$	326,476		$	320,178		$	437,220
Gross operating expenses^(h)		2.26	%^(g)		1.87	%^(g)		2.10	%^(g)		2.30	%		3.03	%		3.15	%
Waiver/reimbursement		(0.28	)%		0.01	%		(0.26	)%		(0.22	)%		—			—
Net operating expenses⁽ⁱ⁾		1.98	%^(g)		1.89	%^(g)		1.84	%^(g)		2.08	%		3.03	%		3.15	%
Dividends and fees on securities sold short		0.02	%		0.05	%		0.04	%		—			—			—
Net operating expenses (excluding dividends and fees on securities sold short)		1.96	%		1.84	%		1.80	%		2.08	%		3.03	%		3.15	%
Net investment income		4.52	%		3.71	%		3.72	%		3.56	%		3.41	%		3.47	%
Portfolio turnover rate		13	%^(e)		55	%		69	%		71	%		50	%		104	%

(a)	Per share data was calculated using average shares outstanding during the period.

(b)	Represents less than $0.005 per share.

(c)	Changed from previously reported amounts of $(0.28) and $(0.07), respectively. See Note 5.

(d)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(e)	Not annualized.

(f)	All ratios for the period have been annualized, unless otherwise indicated.

(g)	Includes dividends and fees on securities sold short.

(h)

Gross operating expenses (excluding interest expense and commitment fees) were 2.10% for the period ended December 31, 2015. Gross operating expenses (excluding interest expense and commitment fees) were 1.84%, 2.02%, 2.16%, 2.61% and 2.68% for the years ended June 30, 2015, 2014, 2013, 2012 and 2011, respectively.

(i)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(j)


44						See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS


		Highland Floating Rate Opportunities Fund, Class Z

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Years Ended June 30,
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			2013			2012			2011

Net Asset Value, Beginning of Period	$	7.83		$	8.19		$	7.74		$	6.84		$	6.96		$	6.55
Income from Investment Operations:
Net investment income^(a)		0.20			0.36			0.36			0.29			0.29			0.29
Redemption fees added to paid-in capital^(a)		—			—			—	^(b)		—	^(b)		—	^(b)		—
Net realized and unrealized gain/(loss)^(a)		(0.96	)		(0.36	)		0.45			1.03			(0.08	)		0.46

Total from investment operations		(0.76	)		—	^(b)		0.81			1.32			0.21			0.75
Less Distributions Declared to Shareholders:
From net investment income		(0.20	)		(0.36	)		(0.35	)		(0.33	)^(c)		(0.33	)		(0.34	)
From return of capital		—			—			(0.01	)		(0.09	)^(c)		—			—


Total distributions declared to shareholders		(0.20	)		(0.36	)		(0.36	)		(0.42	)		(0.33	)		(0.34	)
Net Asset Value, End of Period^(j)	$	6.87		$	7.83		$	8.19		$	7.74		$	6.84		$	6.96
Total Return^(d)(j)		(9.83	)%^(e)		0.11	%		10.68	%		19.77	%		2.73	%		12.11	%
Ratios to Average Net Assets^(f)/Supplemental Data:
Net assets, end of period (in 000’s)	$	175,712		$	283,673		$	340,089		$	170,170		$	22,568		$	35,668
Gross operating expenses^(h)		1.41	%^(g)		1.03	%^(g)		1.25	%^(g)		1.31	%		2.18	%		2.30	%
Waiver/reimbursement		(0.28	)%		0.01	%		(0.26	)%		(0.27	)%		—			—
Net operating expenses⁽ⁱ⁾		1.13	%^(g)		1.04	%^(g)		0.99	%^(g)		1.04	%		2.18	%		2.30	%
Dividends and fees on securities sold short		0.02	%		0.05	%		0.04	%		—			—			—
Net operating expenses (excluding dividends and fees on securities sold short)		1.11	%		0.99	%		0.95	%		1.04	%		2.18	%		2.30	%
Net investment income		5.37	%		4.55	%		4.49	%		3.88	%		4.26	%		4.32	%
Portfolio turnover rate		13	%^(e)		55	%		69	%		71	%		50	%		104	%

(a)	Per share data was calculated using average shares outstanding during the period.

(b)	Represents less than $0.005 per share.

(c)	Changed from previously reported amounts of $(0.34) and $(0.08), respectively. See Note 5.

(d)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(e)	Not annualized.

(f)	All ratios for the period have been annualized, unless otherwise indicated.

(g)	Includes dividends and fees on securities sold short.

(h)

Gross operating expenses (excluding interest expense and commitment fees) were 1.25% for the period ended December 31, 2015. Gross operating expenses (excluding interest expense and commitment fees) were 0.99%, 1.17%, 1.21%, 1.76% and 1.83% for the years ended June 30, 2015, 2014, 2013, 2012 and 2011, respectively.

(i)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(j)


See accompanying Notes to Financial Statements.						45

FINANCIAL HIGHLIGHTS


		Highland Opportunistic Credit Fund, Class A

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Year Ended 06/30/15*

Net Asset Value, Beginning of Period	$	5.30		$	6.22
Income from Investment Operations:
Net investment loss^(a)		0.24			0.24
Net realized and unrealized gain/(loss)^(a)		(1.56	)		(0.93	)

Total from investment operations		(1.32	)		(0.69	)
Less Distributions Declared to Shareholders:
From net realized gains		(0.24	)		(0.23	)


Total distributions declared to shareholders		(0.24	)		(0.23	)
Net Asset Value, End of Period^(b)	$	3.74		$	5.30
Total Return^(b)(c)		(24.96	)%^(d)		(11.14	)%
Ratios to Average Net Assets^(e)/Supplemental Data:
Net assets, end of period (in 000’s)	$	4,783		$	7,730
Gross operating expenses^(f)		2.11	%		2.30	%
Waiver/reimbursement		(0.57	)%		(1.03	)%
Net operating expenses^(g)		1.54	%		1.27	%
Net investment income		10.44	%		4.43	%
Portfolio turnover rate		36	%^(d)		41	%

*	Effective July 1, 2014, the Highland Opportunistic Credit Fund changed its fiscal year end from December 31 to June 30. Class A shares commenced operations on July 1, 2014.

(a)	Per share data was calculated using average shares outstanding during the period.

(b)

(c)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Not annualized.

(e)	All ratios for the period have been annualized, unless otherwise indicated.

(f)	Gross operating expenses (excluding interest expense and commitment fees) were 1.84% for the period ended December 31, 2015.

(g)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.


46						See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS


		Highland Opportunistic Credit Fund, Class C

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Year Ended 06/30/15*

Net Asset Value, Beginning of Period	$	5.30		$	6.22
Income from Investment Operations:
Net investment loss^(a)		0.22			0.21
Net realized and unrealized gain/(loss)^(a)		(1.66	)		(0.93	)

Total from investment operations		(1.44	)		(0.72	)
Less Distributions Declared to Shareholders:
From net realized gains		(0.23	)		(0.20	)


Total distributions declared to shareholders		(0.23	)		(0.20	)
Net Asset Value, End of Period^(b)	$	3.63		$	5.30
Total Return^(b)(c)		(27.77	)%^(d)		(11.61	)%
Ratios to Average Net Assets^(e)/Supplemental Data:
Net assets, end of period (in 000’s)	$	178		$	160
Gross operating expenses^(f)		2.61	%		2.80	%
Waiver/reimbursement		(0.57	)%		(1.03	)%
Net operating expenses^(g)		2.04	%		1.77	%
Net investment income		9.94	%		3.88	%
Portfolio turnover rate		36	%^(d)		41	%

*	Effective July 1, 2014, the Highland Opportunistic Credit Fund changed its fiscal year end from December 31 to June 30. Class C shares commenced operations on July 1, 2014.

(a)	Per share data was calculated using average shares outstanding during the period.

(b)

(c)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Not annualized.

(e)	All ratios for the period have been annualized, unless otherwise indicated.

(f)	Gross operating expenses (excluding interest expense and commitment fees) were 2.34% for the period ended December 31, 2015.

(g)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.


See accompanying Notes to Financial Statements.						47

FINANCIAL HIGHLIGHTS


		Highland Opportunistic Credit Fund, Class Z

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/2015 (unaudited)			For the Year Ended 06/30/2015*			For the Six Months Ended 06/30/2014**			For the Years Ended December 31,
	For the Six Months Ended 12/31/2015 (unaudited)			For the Year Ended 06/30/2015*			For the Six Months Ended 06/30/2014**			2013**			2012**			2011**			2010**

Net Asset Value, Beginning of Period	$	5.30		$	6.21		$	6.04		$	4.49		$	3.36		$	3.60		$	6.98
Income from Investment Operations:
Net investment income/(loss)		0.25			0.26	^(a)		(0.05	)		0.05			(0.04	)^(a)		(0.01	)		0.06	^(a)
Net realized and unrealized gain/(loss)		(1.71	)		(0.92	)		0.22			1.50			1.17			(0.23	)		0.46
Distributions from net investment income to preferred shareholders, including declared distributions		—			—			—			—			—			—			(0.03	)

Total from investment operations shareholders		(1.46	)		(0.66	)		0.17			1.55			1.13			(0.24	)		0.49
Less Distributions Declared to Common Shareholders:
From net investment income		(0.25	)		(0.25	)		—			—			—			—			(0.05	)
From return of capital		—			—			—			—			—			—			(3.82	)


Total distributions declared to common shareholders		(0.25	)		(0.25	)		—			—			—			—			(3.87	)
Net Asset Value, End of Period^(b)	$	3.59		$	5.30		$	6.21		$	6.04		$	4.49		$	3.36		$	3.60
Total Return^(b)(c)		(27.44	)%^(d)		(10.63	)%		2.81	%^(d)		34.52	%		33.23	%		(6.39	)%		12.88	%
Ratios based on average net assets of common shares:
Ratios and Supplemental Data:
Net assets, end of period (in 000’s)	$	46,670		$	78,893		$	2,721		$	816		$	605		$	2,757		$	2,951
Gross expenses^(e)		1.76	%^(f)		1.95	%		4.23	%		8.52	%		6.86	%		5.77	%		3.94	%
Waiver/Reimbursement		(0.57	)%^(f)		(1.04	)%		—			—			—			—			—
Net operating expenses^(g)		1.19	%^(f)		0.91	%		4.23	%		8.52	%		6.86	%		5.77	%		3.94	%
Net investment income/(loss)		10.79	%^(f)		4.80	%		(1.53	)%		0.93	%		(1.55	)%		(0.27	)%		1.46	%^(h)
Common and Preferred Share Information at End of Period:
Ratios based on net assets of common and preferred shares:
Gross expenses^(e)		1.76	%^(f)		1.95	%		4.23	%		8.52	%		6.86	%		5.77	%		3.88	%
Waiver/Reimbursement		(0.57	)%^(f)		(1.04	)%		—			—			—			—			—
Net operating expenses^(g)		1.19	%^(f)		0.91	%		4.23	%		8.52	%		6.86	%		5.77	%		3.88	%
Net investment income/(loss)		10.79	%^(f)		4.81	%		(1.53	)%		0.93	%		(1.55	)%		(0.27	)%		1.33	%
Portfolio turnover rate		36	%		41	%		—			—			—			8	%		3	%⁽ⁱ⁾
Preferred Share Information at End of Period
Aggregate amount outstanding, end of period (000’s)	$	—		$	—		$	—		$	—		$	—		$	—		$	—
Asset coverage per share^(j)	$	—		$	—		$	—		$	—		$	—		$	—		$	—

*	Effective July 1, 2014, the Highland Opportunistic Credit Fund changed its fiscal year end from December 31 to June 30.

**	Historical data shown is that of the Highland Special Situations Fund, which reorganized into the Highland Opportunistic Credit Fund on July 1, 2014 (See Note 13).

(a)	Per share data was calculated using average shares outstanding during the period.

(b)

(c)	Total return is at net asset value assuming all distributions are reinvested and no initial sales charge or CDSC. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Not annualized.

(e)	Gross operating expenses (excluding interest expense and commitment fees) were 1.49% for the period ended December 31, 2015.

(f)	Annualized.

(g)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(h)	Net investment income ratio does not reflect payment to preferred shareholders. The ratio reflecting such payment was 1.34% for the years ended December 31, 2010.

(i)	Portfolio turnover rate excludes securities delivered from processing the redemption-in-kind.

(j)	Asset coverage per share equals net assets of common shares plus the redemption value of the preferred shares divided by the total number of preferred shares outstanding at the end of the period. During the year ended December 31, 2010 all the preferred shares were redeemed.


48						See accompanying Notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS (unaudited)


December 31, 2015		Highland Funds I

Note 1. Organization

Highland Funds I (the “Trust”) was organized as a Delaware statutory trust on February 28, 2006. The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company with eight separate portfolios, each of which is non-diversified: Highland Long/Short Equity Fund (the “Long/Short Equity Fund”), Highland Long/Short Healthcare Fund (the “Long/Short Healthcare Fund”), Highland Floating Rate Opportunities Fund (the “Floating Rate Opportunities Fund”) and Highland Opportunistic Credit Fund (the “Opportunistic Credit Fund”) (each a “Fund” and, collectively, the “Funds”). The Highland/iBoxx Senior Loan ETF, Highland HFR Global ETF, Highland HFR Event-Driven ETF and Highland HFR Equity Hedge ETF are reported separately.

Fund Shares

Each Fund is authorized to issue an unlimited number of transferable shares of beneficial interest with a par value of $0.001 per share (each a “Share” and, collectively, the “Shares”). The Funds currently offer Class A, Class C and Class Z Shares. Class A Shares are sold with a front-end sales charge. Class A and Class C Shares may be subject to a contingent deferred sales charge. Class Z Shares are sold only to certain eligible investors. Certain share classes have their own sales charge and bear class specific expenses, which include distribution fees and service fees.

Note 2. Significant Accounting Policies

The following summarizes the significant accounting policies consistently followed by the Funds in the preparation of their financial statements.

Use of Estimates

The Funds are investment companies that follow the accounting and reporting guidance of Accounting Standards Codification Topic 946 applicable to investment companies. The Funds’ financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Determination of Class Net Asset Values

Each Fund’s income, expenses (other than distribution fees and shareholder service fees) and realized and unrealized

gains and losses are allocated proportionally each day among each Fund’s respective share classes based upon the relative net assets of each class share. Expenses other than those incurred by each specific Fund are allocated pro rata among the Funds and share classes. Certain class specific expenses (such as distribution and shareholder service fees) are allocated to the class that incurs such expense.

Valuation of Investments

In computing the Funds’ net assets attributable to shares, securities with readily available market quotations on the New York Stock Exchange (NYSE), NASDAQ or other nationally recognized exchange, use the closing quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market quotations will be valued pursuant to policies adopted by the Funds’ Board of Trustees (the “Board”). Typically, such securities will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Funds’ loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that the Investment Adviser has determined to generally have the capability to provide appropriate pricing and have been approved by the Board.

Securities for which market quotations are not readily available, for which the Funds have determined the price received from a pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and calculation of the Funds’ net asset value (“NAV”)), will be valued by the Funds at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably determined to be relevant, including, among other things,: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Funds’ NAV will reflect the affected portfolio securities’ fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may


Semi-Annual Report						49

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their NAVs. Determination of fair value is uncertain because it involves subjective judgments and estimates.

There can be no assurance that the Funds’ valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Funds. The NAV shown in the Funds’ financial statements may vary from the NAV published by each Fund as of its period end because portfolio securities transactions are accounted for on the trade date (rather than the day following the trade date) for financial statement purposes and/or because of information relating to the value of each Fund’s portfolio securities as of each Fund’s period end that became available prior to the completion of this semi-annual report that was not available at the time each Fund’s NAV as of its period end was published.

Fair Value Measurements

The Funds have performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Funds’ investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation.

The three levels of the fair value hierarchy are described below:

Level 1 —

Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;

Level 2 —

Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and

Level 3 —

necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The Investment Adviser has established policies and procedures, as described above and approved by the Board, to ensure that valuation methodologies for investments and financial instruments that are categorized within all levels of the fair value hierarchy are fair and consistent. A Pricing Committee has been established to provide oversight of the valuation policies, processes and procedures and is comprised of personnel from the Investment Adviser. The Pricing Committee meets monthly to review the proposed valuations for investments and financial instruments and is responsible for evaluating the overall fairness and consistent application of established policies.

As of December 31, 2015, the Funds’ investments consisted of senior loans, collateralized loan obligations, corporate bonds and notes, sovereign bonds, claims, common stocks, preferred stocks, exchange-traded funds, other registered investment companies, cash equivalents, master limited partnerships, rights, warrants, securities sold short and options. The fair value of the Funds’ loans, bonds and collateralized loan obligations are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans, bonds and collateralized loan obligations that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

The fair value of the Funds’ common stocks, preferred stocks, exchange-traded funds, other registered investment companies, master limited partnerships, rights, warrants and options that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price is utilized to value the option.

At the end of each calendar quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in


50						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available

market value, the fair value of the Funds’ investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Funds may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the inputs used to value each Fund’s assets as of December 31, 2015 is as follows:


	Total value at December 31, 2015			Level 1 Quoted Price			Level 2 Significant Observable Inputs		Level 3 Significant Unobservable Inputs
Long/Short Equity Fund
Assets
Common Stocks⁽¹⁾	$	722,377,109		$	722,377,109		$	—	$	—
Purchased Call Options		244,725			244,725			—		—
Purchased Put Options		328,427			328,427			—		—
Registered Investment Companies		33,116,569			33,116,569			—		—
Cash Equivalents		153,944,508			—			153,944,508		—
Other Financial Instruments
Swap Contracts		1,103,362			—			1,103,362		—

Total Assets		911,114,700			756,066,830			155,047,870		—

Liabilities
Securities Sold Short⁽¹⁾		(216,794,574	)		(216,794,574	)		—		—
Other Financial Instruments
Equity Contracts		(61,000	)		(61,000	)

Total Liabilities		(216,855,574	)		(216,855,574	)		—		—

Total	$	694,259,126		$	539,211,256		$	155,047,870	$	—

⁽¹⁾	See Investment Portfolio detail for industry breakout.


Semi-Annual Report						51

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I


	Total value at December 31, 2015			Level 1 Quoted Price			Level 2 Significant Observable Inputs		Level 3 Significant Unobservable Inputs
Long/Short Healthcare Fund
Assets
U.S. Senior Loans⁽¹⁾	$	2,121,912		$	—		$	2,121,912	$	—
Corporate Bonds & Notes⁽¹⁾		7,906,250			—			7,906,250		—
Foreign Corporate Bonds & Notes⁽¹⁾		8,055,000			—			8,055,000		—
Common Stocks
Consumer Discretionary		1,938,490			1,938,490			—		—
Healthcare
Biotechnology		141,730,622			141,730,622			—		—
Healthcare Distributors		7,889,200			7,889,200			—		—
Healthcare Equipment		83,698,595			83,698,595			—		—
Healthcare Facilities		53,038,790			53,038,790			—		—
Healthcare Services		3,371,392			3,132,430			—		238,962
Healthcare Supplies		20,108,225			20,108,225			—		—
Healthcare Technology		10,551,668			10,551,668			—		—
Life Sciences Tools & Services		12,892,272			12,892,272			—		—
Managed Healthcare		37,897,741			37,897,741			—		—
Pharmaceuticals		190,134,712			183,407,212			—		6,727,500
Master Limited Partnerships⁽¹⁾		69,852			—			—		69,852
Rights⁽¹⁾
Equity Contracts		70,712			70,712			—		—
Warrants⁽¹⁾⁽²⁾					—					—
Equity Contracts		6,767,851			—			6,767,851
Purchased Call Options⁽¹⁾		8,537,400			8,537,400			—		—
Purchased Put Options⁽¹⁾		2,223,178			2,223,178			—		—
Registered Investment Companies		36,667,006			36,667,006			—		—
Cash Equivalents		6,923,883			—			6,923,883		—

Total Assets		642,594,751			603,783,541			31,774,896		7,036,314

Liabilities
Securities Sold Short⁽¹⁾		(300,330,250	)		(300,330,250	)		—		—
Other Financial Instruments
Written Options Contracts		(2,863,650	)		(2,863,650	)		—		—

Total Liabilities		(303,193,900	)		(303,193,900	)		—		—

Total	$	339,400,851		$	300,589,641		$	31,774,896	$	7,036,314

⁽¹⁾	See Investment Portfolio detail for industry breakout.

⁽²⁾	This category includes securities with a value of zero.


52						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I


	Total value at December 31, 2015			Level 1 Quoted Price		Level 2 Significant Observable Inputs			Level 3 Significant Unobservable Inputs
Floating Rate Opportunities Fund
Assets
U.S. Senior Loans
Chemicals	$	17,490,640		$	—	$	17,490,640		$	—
Consumer Products		8,333,181			—		8,333,181			—
Energy		13,298,840			—		13,298,840			—
Financials		10,436,723			—		6,902,899			3,533,824
Food & Drug		667,290			—		667,290			—
Forest Products & Containers		11,652,412			—		11,652,412			—
Gaming & Leisure⁽²⁾		21,967,594			—		14,777,098			7,190,496
Healthcare		45,210,953			—		20,418,132			24,792,821
Housing		12,393,592			—		5,226,954			7,166,638
Information Technology		34,410,586			—		34,410,586			—
Manufacturing		10,637,860			—		8,029,032			2,608,828
Media & Telecommunications⁽²⁾		54,137,352			—		54,137,352			—
Metals & Minerals		4,798,880			—		4,798,880			—
Retail		29,668,615			—		29,668,615			—
Service		81,769,738			—		81,769,738			—
Transportation		3,039,369			—		3,012,550			26,819
Utility		34,019,107			—		32,069,107			1,950,000
Foreign Denominated or Domiciled Senior Loans
Canada		2,148,968			—		2,148,968			—
Germany		285,404			—		—			285,404
Luxembourg		16,304,765			—		16,304,765			—
Marshall Islands		14,372,571			—		10,675,510			3,697,061
United Kingdom		39,923			—		—			39,923
Collateralized Loan Obligations		74,588,109			—		74,588,109			—
Corporate Bonds & Notes⁽¹⁾⁽²⁾		44,181,472			—		44,181,472			—
Claims⁽¹⁾		192,053			—		192,053			—
Common Stocks
Energy		—			—		—			—
Gaming & Leisure⁽²⁾		—			—		—			—
Healthcare		15,734			—		—			15,734
Housing		5,114,290			—		—			5,114,290
Media & Telecommunications⁽²⁾		52,762,375			14,160,062		38,602,313			—
Real Estate		7			—		—			7
Transportation		8,396			—		—			8,396
Utility		2,491,721			—		2,491,721			—
Warrants⁽¹⁾⁽²⁾		—			—		—			—
Registered Investment Companies		20,863,083			20,863,083		—			—
Cash Equivalents		6,907,804			—		6,907,804			—

Total Assets		634,209,407			35,023,145		542,756,021			56,430,241

Liabilities
Foreign Corporate Bonds
Canada		(3,960,000	)		—		(3,960,000	)		—

Total Liabilities		(3,960,000	)		—		(3,960,000	)		—

Total	$	630,249,407		$	35,023,145	$	538,796,021		$	56,430,241

⁽¹⁾	See Investment Portfolio detail for industry breakout.

⁽²⁾	This category includes securities with a value of zero.


Semi-Annual Report						53

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I


	Total value at December 31, 2015		Level 1 Quoted Price		Level 2 Significant Observable Inputs		Level 3 Significant Unobservable Inputs
Opportunistic Credit Fund
Assets
U.S. Senior Loans
Energy	$	4,065,870	$	—	$	4,065,870	$	—
Healthcare		1,060,956		—		1,060,956		—
Housing		805,476		—		805,476		—
Information Technology		2,158,132		—		2,158,132		—
Media & Telecommunications		3,687,406		—		3,687,406		—
Retail		2,121,514		—		2,121,514		—
Service		2,604,402		—		2,604,402		—
Telecommunications		637,382		—		—		637,382
Transportation		952,500		—		—		952,500
Utilities		7,971,903		—		7,971,903		—
Foreign Denominated or Domiciled Senior Loans		3,592,500		—		2,925,000		667,500
Collateralized Loan Obligations		12,462,199		—		12,462,199		—
Corporate Bonds & Notes⁽¹⁾		14,883,975		—		14,883,975		—
Foreign Corporate Bonds & Notes⁽¹⁾		2,201		—		2,201		—
Sovereign Bonds		9		—		9		—
Common Stocks
Capital Goods		357,684		357,684		—		—
Chemicals		927,543		—		—		927,543
Commercial & Professional Services		12,472		12,472		—		—
Energy		1,736,167		1,736,167		—		—
Materials		2,075,293		—		—		2,075,293
Media		489,553		—		489,553		—
Telecommunication Services		1,532,528		—		—		1,532,528
Utilities		1,251,896		454,616		797,280		—
Preferred Stocks⁽¹⁾		932,775		—		932,775		—
Master Limited Partnerships
Energy		1,412,758		1,412,758		—		—
Healthcare Equipment & Services		9,221		—		—		9,221
Warrants⁽¹⁾
Equity Contracts		10,818		10,818		—		—
Registered Investment Companies		4,876,554		4,876,554		—		—

Total	$	72,631,687	$	8,861,069	$	56,968,651	$	6,801,967

⁽¹⁾	See Investment Portfolio detail for industry breakout.


54						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

The tables below set forth a summary of changes in the Long/Short Healthcare Fund, the Floating Rate Opportunities Fund and the Opportunistic Credit Fund’s assets measured at fair value using significant unobservable inputs (Level 3) for the period ended December 31, 2015. The Long/Short Equity Fund had no Level 3 assets as of June 30, 2015 or December 31, 2015.


	Balance as of June 30, 2015			Transfers into Level 3		Transfers Out of Level 3		Net Amortization (Accretion) of Premium/ (Discount)		Net Realized Gains/ (Losses)		Net Unrealized Gains/ (Losses)		Net Purchases		Net (Sales)		Balance as of December 31, 2015		Change in Unrealized Gain/(Loss) on Level 3 securities still held at period end
Highland Long/Short Healthcare Fund
US. Senior Loans	$	—	⁽¹⁾	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Common Stocks
Healthcare Services		348,486			—		—		—		—		(459,232)		—		—		238,962		(109,524)
Pharmaceuticals		8,722,500			—				—		—		(772,500)		—		—		6,727,500		(1,995,000)
Master Limited Partnerships		110,653											69,852						69,852		(40,801)

Total	$	9,181,639		$	—	$	—	$	—	$	—	$	(1,161,879)	$	—	$	—	$	7,036,314	$	(2,145,325)

⁽¹⁾	This category includes securities with a value of zero.


	Balance as of June 30, 2015		Transfers into Level 3		Transfers Out of Level 3		Net Amortization (Accretion) of Premium/ (Discount)		Net Realized Gains/ (Losses)		Net Unrealized Gains/ (Losses)		Net Purchases		Net (Sales)		Balance as of December 31, 2015			Change in Unrealized Gain/(Loss) on Level 3 securities still held at period end
Highland Floating Rate Opportunities Fund
U.S. Senior Loans
Financial	$	—	$	—	$	—	$	484	$	—	$	39,222	$	3,494,118	$	—	$	3,533,824		$	39,222
Gaming & Leisure		5,420,610		1,801,621		—		—		—		(314,059)		282,324		—		7,190,496	⁽¹⁾		(314,059)
Healthcare		22,394,521		—		—		—		—		2,398,300		—		—		24,792,821			2,398,300
Housing		7,435,364		—		—		(10)		(1,713)		(749,094)		906,218		(424,127)		7,166,638			(749,094)
Manufacturing		—		2,608,828		—		—		—		—		—		—		2,608,828			—
Transportation		26,954		—		—		—		—		(135)		—		—		26,819			(135)
Utility		3,346,535		1,950,000		(3,474,670)		21,675		7,467		(21,877)		237,254		(116,384)		1,950,000			—
Foreign Denominated or Domiciled
Senior Loans
Germany		369,491		—		—		—		—		(84,087)		—		—		285,404			(84,087)
Marshall Islands		—		3,697,061		—		—		—		—		—		—		3,697,061			—
United Kingdom		309,860		—		—		—		(25,292)		(3,182)		—		(241,463)		39,923			(3,182)
Claims		320,088		—		(192,053)		—		—		4,164		—		(132,199)		—			4,164
Common Stocks
Broadcasting		463,534		—		—		—		—		(463,534)		—		—		—			(463,534)
Energy		1,677,429		—		—		—		—		(1,677,429)		—		—		—			(1,677,429)
Healthcare		86,953		—		—		—		(3,129,411)		3,058,192		—		—		15,734			3,058,192
Housing		5,196,708		—		—		—		—		(82,418)		—		—		5,114,290			(82,418)
Real Estate		—		—		—		—		—		(4,263,731)		4,263,738		—		7			(4,263,731)
Transportation		8,540		—		—		—		—		(144)		—		—		8,396			(144)
Warrants
Equity Contracts⁽¹⁾		—		—		—		—		—		—		—		—		—	⁽¹⁾		—

Total	$	47,056,587	$	10,057,510	$	(3,666,723)	$	22,149	$	(3,148,949)	$	(2,159,812)	$	9,183,652	$	(914,173)	$	56,430,241		$	(2,137,935)

⁽¹⁾	This category includes securities with a value of zero.


Semi-Annual Report						55

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I


	Balance as of June 30, 2015		Transfers into Level 3		Transfers Out of Level 3		Net Amortization (Accretion) of Premium/ (Discount)		Net Realized Gains/ (Losses)		Net Unrealized Gains/ (Losses)		Net Purchases		Net (Sales)		Balance as of December 31, 2015		Change in Unrealized Gain/(Loss) on Level 3 securities still held at period end
Highland Opportunistic Credit Fund
US. Senior Loans
Telecommunications	$	602,271	$	—	$	—	$	—	$	—	$	467	$	34,644	$	—	$	637,382	$	467
Transportation		—		—		—		1,991		—		509		950,000		—		952,500		509
Utility		2,999,082		—		(3,209,741)		24,677		37,004		263,240		(6,752)		(107,510)		—		263,240
Foreign Corporate Bonds & Notes		—		667,500		—		—		—		—		—		—		667,500		—
Common Stocks		—		—		—		—		—		0		—		—		—		—
Chemicals		—		927,543		—		—		—		—		—		—		927,543		—
Materials		2,302,226		—		—		—		—		(226,933)		—		—		2,075,293		(226,933)
Telecommunication Services		1,544,267		—		—		—		—		(11,739)		—		—		1,532,528		(11,739)
Master Limited Partnerships		—		—		—		—		—		—		—		—		0		—
Healthcare Equipment & Services⁽¹⁾		14,608		—		—		—		—		(5,387)		—		—		9,221		(5,387)

Total	$	7,462,454	$	1,595,043	$	(3,209,741)	$	26,668	$	37,004	$	20,157	$	977,892	$	(107,510)	$	6,801,967	$	20,157

Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments. As a result, for the period ended December 31, 2015, amounts of $10,057,510 and $1,595,043 of the Floating Rate Opportunities Fund and the Opportunistic Credit Fund, respectively, were transferred from Level 2 to Level 3. Determination of fair values is uncertain because it involves subjective judgments and estimates that are unobservable. Transfers from Level 2 to 3 were due to a decline in market activity (e.g. frequency of trades), which resulted in a reduction of available market inputs to determine price.

For the period ended December 31, 2015, amounts of $3,666,723 and $3,209,741 of the Floating Rate Opportunities Fund and the Opportunistic Credit Fund, respectively, were transferred from Level 3 to Level 2. Transfers from Level 3 to Level 2 were due to an increase in market activity (e.g. frequency of trades), which resulted in an increase of available market inputs to determine price.

For the period ended December 31, 2015, there were no transfers between Level 1 and 2.


56						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:


Category	Market Value at 12/31/2015		Valuation Technique	Unobservable Inputs	Input Value(s)
Highland Long/Short Healthcare Fund
Common Stock	$	6,966,462	Weighted Scenarios	Scenario Probabilities	Various
			Multiples Analysis	Multiple of Revenue	3.7x
				Multiple of EBITDA	10.9x
				Liquidity Discount	10%
				Asset-Specific Discount	10%
			Discounted Cash Flow	Discount Rate	12%
Limited Partnership Units		69,852	Recovery Analysis	Scenario Probabilities	Various
			Discounted Cash Flow	Discount Rate	19%

Total	$	7,036,314
Highland Floating Rate Opportunities Fund
Bank Loans	$	51,291,814	Third-Party Pricing Vendor	N/A	N/A
			Adjusted Appraisal	Liquidity Discount	10% - 40%
			Liquidation Analysis	Settlement Discount	50%
			Multiples Analysis	Multiple of Revenue	0.4x - 0.5x
				Multiple of EBITDA	3.5x - 4.5x
Common Stock		5,138,427	Adjusted Appraisal	Liquidity Discount	25%
				Minority Discount	20%
				Regional Market Appreciation	1% - 32%
			Third-Party Pricing Vendor	N/A	N/A
			Multiples Analysis	Multiple of Revenue	0.4x - 0.5x
				Multiple of EBITDA	3.5x - 4.5x

Total	$	56,430,241
Highland Opportunitistic Credit Fund
Common Stock	$	4,535,364	Multiples Analysis	Price/MHz-PoP	$0.13 - $0.50
				Multiple of EBITDA	8.0x - 10.0x
				Minority Discount	20%
			Third-Party Pricing Vendor	N/A	N/A
Bank Loans		2,257,382	Discounted Cash Flow	Spread Adjustment	0.0% - 0.2%
			Third-Party Pricing Vendor	N/A	N/A
Limited Partnership Units		9,221	Recovery Analysis	Scenario Probabilities	Various
			Discounted Cash Flow	Discount Rate	21%

Total	$	6,801,967

Security Transactions

Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of specific identification method for both financial statement and U.S. federal income tax purposes.

Income Recognition

Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums of debt instruments.

U.S. Federal Income Tax Status

Each Fund is treated as a separate taxpayer for U.S. federal income tax purposes. The Funds intend to qualify each year as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended, and will distribute substantially all of their taxable income and gains, if any, for the tax year, and as such will not be subject to U.S. federal income taxes. In addition, the Funds intend to distribute, in each calendar year, all of their net investment income, capital gains and certain other amounts, if any, such that the Funds should not be subject to U.S. federal excise tax. Therefore, no U.S. federal income or excise tax provisions are recorded.


Semi-Annual Report						57

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Management has analyzed the Funds’ tax positions taken on U.S. federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for U.S. federal income tax is required in the Funds’ financial statements. The Funds’ U.S. federal and state income and U.S. federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. Furthermore, management of the Funds, is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next 12 months.

Distributions to Shareholders

The Long/Short Equity Fund and the Long/Short Healthcare Fund intend to pay distributions from net investment income, if any, on an annual basis. The Floating Rate Opportunities Fund and Opportunistic Credit Fund intend to pay distributions from net investment income, if any, on a monthly basis. The Funds intend to pay short-term and long-term net realized capital gains, if any, on an annual basis. The Long/Short Equity Fund and the Long/Short Healthcare Fund claimed a portion of the payment paid to redeeming shareholders as a distribution for income tax purposes.

Statement of Cash Flows

Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows is the amount included within each Fund’s Statement of Assets and Liabilities and includes cash on hand at its custodian bank and sub-custodian bank, respectively, and does not include cash posted as collateral in the segregated account or with the broker-dealers.

Cash & Cash Equivalents

The Funds consider liquid assets deposited with a bank and certain short-term debt instruments of sufficient credit quality with original maturities of 3 months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of the Statement of Assets and Liabilities.

Foreign Currency

Accounting records of the Funds are maintained in U.S. dollars. Foreign currencies, investments and other assets

and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and liabilities resulting from changes in exchange rates, between trade and settlement dates on securities transactions and between the accrual and payment dates on dividends, interest income and foreign withholding taxes, are recorded as unrealized foreign currency gains/(losses). Realized gains/(losses) and unrealized appreciation/(depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.

Securities Sold Short

The Funds may sell securities short. A security sold short is a transaction in which a Fund sells a security it does not own in anticipation that the market price of that security will decline. When a Fund sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. A Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any dividends or other payments received on such borrowed securities. Cash held as collateral for securities sold short is classified as restricted cash on the Long/Short Equity Fund, Long/Short Healthcare Fund, Floating Rate Opportunities Fund and Opportunistic Credit Fund’s Statement of Assets and Liabilities. Restricted cash in the amounts of $213,842,531, $356,786,895, $13,169,662 and $1,829,709 were held with the broker for the Long/Short Equity Fund, Long/Short Healthcare Fund, Floating Rate Opportunities Fund and Opportunistic Credit Fund, respectively. Additionally, securities valued at $167,233,722 and $163,332,457 were posted in the Long/Short Equity Fund, and Long/Short Healthcare Fund segregated accounts as collateral, respectively.

When-Issued Securities & Forward Commitments

The Funds may purchase or sell securities on a when-issued or forward commitment basis. These transactions are arrangements in which the Funds purchase and sell securities with payment and delivery scheduled a month or more after entering into the transactions. The price of the underlying securities and the date when these securities will be delivered and paid for are fixed at the time the transaction is negotiated. Losses may arise due to changes


58						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

in the market value of the underlying securities or if the counterparty does not perform under the contract. In connection with such purchases, the Funds maintain cash or liquid assets in an amount equal to purchase commitments for such underlying securities until settlement date. For sales commitments, the Funds maintain equivalent deliverable securities as “cover” for the transaction. Unsettled commitments are valued at current market value of the underlying security. Daily fluctuations in the value of such contracts are recorded as unrealized gains or losses. The Funds will not enter into such commitments for the purpose of investment leverage. As of December 31, 2015, no Funds held securities on a when-issued or forward commitment basis.

Note 3. Derivative Transactions

The Funds are subject to equity price risk, interest rate risk and foreign currency exchange rate risk in the normal course of pursuing their investment objectives. The Funds enter into derivative transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, to gain market exposure for residual and accumulating cash positions, and for managing the duration of fixed income investments.

Futures Contracts

A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. The Funds may invest in interest rate, financial and stock or bond index futures contracts subject to certain limitations. The Funds invest in futures contracts to manage their exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase a Fund’s exposure to the underlying instrument while selling futures tends to decrease a Fund’s exposure to the underlying instrument, or economically hedge other Fund investments. With futures contracts, there is minimal counterparty credit risk to the Funds since futures contracts are exchange-traded and the exchange’s clearinghouse, as counterparty to all traded futures, guarantees the futures against default. A Fund’s risks in using these contracts include changes in the value of the underlying instruments, non-performance of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade. Upon entering into a financial futures contract, the Funds are required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margins, are

made or received by the Funds each day, depending on the daily fluctuation in the fair value of the underlying security. The Funds record an unrealized gain/(loss) equal to the daily variation margin. Should market conditions move unexpectedly, the Funds may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Funds recognize a realized gain/(loss) on the expiration or closing of a futures contract. The Long/Short Equity Fund invested in futures contracts during the six months ended; however, none were held as of December 31, 2015. The Fund entered into futures transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, to gain market exposure for residual and accumulating cash positions and for managing the duration of fixed-income investments. Cash held as collateral for futures contracts is shown on the Statement of Assets and Liabilities as “Restricted Cash — Futures”, if applicable.

For the six months ended December 31, 2015, the Long/Short Healthcare Fund, Floating Rate Opportunities Fund and Opportunistic Credit Fund did not invest in futures contracts.

Options

The Funds may utilize options on securities or indices to varying degrees as part of their principal investment strategy. An option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option at a specified exercise or “strike” price. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. The Funds may hold options, write option contracts, or both.

If an option written by a Fund expires unexercised, the Fund realizes on the expiration date a capital gain equal to the premium received by the Fund at the time the option was written. If an option purchased by a Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, underlying security, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be affected when a Fund desires. A Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss.


Semi-Annual Report						59

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

During the six months ended December 31, 2015, the Long/Short Equity Fund, Long/Short Healthcare Fund had written options to provide leveraged short exposure, and purchased options to provide leveraged long exposure, to the underlying equity, which is consistent with the investment strategies of these Funds.

Transactions in written options for the six months ended December 31, 2015 were as follows:


Long/Short Equity Fund	Number of Contracts			Notional Value			Premium
Outstanding, June 30, 2015		4,450		$	34,450,000		$	675,857
Call Options Written		28,662			425,900,750			5,053,563
Put Options Written		20,162			395,718,800			14,453,996
Call Options Exercised		(668	)		(13,925,150	)		(224,611	)
Call Options Expired		(12,172	)		(153,703,000	)		(2,182,682	)
Put Options Expired		(6,900	)		(90,600,000	)		(3,214,701	)
Call Options Closed		(15,522	)		(253,922,600	)		(2,601,184	)
Put Options Closed		(16,712	)		(320,068,800	)		(11,731,385	)

Outstanding, December 31, 2015		1,300			23,850,000			228,853


Long/Short Healthcare Fund	Number of Contracts			Notional Value			Premium
Outstanding, June 30, 2015		7,396		$	155,316,000		$	2,199,918
Call Options Written		12,319			81,151,000			2,250,330
Put Options Written		70,368			760,917,500			9,419,045
Call Options Closed		(8,950	)		(67,675,000	)		(1,012,424	)
Put Options Closed		(77,764	)		(916,233,500	)		(11,618,963	)

Outstanding, December 31, 2015		3,369			13,476,000			1,237,906

For the six months ended December 31, 2015, the Floating Rate Opportunities Fund and Opportunistic Credit Fund did not invest in options.

Swap Contracts

The Funds may use swaps as part of its investment strategy or to manage its exposure to interest, commodity, and currency rates as well as adverse movements in the debt and equity markets. Swap agreements are privately negotiated in the OTC market or may be executed in a multilateral or other trade facility platform, such as a registered exchange (“centrally cleared swaps”).

Total return swaps are agreements to exchange the return generated by one instrument for the return generated by another instrument; for example, the agreement to pay interest in exchange for a market or commodity-linked return based on a notional amount. To the extent the total return of the market or commodity-linked index exceeds the offsetting interest obligation, the Fund will receive a

payment from the counterparty. To the extent it is less, the Fund will make a payment to the counterparty. Periodic payments received or made by the Fund are recorded in “Net realized gain (loss) on swap contracts” on the accompanying Statement of Operations and Changes in Net Assets as realized gains or losses, respectively. As of December 31, 2015, the Long/Short Equity Fund was a party to open swap contracts having a fair value of $1,103,362.

For the six months ended December 31, 2015, the Long/Short Healthcare Fund, Floating Rate Opportunities Fund and Opportunistic Credit Fund did not invest in swap contracts.

Additional Derivative Information

The Funds adopted amendments to authoritative guidance on disclosures about derivative instruments and hedging activities which require that the Funds disclose: a) how and why an entity uses derivative instruments, b) how derivative instruments and related hedged items are accounted for, c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows and d) how the netting of derivatives subject to master netting arrangements affects the net exposure of the Funds related to the derivatives.

The fair value of derivative instruments on the Statement of Assets and Liabilities have the following risk exposure at December 31, 2015:


	Fair Value
Fund	Asset Derivative			Liability Derivative
Long/Short Equity Fund
Equity Price Risk	$	1,676,514	⁽¹⁾⁽²⁾	$	61,000	⁽³⁾
Long/Short Healthcare Fund
Equity Price Risk		10,420,678	⁽¹⁾		2,863,650	⁽³⁾

⁽¹⁾	Statement of Assets and Liabilities location: Unaffiliated investments, at value.

⁽²⁾	Statement of Assets and Liabilities location: Swaps, at value.

⁽³⁾	Statement of Assets and Liabilities location: Written options contracts, at value.

To reduce counterparty credit risk with respect to over-the-counter (“OTC”) transactions, the Funds have entered into master netting arrangements, established within the Funds’ International Swap and Derivatives Association, Inc. (“ISDA”) master agreements, which allows the Funds to make (or to have an entitlement to receive) a single net payment in the event of default (close-out netting) for outstanding payables and receivables with respect to certain OTC derivative positions in forward currency exchange contracts for each individual counterparty. In addition, the Funds may require that certain counterparties post cash


60						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

and/or securities in collateral accounts to cover their net payment obligations for those derivative contracts subject to ISDA master agreements. If the counterparty fails to perform under these contracts and agreements, the cash and/or securities will be made available to the Funds.

Certain ISDA master agreements include credit related contingent features which allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity in the event the Funds’ net assets decline by a stated percentage or a Fund fails to meet the terms of its ISDA master agreements, which would cause the Funds to accelerate payment of any net liability owed to the counterparty.

For financial reporting purposes, the Funds do not offset derivative assets and derivative liabilities that are subject to netting arrangements in the Statement of Assets and Liabilities. Bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events.

Collateral terms are contract specific for OTC derivatives. For derivatives traded under an ISDA master agreement, the collateral requirements are typically calculated by netting the mark to market amount for each transaction under such agreement and comparing that to the value of any collateral currently pledged by the Fund or the Counterparty.

For financial reporting purposes, cash collateral that has been pledged to cover obligations of the Funds, if any, is reported in restricted cash on the Statement of Assets and Liabilities. Generally, the amount of collateral due from or to a party must exceed a minimum transfer amount threshold before a transfer has to be made. To the extent amounts due to the Funds from their counterparties are not fully collateralized, contractually or otherwise, the Funds bear the risk of loss from counterparty non-performance.

The following tables present derivative instruments that are subject to enforceable netting arrangements as of December 31, 2015:


Gross Amounts Not Offset in the Statement of Assets and Liabilities
	Gross Amounts of Recognized Assets		Gross Amount Offset in the Statement of Assets and Liabilities			Net Amount of Assets Presented in the Statement of Assets and Liabilities		Financial Instruments		Cash Collateral Received		Net Amount
Derivatives	$	1,175,556	$	(72,194	)	$	1,103,362		—		—	$	1,103,362

The effect of derivative instruments on the Statement of Operations for the six months ended December 31, 2015, is as follows:


Fund	Net Realized Gain/(Loss) on Derivatives			Net Change in Unrealized Appreciation/ (Depreciation) on Derivatives
Long/Short Equity Fund
Equity Price Risk	$	13,869,249	^(1)(2)(3)⁽⁴⁾	$	(2,232,469	)^(5)(6)(7)(8)
Foreign Currency Risk		231,756	⁽⁴⁾		—
Long/Short Healthcare Fund
Equity Price Risk		(2,227,313	)⁽¹⁾⁽³⁾		4,368,387	⁽⁵⁾⁽⁷⁾

⁽¹⁾	Statement of Operations location: Realized gain (loss) from unaffiliated issuers.

⁽²⁾	Statement of Operations location: Realized gain (loss) on swap contracts.

⁽³⁾	Statement of Operations location: Realized gain (loss) on written options contracts.

⁽⁴⁾	Statement of Operations location: Realized gain (loss) on futures contracts

⁽⁵⁾	Statement of Operations location: Net change in unrealized appreciation/(depreciation) on investments.

⁽⁶⁾	Statement of Operations location: Net change in unrealized appreciation/(depreciation) on swaps contracts.

⁽⁷⁾	Statement of Operations location: Net change in unrealized appreciation/(depreciation) on written options contracts.

⁽⁸⁾	Statement of Operations location: Net change in unrealized appreciation/(depreciation) on futures contracts.

The average quarterly volume of derivative activity for the six months ended December 31, 2015, is as follows:


Fund	Units/ Contracts		Appreciation/ (Depreciation)
Long/Short Equity Fund
Purchased Options Contracts		6,433	$	—
Futures Contracts		—		90,069
Swap Contracts		—		367,787
Written Options Contracts		3,838		—
Long/Short Healthcare Fund
Purchased Options Contracts		16,773		—
Written Options Contracts		1,685


Semi-Annual Report						61

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Note 4. Securities Lending

Each Fund may seek additional income by making secured loans of its portfolio securities through its custodian, State Street Bank and Trust Company (“State Street”). Such loans will be in an amount not greater than one-third of the value of the Fund’s total assets. State Street will charge a Fund fees based on a percentage of the securities lending income.

The Funds will receive collateral consisting of cash, securities of the U.S. Government or its agencies or instrumentalities, irrevocable letters of credit issued by a bank or forms of collateral acceptable under the Trust’s securities lending agreement, which collateral will be maintained at all times in an amount equal to 102% of the current market value of the loaned securities. If the collateral consists of non-cash collateral, the borrower will pay the Fund a loan premium fee. If the collateral consists of cash, State Street will reinvest the cash. Although voting rights, or rights to consent, with respect to the loaned securities pass to the borrower, the Fund retains the right to call the loans at any time on reasonable notice, and it will do so in order that the securities may be voted by the Fund if the holders of such securities are asked to vote upon or consent to matters materially affecting the investment. The Fund also may call such loans in order to sell the securities involved.

The risks in lending portfolio securities, as with other extensions of credit, consist of possible delays in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. A Fund also bears the risk that the value of investments made with collateral may decline. Although a Fund has the right to call loans at any time on reasonable notice and will do so if holders of a loaned security are asked to vote upon or consent to material matters, the Fund bears the risk of delay in the return of the security, impairing the Fund’s ability to vote on such matters.

Securities lending also exposes a Fund to counterparty risk, as the borrower of the Fund’s securities may be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. There can be no assurance that a counterparty will meet its obligations, especially during unusually adverse market conditions. If the counterparty defaults, the Fund will have contractual remedies, but the Fund may be unable to enforce its contractual rights.

Securities lending transactions are entered into pursuant to Securities Lending Authorization Agreements (“SLAA”), which provides the right, in the event of default (including bankruptcy or insolvency) for the non-defaulting party to liquidate the collateral and calculate a net exposure to the

defaulting party or request additional collateral. In the event that a borrower defaults, a Fund, as lender, would offset the market value of the collateral received against the market value of the securities loaned. The value of the collateral is typically greater than that of the market value of the securities loaned, leaving the lender with a net amount payable to the defaulting party. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of a SLAA counterparty’s bankruptcy or insolvency. Under the SLAA, a Fund can reinvest cash collateral, or, upon an event of default, resell or repledge the collateral, and the borrower can resell or repledge the loaned securities. The risks of securities lending also include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. To mitigate this risk, each Fund benefits from a borrower default indemnity provided by State Street Bank and Trust Company (“State Street”). State Street’s indemnity generally provides for replacement of securities lent or the approximate value thereof.

The following table presents financial instruments that are subject to enforceable netting arrangements as of December 31, 2015:


Gross Amounts Not Offset in the Statement of Assets and Liabilities
Fund	Gross Amounts of Liabilities Presented in Statement of Assets & Liabilities⁽¹⁾		Financial Instrument⁽²⁾			Collateral Received		Net Amount (not less than 0)
Long/Short Equity Fund	$	33,116,569	$	(32,269,623	)	$	—	$	846,946
Long/Short Healthcare Fund		36,667,006		(35,276,071	)		—		1,390,935
Floating Rate Opportunities Fund		20,863,083		(21,066,138	)		—		—
Opportunistic Credit Fund		4,876,554		(4,799,422	)		—		77,132

⁽¹⁾	In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization.

⁽²⁾	Represents market value of securities on loan at period end.


62						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

For the six months ended December 31, 2015, the market value of securities loaned and the amounts secured with cash and securities collateral, which are included on each Fund’s Investment Portfolio were as follows:


Fund	Security Lending Market Value		Security Lending Collateral Cash Collateral⁽¹⁾		Security Lending Collateral Non-Cash Collateral⁽²⁾
Long/Short Equity Fund	$	32,269,623	$	33,116,569	$	—
Long/Short Healthcare Fund		35,276,071		36,667,006		—
Opportunistic Credit Fund		4,799,422		4,876,554		—
Floating Rate Opportunities Fund		21,066,138		20,863,083		—

⁽¹⁾	The loaned securities were secured with cash collateral which was invested in the State Street Navigator Prime Securities Lending Portfolio.

⁽²⁾	Security lending non-cash collateral consists of U.S. Government Treasury & Agency debt.

Note 5. U.S. Federal Income Tax Information

The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from U.S. GAAP. These differences include (but are not limited to) investments organized as partnerships for tax purposes, foreign taxes, investments in futures, losses deferred to off-setting positions, tax treatment of organizational start-up costs, losses deferred due to wash sale transactions, tax treatment of net investment loss and distributions in excess of net investment income,

dividends deemed paid upon shareholder redemption of Fund shares and tax attributes from Fund reorganizations. Reclassifications are made to the Funds’ capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or net asset value of the Funds. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments.

For the year ended June 30, 2015, permanent differences chiefly resulting from net investment losses, dividends on short sales, foreign currency gains and losses, non-deductible excise taxes paid, partnership-basis adjustments, return of capital distributions, equalization, short sale holding period reclass, capital loss carryover write-offs and REITs were identified and reclassified among the components of the Funds’ net assets as follows:


Fund	Undistributed Net Investment Income		Accumulated Net Realized Gain/(Loss)			Paid-in- Capital
Long/Short Equity Fund	$	12,750,421	$	(20,636,240	)	$	7,885,819
Long/Short Healthcare Fund		9,408,755		(19,967,053	)		10,558,298
Floating Rate Opportunities Fund		1,650,533		64,100,023			(65,750,556	)
Opportunistic Credit Fund		26,302		5,482,143			(5,508,445	)

At June 30, 2015, the Funds’ most recent tax year end, components of distributable earnings on a tax basis is as follows:


Fund	Undistributed Income		Undistributed Long-Term Capital Gains		Undistributed Tax-Exempt Income		Other Temporary Differences⁽¹⁾			Accumulated Capital and Other Losses			Net Tax Appreciation/ (Depreciation)⁽²⁾
Long/Short Equity Fund	$	25,871,187	$	4,594,106	$	—	$	—		$	—		$	32,449,937
Long/Short Healthcare Fund		29,427,253		—		—		(60,310	)		—			2,171,289
Opportunistic Credit Fund		1,535,792		—		—		(476,286	)		(859,127,547	)		(417,122,234	)
Floating Rate Opportunities Fund		343,168		—		—		(50,199	)		(3,237,516	)		(5,442,157	)

⁽¹⁾	Other temporary differences are comprised of dividends payable, organizational expenses and potential gains from Genesys Partnership.

⁽²⁾	Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to deferral of losses from wash sales, partnership-basis adjustments, defaulted bonds, and premium amortization.

As of June 30, 2015, the Floating Rate Opportunities Fund and the Opportunistic Credit Fund have capital loss carryovers as indicated below. The capital loss carryovers are available to offset future realized capital gains to the extent provided in the Code and regulations promulgated thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income.


Semi-Annual Report						63

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I


Fund	2016			2017			2018			No Expiration Short- Term⁽¹⁾		No Expiration Long- Term⁽¹⁾		Total
Floating Rate Opportunities Fund	$	232,159,979	⁽²⁾	$	393,425,946	⁽²⁾	$	143,999,490	⁽²⁾	$	—	$	89,542,132	$	859,127,547
Opportunistic Credit Fund		—			—			780,886	⁽³⁾		—		2,456,630		3,237,516

⁽¹⁾

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was signed into law. The Modernization Act modifies several of the Federal income and excise tax provisions related to RICs. Under the Modernization Act, new capital losses may now be carried forward indefinitely, and retain the character of the original loss as compared with pre-enactment law where capital losses could be carried forward for eight years, and carried forward as short-term capital losses, irrespective of the character of the original loss. These losses without expiration must be used prior to the loss layers with expiration.

⁽²⁾	These capital loss carryforward amounts were acquired in a reorganization and are available to offset future capital gains of Floating Rate Opportunities Fund. The Fund’s ability to utilize the capital loss carryforwards is limited under Internal Revenue Service regulations.

⁽³⁾	These capital loss carryforward amounts were limited due to an ownership change and are available to offset future capital gains of the Opportunistic Credit Fund. The Fund’s ability to utilize the capital loss carry forwards is limited under Internal Revenue Service regulations.

For the year ended June 30, 2015 there were no capital loss carryforwards for the Long/Short Equity Fund and the Long/Short Healthcare Fund.

The tax character of distributions paid during the years ended June 30, 2015 and June 30, 2014 (unless otherwise indicated) is as follows:


	Distributions Paid From:
Fund	Ordinary Income⁽¹⁾		Long- Term Capital Gains		Return of Capital
Long/Short Equity Fund
2015	$	35,544,074	$	2,142,897	$	—
2014		70,812,740		3,123,983		—
Long/Short Healthcare Fund
2015		14,918,004		825,974		—
2014		—		—		—
Floating Rate Opportunities Fund
2015		37,405,128		—		—
2014		46,931,922		—		950,186
Opportunistic Credit Fund
2015		2,558,269		—		—
2014		—		—		—

⁽¹⁾	For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions.

Unrealized appreciation and depreciation at December 31, 2015, based on cost of investments for U.S. federal income tax purposes is:


Fund	Gross Appreciation		Gross Depreciation		Net Appreciation/ (Depreciation)⁽¹⁾			Cost
Long/Short Equity Fund	$	14,306,673	$	44,366,634	$	(30,059,961	)	$	940,071,299
Long/Short Healthcare Fund		23,848,990		68,142,287		(44,293,297	)		686,888,048
Floating Rate Opportunities Fund		29,624,876		552,020,841		(522,395,965	)		1,156,605,372
Opportunistic Credit Fund		1,769,232		34,423,329		(32,654,097	)		105,285,784

⁽¹⁾	Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to deferral of losses from wash sales, partnership-basis adjustments, defaulted bonds and premium amortization.

Qualified Late Year Ordinary and Post October Losses

Under current laws, certain capital losses realized after October 31 may be deferred (and certain ordinary losses after January 1st may be deferred) and treated as occur-

ring on the first day of the following fiscal year. For the fiscal year ended June 30, 2015, none of the Funds elected to defer the following losses incurred from November 1, 2014 or January 1, 2015 through June 30, 2015.


64						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Note 6. Credit Agreement

Effective June 13, 2012, the Floating Rate Opportunities Fund entered into a $300,000,000 credit agreement (the “Credit Agreement”) with State Street Bank and Trust Company with an expiration of June 10, 2013. On October 29, 2012, the Credit Agreement was amended, reducing the facility from $300,000,000 to $250,000,000. For the period June 13, 2012 to June 9, 2013, interest was charged at a rate equal to the adjusted London Interbank Offered Rate (“LIBOR”) plus 1.10% per annum based on the outstanding borrowings. On June 10, 2013, the Credit Agreement was amended to reduce the interest rate to the adjusted LIBOR plus 0.95% per annum based on the outstanding borrowings. In addition, a commitment fee of 0.15% per annum is charged on the unutilized commitment amount. On May 16, 2014, the Credit Agreement was amended to increase the facility to $350,000,000 and to extend the expiration date to May 15, 2015. On October 27, 2014 the Credit Agreement was amended, reducing the facility to $225,000,000. On May 22, 2015, the Credit Agreement was amended, increasing the facility to $275,000,000 and to extend the expiration date to May 20, 2016. Additionally, the interest rate was increased to LIBOR plus 1.10% and commitment fees increased to 0.20%. On August 31, 2015 the Credit Agreement was amended to include the addition of three new funds; (a) Highland GFR Equity Hedge ETF, (b) Highland HFR Event-Driven ETF and (c) Highland HFR Global ETF, each a series of Highland Funds 1. Included in the Statement of Operations is $564,519 of interest expense related to the Credit Agreement. As of December 31, 2015, the fair value of the outstanding debt under the Credit Agreement was estimated to be $46,853,956 and would be categorized as Level 3 within the fair value hierarchy. The fair value was estimated based on discounting the cash flows owed using a discount rate of 0.50% over the 5 month risk free rate. For the six months ended December 31, 2015, the Floating Rate Opportunities Fund’s average daily note balance was $49,986,413 at a weighted average interest rate of 0.95%.

The Floating Rate Opportunities Fund is required to maintain 300% asset coverage with respect to amounts outstanding under the Credit Agreement, as amended, and the Fund is required to maintain 300% asset coverage under Section 18(a) of the 1940 Act. Asset coverage is calculated by subtracting the Fund’s total liabilities, not including any amount representing bank loans and senior securities, from the Fund’s total assets and dividing the result by the principal amount of the borrowings

outstanding. As of the dates indicated below, the Floating Rate Opportunities Fund’s debt outstanding and asset coverage was as follows:


Date	Total Amount Outstanding		% of Asset Coverage of Indebtedness
12/31/2015	$	46,500,000		1,371.3	%
06/30/2015		51,500,000		1,641.4	%
06/30/2014		60,000,000		1,577.6	%
06/30/2013		N/A		N/A
06/30/2012		89,000,000		718.4
06/30/2011		135,000,000		659.9
06/30/2010		115,000,000		606.0
06/30/2009		181,000,000		465.8
06/30/2008		511,000,000		409.3
06/30/2007		960,000,000		400.5

Effective May 24, 2013, the Long/Short Equity Fund and the Long/Short Healthcare Fund entered into a $25,000,000 unsecured credit agreement with State Street Bank and Trust Company (the “Unsecured Credit Agreement”) to be used for temporary purposes to facilitate portfolio liquidity. The Funds have access to the facility, but aggregate borrowings cannot exceed $25,000,000. Interest is charged to the Funds based on their borrowing at a rate equal to the greater of the Federal Funds Effective Rate plus 1.25% or the LIBOR plus 1.25%. In addition, the Funds agree to pay commitment fee expenses of 0.10% on the undrawn amounts, which are included in “Commitment fees-credit agreement” on the Statement of Operations. On May 23, 2014, the Unsecured Credit Agreement was amended to extend the expiration date to May 22, 2015. Effective July 31, 2014, the Unsecured Credit Agreement was amended to include the Opportunistic Credit Fund. On October 27, 2014, the Unsecured Credit Agreement was increased to $150,000,000. Additionally, the Funds agreed to pay increased commitment fee expenses of 0.15% on undrawn amounts. On May 22, 2015, the Unsecured Credit Agreement was amended to extend the expiration date to May 20, 2016 and to increase commitment fee expenses to 0.20% on undrawn amounts. For the six months ended December 31, 2015, the Opportunistic Credit Fund’s average daily note balance was $12,668,478 at a weighted average interest rate of 0.95%.

During the six months ended December 31, 2015, the Long/Short Equity Fund and the Long/Short Healthcare Fund did not have any outstanding borrowings.


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NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Note 7. Advisory, Administration, Service and Distribution, Trustee, and Other Fees

Investment Advisory Fees and Sub-advisory Fees

The Investment Adviser receives from the Long/ Short Equity Fund, the Opportunistic Credit Fund and the Long/Short Healthcare Fund monthly investment advisory fees, computed and accrued daily based on the Average Daily Managed Assets of each Fund, at the annual rate of 2.25%, 1.00% and 1.00%, respectively.

The Investment Adviser receives from the Floating Rate Opportunities Fund monthly investment advisory fees, computed and accrued daily, based on an annual rate of 0.65% of the Fund’s Average Daily Managed Assets for the first $1 billion, 0.60% of the Fund’s Average Daily Managed Assets for the next $1 billion and 0.55% of the Fund’s Average Daily Managed Assets over $2 billion.

Administration Fees

The Investment Adviser provides administrative services to each Fund. For its services, the Investment Adviser receives a monthly administration fee, computed and accrued daily, at the annual rate of 0.20% of each Fund’s Average Daily managed net assets from each Fund except Opportunistic Credit Fund.

Service and Distribution Fees

Highland Capital Funds Distributor, Inc. (formerly, Foreside Funds Distributors LLC (the “Underwriter”), serves as the principal underwriter and distributor of each Fund’s shares. The Underwriter receives the front-end sales charge imposed on the sale of Class A Shares and the contingent deferred sales charge (“CDSC”) imposed on certain redemptions of Class A and Class C Shares. For the six months ended December 31, 2015, the Underwriter received $111,959, $604,906 and $223,809 of front end sales charges for Class A Shares of the Long/Short Equity Fund, the Long/Short Healthcare Fund and the Floating Rate Opportunities Fund, respectively. The Underwriter also received $4,105, $6,577 and $780 of CDSC for Class C Shares of the Long/Short Equity Fund, the Long/Short Healthcare Fund and the Floating Rate Opportunities Fund, respectively.

The Funds have adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the “Plan”) for Class A Shares and Class C Shares of the Funds, which requires the payment of a monthly fee to the Underwriter at an annual rate of the average daily net assets of each class as follows:


Fund	Class A Shares			Class C Shares
Long/Short Equity Fund		0.35	%		1.00	%
Long/Short Healthcare Fund		0.35	%		1.00	%
Floating Rate Opportunities Fund		0.35	%		0.85	%
Opportunistic Credit Fund		0.35	%		0.85	%

For the six months ended December 31, 2015, the Distribution and Service fees, which are included on the Statement of Operations for each class, were as follows:


Fund	Class A Fees		Class C Fees
Long/Short Equity Fund	$	136,930	$	310,479
Long/Short Healthcare Fund		330,602		477,052
Floating Rate Opportunities Fund		330,118		1,207,150
Opportunistic Credit Fund		11,410		636

Expense Limits and Fee Reimbursements

For the Long/Short Equity Fund, the Investment Adviser contractually agreed to waive a portion of its advisory fee in an amount equal to 1.25% of the Fund’s management fees. This waiver will continue through at least October 31, 2016 and may not be terminated prior to this date without the action or consent of the Board of Trustees.

For the Floating Rate Opportunities Fund, the Investment Adviser contractually agreed to limit the total annual operating expenses of the Floating Rate Opportunities Fund (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the Investment company Act of 1940, taxes, dividend expenses on short sales, interest payments, brokerage commissions and other transaction costs, acquired fund fees and expenses, and extraordinary expenses) of the Fund to 0.95% of average daily net assets of the Fund (the “FRO Expense Cap”). The FRO Expense Cap will continue through at least October 31, 2016, and may not be terminated prior to this date without the action or consent of the Board of Trustees.

The Trust, on behalf of the Floating Rate Opportunities Fund, has contractually agreed to pay the Investment Adviser all amounts previously paid, waived or reimbursed by the Investment Adviser with respect to the Fund pursuant to the Expense Cap, provided that the amount of such additional payment in any year, together with all other expenses of the Fund, (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1


66						Semi-Annual Report

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December 31, 2015		Highland Funds I

under the 1940 Act, interest payments, taxes, dividend expenses on short sales, brokerage commissions and other transaction costs, acquired fund fees and expenses, and extraordinary expenses) in the aggregate, would not cause the Fund’s total annual operating expenses in any such year to exceed the amount of the Expense Cap, and provided further that no additional payments by the Trust will be made with respect to amounts paid, waived or reimbursed by the Investment Adviser more than 36 months from the date such amounts were paid, reimbursed or waived. The Investment Adviser may not recoup any amounts previously paid, waived or reimbursed under the Expense Cap before payment of the Floating Rate Opportunities Fund’s operating expenses for the year in which the Investment Adviser intends to recoup such amounts.

For the six months ended December 31, 2015, the Investment Adviser did not have any recoupments for amounts previously paid, waived or reimbursed.

For the Opportunistic Credit Fund, the Investment Adviser contractually agreed to limit the total annual operating expenses (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the Investment Company Act of 1940, taxes, dividend expenses on short sales, interest payments, brokerage commissions and other transaction costs, acquired fund fees and expenses, and extraordinary expenses (collectively, the “Excluded Expenses”)) to 0.90% of average daily net assets of the Fund (the “HOCF Expense Cap”). The HOCF Expense Cap will continue through at least October 31, 2016, and may not be terminated prior to this date without the action or consent of the Board of Trustees. The Trust, on behalf of the Opportunistic Credit Fund, has contractually agreed to pay the Investment Adviser all amounts previously paid, waived or reimbursed by the Investment Adviser with respect to the Fund pursuant to the Expense Cap, provided that the amount of such additional payment in any year, together with all other expenses (excluding Excluded Expenses) of the Fund, in the aggregate, would not cause the Fund’s total annual operating expenses in any such year to exceed the amount of the Expense Cap, and provided further that no additional payments by the Trust will be made with respect to amounts paid, waived or reimbursed by the Investment Adviser more 36 months from the date such amounts were paid, reimbursed or waived. The Investment Adviser may not recoup any amounts previously paid, waived or reimbursed under the Expense Cap before payment of the Opportunistic Credit Fund’s operating expenses for the year in which the Investment Adviser intends to recoup such amounts. On December 31, 2015, the amounts subject to possible future

recoupment under the Funds’ expense limitations were as follows:


	Expiring
Fund	2017		2018
Floating Rate Opportunities Fund	$	1,358,354	$	2,810,173
Opportunistic Credit Fund		—		501,010

For the six months ended December 31, 2015, the Investment Adviser waived $5,589,531, $1,002,899 and $213,080 for the Long/Short Equity Fund, Floating Rate Opportunities Fund and Opportunistic Credit Fund, respectively.

Fees Paid to Officers and Trustees

Each Trustee who is not an “interested person” of the Funds as defined in the 1940 Act (the “Independent Trustees”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser and its affiliated advisers as of the date of this report. Although the Funds believe that Mr. Powell is technically no longer an “interested person” of the Funds, in light of his previous employment with the Investment Adviser and an affiliate of the Investment Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an “interested person” of the Funds. Therefore, the Funds intend to treat Mr. Powell as an “interested person” of the Funds for all purposes other than compensation (Mr. Powell will be compensated at the same rate as the Independent Trustees) from December 16, 2015 until December 4, 2017 (the second anniversary of his resignation).

The Funds pay no compensation to their officers, all of whom are employees of the Investment Adviser or its affiliate.

Note 8. Disclosure of Significant Risks and Contingencies

The primary risks of investing in the Funds are described below in alphabetical order:

Counterparty Risk

Counterparty risk is the potential loss the Funds may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. Counterparty risk is measured as the loss the Funds would record if its counterparties failed to perform pursuant to the terms of their obligations to the Funds. Because the Funds may enter into over-the-counter forwards, options, swaps and other derivative financial instruments, the Funds may be exposed to the credit risk of their counterparties. To limit the counterparty risk associated with such


Semi-Annual Report						67

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

transactions, the Funds conduct business only with financial institutions judged by the Investment Adviser to present acceptable credit risk.

Credit Risk

Investments rated below investment grade are commonly referred to as high-yield, high risk or “junk debt.” They are regarded as predominantly speculative with respect to the issuing company’s continuing ability to meet principal and/ or interest payments. Investments in high yield debt and high yield Senior Loans may result in greater NAV fluctuation than if a Fund did not make such investments.

Corporate debt obligations, including Senior Loans, are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to a Fund, a reduction in the value of the corporate debt obligation experiencing non-payment and a potential decrease in the NAV of the Fund.

Currency Risk

A portion of the Funds’ assets may be quoted or denominated in non-U.S. currencies. These securities may be adversely affected by fluctuations in relative currency exchange rates and by exchange control regulations. The Funds’ investment performance may be negatively affected by a devaluation of a currency in which the Funds’ investments are quoted or denominated. Further, the Funds’ investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities quoted or denominated in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar.

Distressed or Defaulted Securities Risk

The Funds may invest in companies that are troubled, in distress or bankrupt. As such, they are subject to a multitude of legal, industry, market, environmental and governmental forces that make analysis of these companies inherently difficult. Further, the Investment Adviser relies on company management, outside experts, market participants and personal experience to analyze potential investments for the Funds. There can be no assurance that any of these sources will prove credible, or that the resulting analysis will produce accurate conclusions.

Futures Contracts Risk

The risks of entering into futures contracts include the possibilities that their markets may become illiquid and/or changes in the values of the contracts may not correlate to changes in the values of the underlying instruments.

Hedging Transactions Risk

Each Fund may engage in “hedging,” the practice of attempting to offset a potential loss in one position by establishing an opposite position in another investment. Hedging strategies in general are usually intended to limit or reduce investment risk, but can also be expected to limit or reduce the potential for profit. For example, if the Fund has taken a defensive posture by hedging its portfolio, and stock prices advance, the return to investors will be lower than if the portfolio had not been hedged. No assurance can be given that any particular hedging strategy will be successful, or that the Investment Adviser will elect to use a hedging strategy at a time when it is advisable.

Illiquid Securities Risk

The investments made by the Funds may be illiquid, and consequently the Funds may not be able to sell such investments at prices that reflect the Investment Adviser’s assessment of their value or the amount originally paid for such investments by the Funds. Illiquidity may result from the absence of an established market for the investments as well as legal, contractual or other restrictions on their resale and other factors. Furthermore, the nature of the Funds’ investments, especially those in financially distressed companies, may require a long holding period prior to profitability.

Industry Concentration Risk

The Funds may focus their investments in instruments of only a few companies. The concentration of the Funds’ portfolio in any one obligor would subject the Funds to a greater degree of risk with respect to defaults by such obligor, and the concentration of the portfolio in any one industry would subject the Funds to a greater degree of risk with respect to economic downturns relating to such industry.

Leverage Risk

Each of the Funds may use leverage in its investment program, including the use of borrowed funds and investments in certain types of options, such as puts, calls and warrants, which may be purchased for a fraction of the price of the underlying securities. While such strategies and techniques increase the opportunity to achieve higher returns on the amounts invested, they also increase the risk of loss. To the extent the Funds purchase securities with borrowed funds, their net assets will tend to increase or decrease at a greater rate than if borrowed funds are not used. If the interest expense on borrowings were to exceed the net return on the portfolio securities purchased with borrowed funds, the Funds’ use of leverage would result in a lower rate of return than if the Funds were not leveraged.


68						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Non-U.S. Securities and Emerging and Developing Markets Risk

Investments in foreign markets involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, restrictions on repatriation of income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile.

The Funds may be subject to capital gains and repatriation taxes imposed by certain countries in which they invest. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned.

Options Risk

There are several risks associated with transactions in options on securities. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A transaction in options or securities may be unsuccessful to some degree because of market behavior or unexpected events.

When a Fund writes a covered call option, the Fund forgoes, during the option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but retains the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation and once an option writer has received an exercise notice, it must deliver the underlying security in exchange for the strike price.

When a Fund writes a covered put option, the Fund bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is exercised, the Fund could incur a loss if it is required to purchase the stock underlying the put option at a price greater than the market price of the stock at the time of exercise plus the put premium the Fund received when it wrote the option. While the Fund’s potential gain in writing a covered put option is limited to distributions earned on the liquid assets securing the put option plus the premium received from the purchaser of the put option, the Fund risks a loss equal to the entire exercise price of the option minus the put premium.

Senior Loans Risk

The risk that the issuer or a senior may fail to pay interest or principal when due, and changes in market interest rates may reduce the value of the senior loan or reduce the Fund’s returns. The risks associated with senior loans are similar to the risks of high yield debt securities. Senior loans and other debt securities are also subject to the risk of price declines and to increases in prevailing interest rates. The Fund’s investments in senior loans are typically below investment grade and are considered speculative because of the credit risk of their issuers.

Short-Selling Risk

Short sales by the Funds that are not made where there is an offsetting long position in the asset that it is being sold short theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Short selling allows the Funds to profit from declines in market prices to the extent such decline exceeds the transaction costs and costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out the short position can itself cause the price of securities to rise further, thereby exacerbating the loss. The Funds may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions, a Fund might have difficulty purchasing securities to meet margin calls on its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.


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NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Note 9. Investment Transactions

Purchases & Sales of Securities

The cost of purchases and the proceeds from sales of investments, other than short-term securities and short-term options, for the six months ended December 31, 2015, were as follows:


	U.S Government Securities⁽¹⁾				Other Securities
Fund	Purchases		Sales		Purchases		Sales
Long/Short Equity Fund	$	—	$	—	$	1,364,371,048	$	1,337,875,738
Long/Short Healthcare Fund		—		—		2,587,072,303		2,544,710,058
Floating Rate Opportunities Fund		—		—		95,338,823		287,457,366
Opportunistic Credit Fund		—		—		32,458,523		184,380,717

⁽¹⁾	The Funds did not have any purchases or sales of U.S. Government Securities for the six months ended December 31, 2015.

Note 10. Affiliated Issuers

Under Section 2 (a) (3) of the Investment Company Act of 1940, as amended, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities.

The Long/Short Healthcare Fund held at least five percent of the outstanding voting securities of the following companies during the six months ended December 31, 2015:


					Market Value
Issuer	Shares at June 30, 2015		Shares at December 31, 2015		June 30, 2015		December 31, 2015		Affiliated Income		Purchases		Sales
Minerva Neurosciences, Inc. (Common Stocks)⁽¹⁾		1,204,320		1,273,470	$	6,985,056	$	7,729,963	$	—	$	5,957,737	$	—
Streamline Health Solutions, Inc. (Common Stocks)⁽¹⁾		252,782		1,084,267		707,790		1,528,817		—		2,402,039		156,884

		1,457,102		2,357,737	$	7,692,846	$	9,258,780	$	—	$	8,359,776	$	156,884

The Floating Rate Opportunities Fund held at least five percent of the outstanding voting securities of the following companies during the six months ended December 31, 2015:


					Market Value
Issuer	Shares at June 30, 2015		Shares at December 31, 2015		June 30, 2015		December 31, 2015		Affiliated Income		Purchases		Sales
Allenby (Common Stocks)⁽¹⁾		733,863		923,094	$	—	$	—	$	—	$	189,231	$	—
CCS Medical, Inc. (Common Stocks)⁽¹⁾		31,353,791		31,353,791		22,481,474		24,808,555				—		—
Claymore (Common Stocks)⁽¹⁾		2,254,761		6,329,267		—		6				4,074,505		—
Endurance Business Media, Inc. (Common Stocks)⁽¹⁾		2,251,261		2,251,261		—		—		—		—		—
Las Vegas Land Holdings LLC (Common Stocks)⁽¹⁾		70,480		70,480		4,405		4,405		—		—		—
LLV Holdco, LLC (Common Stocks)		11,012,331		11,294,655		5,420,610		5,388,875				282,324		—
Nevada Land Group LLC (Common Stocks)⁽¹⁾		8		8		—		—		—		906,218		—

		1,396,952		34,992	$	26,876,967	$	30,201,842	$	—	$	5,452,278	$	—


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NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Note 11. Unfunded Loan Commitments

As of December 31, 2015, the Floating Rate Opportunities Fund had unfunded loan commitments of $2,290,545, which could be extended at the option of the borrower, as detailed below:

Borrower

Unfunded

Loan

Commitment

Value

Unrealized
Appreciation
(Depreciation)

CCS Medical, Inc.

2,290,545

—

Unfunded loan commitments are marked to market on the relevant day of valuation in accordance with the Fund’s valuation policies. Any applicable unrealized gain/(loss) and unrealized appreciation/(depreciation) on unfunded loan commitments are recorded on the Statement of Assets and Liabilities and the Statement of Operations, respectively. As of December 31, 2015, the Floating Rate Opportunities Fund recognized net discount and unrealized depreciation on unfunded transactions of $0. The net change in unrealized appreciation/(depreciation) on unfunded transactions was $0.

Note 12. Legal Matters

Matters Relating to FRO’s Investment in TOUSA, Inc.

Floating Rate Opportunities Fund (“FRO”) is one of numerous defendants (“Lenders”) that have been named in an adversary proceeding pending in the Bankruptcy Court of the Southern District of Florida (the “Court”). The action, entitled In re Tousa Inc., et al., was filed on July 15, 2008, by the Official Committee of Unsecured Creditors of TOUSA, Inc. and its affiliates (the “Plaintiff”), which are home building companies to which the Lenders loaned money through different lending facilities. Plaintiff alleges that monies used to repay the Lenders should be voided as fraudulent and preferential transfers under the bankruptcy laws. More specifically, Plaintiff alleges that subsidiaries of the home building companies were forced to become co-borrowers and guarantors of the monies used to repay the Lenders, and that the subsidiaries did not receive fair consideration or reasonably equivalent value when they transferred the proceeds to repay the Lenders. Plaintiff seeks to void the transfers and other equitable relief. FRO and other Funds and accounts managed by the Investment Adviser and the other Lenders are named as defendants in two separate lending capacities; first, as lenders in a credit agreement (the “Credit Lenders”); and second, as lenders in a term loan (the “Term Loan Lenders”). The case went to trial, which concluded in August 2009. On October 13, 2009, the Bankruptcy Court ruled for the Plaintiff in the action and ordered the Defendants to return the proceeds received from the payoff of the term loan at par on July 31, 2007. The proceeds

received by FRO totaled $4,000,000. Additionally, the court ordered the Defendants to pay simple interest on the amount returned at an annual rate of 9%. In November 2009, FRO and other Defendants filed appealed the decision from the Bankruptcy Court to the District Court. On December 22, 2009, FRO posted $5,310,479 (“Security”) with the Court. This amount was recorded in the Statement of Assets and Liabilities and the Statement of Operations. On February 11, 2011, the District Court entered an order quashing all liability of the Lenders and declaring the remedies against the Lenders null and void. On May 15, 2012, the Eleventh Circuit Court of Appeal (“Eleventh Circuit”) issued its decision reversing the judgment of the District Court, affirming the liability findings of the Bankruptcy Court, and remanding to the District Court for further proceedings consistent with their opinion. The case was then stayed at the District Court pending the outcome of a series of related US Supreme Court cases which significantly effect on the Tousa action. The last such case was heard by the US Supreme Court case on January 14, 2015. On June 23, 2015, the District Court remanded the case back to the Bankruptcy Court for a report and recommendations regarding the effects of certain settlements on the Plaintiff’s available damages. The Bankruptcy Court heard oral arguments on November 19, 2015, but has not yet issued a ruling. The additional liability and damages issues remain stayed at the District Court until the Bankruptcy Court issues its report. FRO’s posted Security will be released upon a final appellate ruling.

Note 13. Reorganization

Effective July 1, 2014, all assets and liabilities of the Predecessor Fund were acquired by Highland Opportunistic Credit Fund pursuant to an Agreement and Plan of Reorganization dated July 1, 2014 (the “Fund Merger”). In the Fund Merger, shareholders of the Predecessor Fund received Class Z Shares of the Highland Opportunistic Credit Fund in exchange for Common Shares of the Predecessor Fund.

Because the Highland Opportunistic Credit Fund had no investment operations prior to the closing of the Fund Merger, and based on the similarity of the Highland Opportunistic Credit Fund to the Predecessor Fund, the Predecessor Fund is treated as the survivor of the Fund Merger for accounting and performance reporting purposes. Accordingly, all performance and other information shown for the Highland Opportunistic Credit Fund for periods prior to July 1, 2014 is that of the Predecessor Fund. Mr. James Dondero, the current portfolio manager of the Opportunistic Credit Fund, also served as the portfolio manager of the Predecessor Fund since its inception on May 18, 2005.


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NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Note 14. Changes of Independent Registered Public Accounting Firms

The Funds have selected KPMG, LLP (“KPMG”) to serve as the Funds’ independent registered public accounting firm for the Funds’ fiscal year ended June 30, 2016. The decision to select KPMG was recommended by the Funds’ Audit Committee and approved by the Board on September 11, 2015. With respect to the Funds’ fiscal years ended June 30, 2014 and June 30, 2015, for which PricewaterhouseCoopers, LLP (“PwC”) served as the Funds’ independent registered public accounting firm, neither the Funds, nor anyone on their behalf, consulted with KPMG on items which: (i) concerned the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Funds’ financial statements; or (ii) concerned the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K) or reportable events (as described in paragraph (a)(1)(iv) of said Item 304). The selection of KPMG does not reflect any disagreements with or dissatisfaction by the Funds or the Board with the performance of PwC. The decision not to renew the engagement of PwC, effective upon its completion of its audit for the fiscal years ended June 30, 2015, and to select KPMG was recommended by the Funds’ Audit Committee and approved by the Board. PwC’s report on the Funds’ financial statements for the fiscal years ended June 30, 2014 and June 30, 2015 contained no adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. With respect to Funds’ fiscal years ended June 30, 2014, and June 30, 2015, (i) there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the Funds’ financial statements for such years; and (ii) there were no “reportable events” of the kind described in Item 304(a)(1)(v) of Regulation S-K.

Note 15. New Accounting Pronouncements

consolidate a limited partnership. This update also affects the consolidation analysis of reporting entities that are involved with VIEs. The update also provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to Rule 2a-7 of the investment Company Act of 1940 for registered money market funds.

In April 2015, FASB issued ASU No. 2015-03 regarding “Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. ASU No. 2015-03 will simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments.

In May 2015, FASB issued ASU No. 2015-07 regarding “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share”. The amendments in this update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. ASU No. 2015-07 will eliminate the requirement to categorize investments in the fair value hierarchy if their fair value is measured at NAV per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance.

At this time management is evaluating the implications of these ASU’s and their impact on the financial statement disclosures has not yet been determined.

Note 16. Subsequent Events

Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were issued, and has determined that there were no subsequent events.


72						Semi-Annual Report

ADDITIONAL INFORMATION (unaudited)


December 31, 2015		Highland Funds I

Additional Portfolio Information

The Investment Adviser and its affiliates manage other accounts, including registered and private Funds and individual accounts. Although investment decisions for the Funds are made independently from those of such other accounts, the Investment Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts that may be the same or different from those made to the Funds, including investments in different levels of the capital structure of a company, such as equity versus senior loans, or that involve taking contradictory positions in multiple levels of the capital structure. The Investment Adviser has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, this may create situations where a client could be disadvantaged because of the investment activities conducted by the Investment Adviser for other client accounts. When the Funds and one or more of such other accounts is prepared to invest in, or desires to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Investment Adviser to be equitable to the Funds and such other accounts. The Investment Adviser also may aggregate orders to purchase and sell securities for the Funds and such other accounts. Although the Investment Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all accounts including the Funds, in some cases these activities may adversely affect the price paid or received by the Funds or the size of the position obtained or disposed of by the Funds.

Disclosure of Fund Expenses

As a shareholder of a Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchases and redemption fees; and (2) ongoing costs, including management fees; distribution (12b-1) and service fees; and other Fund expenses. This example is intended to help you understand the ongoing costs (in dollars) of investing in your Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

The example is based on an investment of $1,000 invested at the beginning of the period and held for the six-month period July 1, 2015 through December 31, 2015, unless otherwise indicated.

This table illustrates your Fund’s costs in two ways:

Actual Expenses: The first part of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes: The second part of the table provides information about hypothetical account values and hypothetical expenses based on your Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Fund’s actual return. The actual expense ratio includes voluntary fee waivers or expense reimbursements by the Fund’s investment adviser. The expense ratio would be higher had the fee waivers or expense reimbursements not been in effect. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) or redemption fees. Therefore, the second part of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.


Semi-Annual Report						73

ADDITIONAL INFORMATION (unaudited) (continued)


December 31, 2015		Highland Funds I


	Beginning Account Value 7/1/2015		Ending Account Value 12/31/2015		Annualized Expense Ratio⁽¹⁾			Expenses Paid During the Period⁽²⁾		Actual Returns for Period
Long/Short Equity Fund
Actual Fund Return
Class A	$	1,000.00	$	964.00		2.34	%	$	11.55		-3.60	%
Class C		1,000.00		961.00		3.00	%		14.79		-3.90	%
Class Z		1,000.00		965.90		1.99	%		9.83		-3.41	%
Hypothetical
Class A	$	1,000.00	$	1,013.37		2.34	%	$	11.84		5.00	%
Class C		1,000.00		1,010.05		3.00	%		15.16		5.00	%
Class Z		1,000.00		1,015.13		1.99	%		10.08		5.00	%
Long/Short Healthcare Fund
Actual Fund Return
Class A	$	1,000.00	$	850.90		2.48	%	$	11.54		-14.91	%
Class C		1,000.00		848.30		3.14	%		14.59		-15.17	%
Class Z		1,000.00		852.50		2.12	%		9.87		-14.75	%
Hypothetical
Class A	$	1,000.00	$	1,012.67		2.48	%	$	12.55		5.00	%
Class C		1,000.00		1,009.35		3.14	%		15.86		5.00	%
Class Z		1,000.00		1,014.48		2.12	%		10.74		5.00	%
Floating Rate Opportunities Fund
Actual Fund Return
Class A	$	1,000.00	$	907.80		1.48	%	$	7.10		-9.22	%
Class C		1,000.00		904.20		1.98	%		9.48		-9.58	%
Class Z		1,000.00		909.30		1.13	%		5.42		-9.07	%
Hypothetical
Class A	$	1,000.00	$	1,017.70		1.48	%	$	7.51		5.00	%
Class C		1,000.00		1,015.18		1.98	%		10.03		5.00	%
Class Z		1,000.00		1,019.46		1.13	%		5.74		5.00	%
Opportunistic Credit Fund
Actual Fund Return
Class A	$	1,000.00	$	735.20		1.54	%	$	6.72		-26.48	%
Class C		1,000.00		732.70		2.04	%		8.89		-26.73	%
Class Z		1,000.00		737.50		1.19	%		5.20		-26.25	%
Hypothetical
Class A	$	1,000.00	$	1,017.39		1.54	%	$	7.81		5.00	%
Class C		1,000.00		1,014.88		2.04	%		10.33		5.00	%
Class Z		1,000.00		1,019.15		1.19	%		6.04		5.00	%

(1)	Annualized, based on the Fund’s most recent fiscal half-year expenses, including dividends on short positions and interest expenses, if any.

(2)	Expenses are equal to the Fund’s annualized expense ratio including interest expense and dividends on short positions, if any, multiplied by the average account value over the period, multiplied by the number of days in the fiscal half-year, then divided by 365.


74						Semi-Annual Report

ADDITIONAL INFORMATION (unaudited) (continued)


December 31, 2015		Highland Funds I

Approval of Highland Funds I Investment Advisory Agreements

The Trust has retained the Investment Adviser to manage the assets of each Fund pursuant to investment advisory agreements between the Investment Adviser and each such Fund (the “Advisory Agreements”). The Advisory Agreements have been approved by the Funds’ Board of Trustees, including a majority of the Independent Trustees.

Each of the Advisory Agreements continues in effect from year-to-year, provided that such continuance is specifically approved at least annually by the vote of holders of at least a majority of the outstanding shares of the Fund or by the Board of Trustees and, in either event, by a majority of the Independent Trustees of the Fund casting votes in person at a meeting called for such purpose.

At a meeting held on August 27, 2015, the Board of Trustees gave preliminary consideration to information bearing on the continuation of the Advisory Agreements, for a one-year period commencing November 1, 2015, with respect to each Fund. The primary purpose of the meeting was to ensure that the Trustees had ample opportunity to consider matters they deemed relevant in evaluating the continuation of the Advisory Agreements, and to request any additional information they considered reasonably necessary to their deliberations.

At a meeting held on September 10-11, 2015, the Board of Trustees, including the Independent Trustees, approved the continuance of the Advisory Agreements for a one-year period commencing on November 1, 2015.

As part of its review process, the Board of Trustees requested, through its independent legal counsel, and received from the Investment Adviser, various information and written materials in connection with meetings of the Board of Trustees held on August 27, 2015 and September 10-11, 2015, including: (1) information regarding the financial soundness of the Investment Adviser and the profitability of the Advisory Agreements to the Investment Adviser; (2) information on the advisory and compliance personnel of the Investment Adviser, including compensation arrangements for portfolio managers; (3) information on the internal compliance procedures of the Investment Adviser; (4) comparative information showing how the Funds ’ fees and operating expenses compare to those of other registered investment companies and comparable funds that follow investment strategies similar to those of the Funds; (5) information on the investment performance of the Funds, including comparisons of the Funds’ performance against that of other registered investment companies and comparable funds that follow investment strategies similar to those of the Funds; (6) information regarding brokerage and portfolio

transactions; and (7) information on any legal proceedings or regulatory audits or investigations affecting the Investment Adviser. The Trustees also relied on information provided at periodic meetings of the Board of Trustees over the course of the year. In addition, the Trustees received an independent report from Morningstar Associates, LLC (“Morningstar”), an independent source of investment company data, relating to the Long/Short Equity Fund’s, Long/Short Healthcare Fund’s, Floating Rate Opportunities Fund’s and Opportunistic Credit Fund’s performance, volatility and expenses compared to the performance, volatility and expenses of a peer group determined by Morningstar to be comparable. The Trustees reviewed various factors discussed in independent counsel’s legal memoranda, the detailed information provided by the Investment Adviser and other relevant information and factors. The Trustees’ conclusions as to the approval of the Advisory Agreements were based on a comprehensive consideration of all information provided to the Trustees without any single factor being dispositive in and of itself. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors.

The nature, extent, and quality of the services to be provided by the Investment Adviser

The Board of Trustees considered the portfolio management services to be provided by the Investment Adviser under the Advisory Agreements and the activities related to portfolio management, including use of technology, research capabilities, and investment management staff. The Board of Trustees discussed the relevant experience and qualifications of the personnel providing advisory services, including the background and experience of the members of each Fund’s portfolio management team and portfolio manager compensation arrangements. The Trustees reviewed the management structure, assets under management and investment philosophies and processes of the Investment Adviser. The Trustees also reviewed and discussed information regarding the Investment Adviser’s compliance policies, procedures and personnel. The Trustees concluded that the Investment Adviser had the quality and depth of personnel and investment methods essential to performing its duties under the Advisory Agreements, and that the nature and the quality of such advisory services were satisfactory.

The Investment Adviser’s historical performance in managing the Funds

With respect to the Advisory Agreements being considered for renewal, the Board of Trustees reviewed the historical performance of the Investment Adviser and the Funds’


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ADDITIONAL INFORMATION (unaudited) (continued)


December 31, 2015		Highland Funds I

portfolio management teams in managing the Funds over various time periods and reflected on previous discussions regarding matters bearing on the Investment Adviser’s performance at their meetings throughout the year. With respect to the Funds, the Trustees discussed relative performance and contrasted the performance of the Funds and their respective portfolio management teams to that of the Funds ’ peers, as represented by certain other registered investment companies that follow investment strategies similar to the Funds as well as comparable indices and the relevant Morningstar category.

The Board of Trustees considered that, with respect to the Long/Short Equity Fund’s performance, the Long/Short Equity Fund had trailed its benchmark, the Standard & Poor’s 500 Index, but outperformed the Morningstar peer group and category median for the one-year period ended June 30, 2015 and trailed its benchmark but matched the returns of its peer group median for the 3- and 5-year periods ended June 30, 2015. The Fund outperformed its category median for the 3-year period and trailed its category median for the 5-year period. The Board of Trustees also took into account management’s discussion of the Long/Short Equity Fund’s performance.

With respect to the Long/Short Healthcare Fund’s performance, the Board of Trustees considered that the Long/Short Healthcare Fund had outperformed the Morningstar peer group and category median for the one-, three- and five-year periods ended June 30, 2015. The Long/Short Healthcare Fund outperformed its benchmark, the Standard & Poor’s 500 Index, for the one-year period and underperformed its benchmark for the three- and five-year periods. The Board of Trustees also took into account management’s discussion of the Long/Short Healthcare Fund’s performance.

With respect to the Floating Rate Opportunities Fund’s performance, the Board of Trustees considered that the Floating Rate Opportunities Fund had outperformed the Morningstar peer group, category median and its benchmark, the Credit Suisse Leveraged Loan USD Index, for the three- and five-year periods ended June 30, 2015. The Board of Trustees further considered that the Floating Rate Opportunities Fund had underperformed the Morningstar peer group, category median and its benchmark for the one- and ten-year periods ended June 30, 2015. The Board of Trustees also took into account management’s discussion of the Floating Rate Opportunities Fund’s performance.

With respect to the Opportunistic Credit Fund’s performance, the Board of Trustees considered that the Opportunistic Credit Fund had outperformed the Morningstar peer group, category median and its benchmark, the Credit Suisse Leveraged Loan USD Index, for the three-, five- and

ten-year periods ended June 30, 2015. The Board of Trustees further considered that the Opportunistic Credit Fund had underperformed the Morningstar peer group, category median and its benchmark for the one-year period ended June 30, 2015. The Board of Trustees also took into account management’s discussion of the Opportunistic Credit Fund’s performance.

In the case of each Fund that had performance that lagged, as applicable, that of its Morningstar peer group median, category median and/or benchmark for certain periods, the Trustees concluded that underperformance was attributable, to a significant extent, to investment decisions (such as security selection or sector allocation) by the Investment Adviser that was reasonable under the circumstances prevailing at the time and consistent with the applicable Fund’s investment objective and policies.

With respect to each Fund, the Trustees concluded that the Fund’s performance and other relevant factors supported the renewal of the Advisory Agreement relating to that Fund.

The costs of the services to be provided by the Investment Adviser and the profits to be realized by the Investment Adviser and its affiliates from the relationship with the Funds

The Board of Trustees also gave substantial consideration to the fees payable under the Advisory Agreements, the expenses that the Investment Adviser incurs in providing advisory services and the profitability to the Investment Adviser of managing the Funds, including: (1) information regarding the financial condition of the Investment Adviser; (2) information regarding the total fees and payments received by the Investment Adviser for its services and whether such fees are appropriate given economies of scale and other considerations; (3) comparative information showing (a) the fees payable under the Advisory Agreements versus the investment advisory fees of certain registered investment companies and comparable funds that follow investment strategies similar to those of the Funds and (b) the expense ratios of the Funds versus the expense ratios of certain registered investment companies and comparable funds that follow investment strategies similar to those of the Funds; and (4) information regarding the total fees and payments received and the related amounts waived and/or reimbursed by the Investment Adviser for providing administrative services to the Funds under separate agreements and whether such fees are appropriate. The Trustees also considered the so-called “fall-out benefits” to the Investment Adviser with respect to the Funds, such as the reputational value of serving as Investment Adviser to the Funds, potential fees paid to the Investment Adviser’s affiliates by a Fund or


76						Semi-Annual Report

ADDITIONAL INFORMATION (unaudited) (continued)


December 31, 2015		Highland Funds I

portfolio companies for services provided, including administrative services provided to the Funds by the Investment Adviser pursuant to separate agreements, the benefits of scale from investment by the Funds in affiliated funds and the benefits of research made available to the Investment Adviser by reason of brokerage commissions (if any) generated by the Funds ’ securities transactions.

The Board of Trustees considered that, after accounting for the Investment Adviser’s waiver of 1.25% of its total management fee, the Long/Short Equity Fund’s actual management fee was lower than its Morningstar peer group median and category median. The Board of Trustees noted that the period for which the Investment Adviser had agreed to waive 1.25% of its total management fee was through at least October 31, 2016 and that the waiver may not be terminated prior to this date without the action or consent of the Board of Trustees. The Board of Trustees also considered that the Long/Short Equity Fund’s net expenses were the same as its Morningstar category median and above its Morningstar peer group.

The Board of Trustees considered that the Long/Short Healthcare Fund’s management fee was below both its Morningstar peer group median and category median. The Board of Trustees also considered that the Long/Short Healthcare Fund’s net expenses were below its Morningstar peer group and category median. The Board of Trustees considered that the Floating Rate Opportunities Fund’s management fee was higher than its Morningstar peer group and category median. The Board of Trustees noted that, among other expenses, expenses relating to the Floating Rate Opportunities Fund’s use of leverage contributed to the Fund’s total expense ratio being above its Morningstar peer group and category median. The Board of Trustees further noted that the Investment Adviser had agreed to waive fees and/or reimburse expenses to cap the total annual fund operating expense to 0.95% of the average daily net assets of the Floating Rate Opportunities Fund through at least October 31, 2016 and that this waiver may not be terminated prior to this date without the action or consent of the Board of Trustees. The Board of Trustees also considered that the Floating Rate Opportunities Fund’s net expenses were above its Morningstar peer group and category median.

The Board of Trustees considered that the Opportunistic Credit Fund’s contractual management fee was above its Morningstar peer group and category median. The Board of Trustees noted that the Investment Adviser had agreed to waive fees and/or reimburse expenses to cap the total annual fund operating expense to 0.90% of the average daily net assets of the Opportunistic Credit Fund through at least October 31, 2016, and that this waiver may not be terminated prior to this date without the action or consent

of the Board of Trustees. The Board of Trustees further noted that the Opportunistic Credit Fund’s net expenses were below its Morningstar peer group and category median.

After such review, the Trustees determined that the anticipated profitability to the Investment Adviser of the Advisory Agreements was reasonable. The Trustees also took into consideration the amounts waived and/or reimbursed, if any, where expense caps or advisory fee waivers had been implemented.

The extent to which economies of scale would be realized as each Fund grows and whether fee levels reflect these economies of scale for the benefit of shareholders

The Board of Trustees considered the respective asset levels of the Funds over time and historical net expenses relative to asset levels, the information provided by the Investment Adviser relating to its costs and information comparing the fee rates charged by the Investment Adviser with fee rates charged by other unaffiliated investment advisers to their clients. The Board of Trustees noted that the fee schedule for the Floating Rate Opportunities Fund contained breakpoints that reduce the fee rate above specified asset levels. The Board of Trustees also noted those Funds that did not contain breakpoints in the advisory fee schedules and took into account management’s discussion of the same. The Trustees concluded that the fee structures are reasonable, and appropriately should result in a sharing of economies of scale in view of the information provided by the Investment Advisers. The Board determined to continue to review ways, and the extent to which, economies of scale might be shared between the Investment Adviser on the one hand and shareholders of the Funds on the other. The Board of Trustees also requested that the Investment Adviser consider ways in which economies of scale can be shared with Fund shareholders.

Conclusion

Following a further discussion of the factors above and the merits of the Advisory Agreements and their various provisions, it was noted that in considering the approval of the Advisory Agreements, no single factor was determinative to the decision of the Board of Trustees. Rather, after weighing all of the factors and reasons discussed above, the Trustees, including the Independent Trustees, unanimously agreed that the Advisory Agreements, including the advisory fees to be paid to the Investment Adviser, are fair and reasonable to the Funds in light of the services that the Investment Adviser provides, the expenses that it incurs and the reasonably foreseeable asset levels of the Funds.


Semi-Annual Report						77

LOGO

Highland Funds

c/o BFDS

30 Dan Road

Canton, MA 02021-2809

LOGO


Highland Funds I		Semi-Annual Report, December 31, 2015


www.highlandfunds.com		HFI-SAR-1215

LOGO

Highland Funds I

Highland/iBoxx Senior Loan ETF

Highland HFR Global ETF

Highland HFR Event-Driven ETF

Highland HFR Equity Hedge ETF

Semi-Annual Report

December 31, 2015

Highland Funds I

Highland/iBoxx Senior Loan ETF

Highland HFR Global ETF

Highland HFR Event-Driven ETF

Highland HFR Equity Hedge ETF

TABLE OF CONTENTS


Fund Profiles			1
Financial Statements			5
Investment Portfolios			6
Statements of Assets and Liabilities			16
Statements of Operations			17
Statements of Changes in Net Assets			18
Financial Highlights			22
Notes to Financial Statements			26
Additional Portfolio Information			37
Disclosure of Fund Expenses			37
Approval of Investment Advisory Agreement			38
Important Information About This Report			41

Economic and market conditions change frequently.

There is no assurance that the trends described in this report will continue or commence.

A prospectus must precede or accompany this report. Please read the prospectus carefully before you invest.

FUND PROFILE (unaudited)


		Highland/iBoxx Senior Loan ETF

Objective

Highland/iBoxx Senior Loan ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Markit iBoxx USD Liquid Leveraged Loan Index.

Net Assets as of December 31, 2015

$294.3 million

Portfolio Data as of December 31, 2015

The information below provides a snapshot of Highland/iBoxx Senior Loan ETF at the end of the reporting period.


Quality Breakdown as of 12/31/15 (%)*
BBB			1.2
BB			35.6
B			55.9
CCC			4.9
Not Rated			2.4


Top 5 Sectors as of 12/31/15 (%)*
Service			13.2
Media/Telecommunications			13.0
Healthcare			12.0
Information Technology			10.6
Retail			8.8


Top 10 Holdings as of 12/31/15 (%)*
Albertson’s LLC (Term B-4 Loan)			2.2
Avago Technologies Cayman Ltd. (Term Loan)			2.2
DaVita HealthCare Partners, Inc. (Tranche B Term Loan)			2.0
Hilton Worldwide Finance (Initial Term Loan)			2.0
FMG Resources (August 2006) (FMG America Finance, Inc.)			1.9
PetSmart, Inc. (Tranche B-1 Loan)			1.8
Univision Communications, Inc. (Replacement First-Lien Term Loan)			1.8
Grifols Worldwide Operations Limited (U.S. Tranche B Term Loam)			1.8
Delta 2 (Lux) S.a r.l (Facility B3 (USD))			1.7
Avago Technologies Cayman Ltd. (Term Loan B)			1.7

The Fund is non-diversified and may invest a larger portion of its assets in the securities of fewer issuers than if the Fund were diversified.

Please refer to Note 7, Disclosure of Significant Risks and Contingencies, for more information.

Quality is calculated as a percentage of total senior loans. Sectors and holdings are calculated as a percentage of total net assets. The quality ratings reflected were issued by Standard & Poor’s, a nationally recognized statistical rating organization. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not that of the Fund itself. Credit quality ratings assigned by a rating agency are subjective opinions, not statements of fact, and are subject to change, including daily. The ratings assigned by credit rating agencies are but one of the considerations that the Fund’s investment adviser incorporates into its credit analysis process, along with such other issuer-specific factors as cash flows, capital structure and leverage ratios, ability to de-leverage through free cash flow, quality of management, market positioning and access to capital, as well as such security-specific factors as the terms of the security (e.g., interest rate, and time to maturity) and the amount of any collateral. Quality Ratings are subject to change.


Semi-Annual Report						1

FUND PROFILE (unaudited)


		Highland HFR Global ETF

Objective

Highland HFR Global ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the HFRL Global Index.

Net Assets as of December 31, 2015

$9.4 million

Portfolio Data as of December 31, 2015

The information below provides a snapshot of Highland HFR Global ETF at the end of the reporting period.


Sectors as of 12/31/2015 (%)⁽¹⁾	Long Exposure		Short Exposure			Net Exposure
Financials		13.9		—			13.9
Industrials		13.8		(1.1	)		12.7
Health Care		13.3		(1.4	)		11.9
Consumer Discretionary		8.3		(2.5	)		5.8
Materials		4.7		—			4.7
Consumer Staples		5.6		(1.4	)		4.2
Information Technology		5.2		(1.6	)		3.6
Telecommunication Services		2.8		—			2.8
Energy		—		(1.9	)		(1.9	)
Exchange Traded Funds		10.3		(19.2	)		(8.9	)


Top 5 Holdings as of 12/31/15 (%)⁽¹⁾ Long Securities		Short Securities
HD Supply, Inc (Corporate Bond)	3.8	SPDR S&P 500 ETF Trust (Exchange Traded Fund)	(6.2	)
Rite Aid Corp. (Corporate Bond)	2.6	iShares Nasdaq Biotechnology ETF (Exchange Traded Fund)	(1.6	)
Powershares QQQ Trust Series 1 (Exchange Traded Fund)	2.3	SPDR Gold Shares (Exchange Traded Fund)	(1.5	)
US Foods, Inc (Corporate Bond)	2.2	iShares Russell 2000 ETF (Exchange Traded Fund)	(1.5	)
American International Group, Inc (Common Stock)	2.1	Industrial Select Sector SPDR Fund (Exchange Traded Fund)	(1.4	)

Please refer to Note 7, Disclosure of Significant Risks and Contingencies, for more information.

⁽¹⁾	Long and short sector exposure and holdings are calculated as a percentage of total net assets.


2						Semi-Annual Report

FUND PROFILE (unaudited)


		Highland HFR Event-Driven ETF

Objective

Highland HFR Event-Driven ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the HFRL Event-Driven Index.

Net Assets as of December 31, 2015

$9.7 million

Portfolio Data as of December 31, 2015

The information below provides a snapshot of Highland HFR Event-Driven ETF at the end of the reporting period.


Sectors as of 12/31/2015 (%)⁽¹⁾	Long Exposure		Short Exposure			Net Exposure
Consumer Discretionary		24.8		(4.2	)		20.6
Consumer Staples		2.1		(2.0	)		0.1
Energy		4.9		(2.0	)		2.9
Financials		10.4		—			10.4
Health Care		14.8		(3.6	)		11.2
Industrials		9.9		(0.5	)		9.4
Information Technology		9.2		(1.7	)		7.5
Materials		13.6		—			13.6
Telecommunication Services		4.0		—			4.0
Exchange Traded Funds		—		(17.2	)		(17.2	)


Top 5 Holdings as of 12/31/15 (%)⁽¹⁾ Long Securities		Short Securities
Time Warner Cable, Inc (Common Stock)	4.7	SPDR S&P 500 ETF Trust (Exchange Traded Fund)	(14.0	)
Precision Castparts Corp. (Common Stock)	3.9	Charter Communications, Inc (Common Stock)	(2.5	)
VEREIT, Inc (Common Stock)	3.4	Mylan NV (Common Stock)	(2.5	)
Perrigo Co. (Common Stock)	3.1	Alibaba Group Holding Ltd. (Foreign Common Stock)	(1.7	)
Akorn, Inc (Common Stock)	3.0	Sirius XM Holdings, Inc (Common Stock)	(1.7	)

Please refer to Note 7, Disclosure of Significant Risks and Contingencies, for more information.

⁽¹⁾	Long and short sector exposure and holdings are calculated as a percentage of total net assets.


Semi-Annual Report						3

FUND PROFILE (unaudited)


		Highland HFR Equity Hedge ETF

Objective

Highland HFR Equity Hedge ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the HFRL Equity Hedge Index.

Net Assets as of December 31, 2015

$9.5 million

Portfolio Data as of December 31, 2015

The information below provides a snapshot of Highland HFR Equity Hedge ETF at the end of the reporting period.


Sectors as of 12/31/2015 (%)⁽¹⁾	Long Exposure		Short Exposure			Net Exposure
Consumer Discretionary		10.4		(2.2	)		8.2
Consumer Staples		1.4		—			1.4
Energy		1.6		—			1.6
Financials		11.8		(0.2	)		11.6
Health Care		11.8		(0.7	)		11.1
Industrials		11.3		(2.9	)		8.4
Information Technology		12.0		—			12.0
Materials		1.6		—			1.6
Telecommunication Services		0.7		—			0.7
Exchange Traded Funds		1.5		(19.6	)		(18.1	)


Top 5 Holdings as of 12/31/15 (%)⁽¹⁾ Long Securities		Short Securities
Alphabet, Inc, Cl A (Common Stock)	2.8	SPDR S&P 500 ETF Trust (Exchange Traded Fund)	(7.1	)
Allergan (Common Stock)	2.5	iShares Russell 2000 ETF (Exchange Traded Fund)	(3.4	)
ManTech International Corp. (Common Stock)	2.1	iShares Nasdaq Biotechnology ETF (Exchange Traded Fund)	(3.1	)
Hilltop Holdings, Inc (Common Stock)	1.9	Expedia, Inc (Common Stock)	(2.2	)
General Motors Co. (Common Stock)	1.7	iShares Core S&P Small-Capital ETF (Exchange Traded Fund)	(2.0	)

Please refer to Note 7, Disclosure of Significant Risks and Contingencies, for more information.

⁽¹⁾	Long and short sector exposure and holdings are calculated as a percentage of total net assets.


4						Semi-Annual Report

FINANCIAL STATEMENTS


December 31, 2015

A guide to understanding each Fund’s financial statements


Investment Portfolio		The Investment Portfolio details each Fund’s holdings and their market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification.

Statement of Assets and Liabilities		This statement details each Fund’s assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all of a Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and non-investment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that share class by the number of shares outstanding in that class as of the last day of the reporting period.

Statement of Operations		This statement reports income earned by each Fund and the expenses incurred by each Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents the Fund’s net increase or decrease in net assets from operations.

Statement of Changes in Net Assets		This statement details how each Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and distribution reinvestments) during the reporting period. The Statement of Changes in Net Assets also details changes in the number of shares outstanding.

Financial Highlights		The Financial Highlights demonstrate how each Fund’s net asset value per share was affected by the Fund’s operating results. The Financial Highlights also disclose the class’ performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets).

Notes to Financial Statements		These notes disclose the organizational background of the Funds, certain of their significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies.


Semi-Annual Report						5

INVESTMENT PORTFOLIO (unaudited)


As of December 31, 2015		Highland/iBoxx Senior Loan ETF



Principal Amount ($)			Value ($)

	US Senior Loans (a) - 77.1%

	AEROSPACE - 1.7%
	3,561,828	TransDigm, Inc. Tranche C Term Loan, 3.750%, 02/28/20		3,483,663
	1,487,425	TransDigm Inc. Tranche D Term Loan, 3.750%, 06/04/21		1,453,162

				4,936,825


	AUTOMOTIVE - 2.4%
	2,984,772	Allison Transmission, Inc. Term B-3 Loan, 3.500%, 08/23/19		2,970,788
	4,198,741	Gates Global, LLC Initial Dollar Term Loan, 4.251%, 07/03/21		3,949,797

				6,920,585


	BROADCASTING - 4.7%
	1,957,368	Charter Communications Operating, LLC Term E Loan, 3.000%, 07/01/20		1,925,972
	1,948,651	Charter Communications Operating, LLC Term F Loan, 3.000%, 01/03/21		1,914,062
	7,000,000	iHeartCommunications, Inc. Tranche D Term Loan, 7.175%, 01/30/19		4,925,025
	2,000,000	iHeartCommunications, Inc. Tranche E Term Loan, 7.926%, 07/30/19		1,406,000
	1,990,471	Numericable U.S., LLC Dollar Denominated Tranche B-1 Loan, 4.501%, 05/21/20		1,922,427
	1,722,029	Numericable U.S., LLC Dollar Denominated Tranche B-2 Loan, 4.501%, 05/21/20		1,663,161

				13,756,647


	CHEMICALS - 1.8%
	3,159,111	Axalta Coating Systems U.S. Holdings, Inc. Refinanced Term B Loan, 3.750%, 02/01/20		3,134,991
	315,000	Macdermid, Incorporated Tranche B-2 Term Loan, 5.500%, 06/07/20		305,493
	1,979,592	PQ Corporation 2014 Term Loan, 4.000%, 08/07/17		1,967,526

				5,408,010


	ENERGY - 0.2%
	992,386	Peabody Energy Corporation Term Loan, 4.251%, 09/24/20		476,345


	FINANCIAL - 1.1%
	3,297,612	Hub International Limited Initial Term Loan, 4.000%, 10/02/20		3,121,404


	FOOD & DRUG - 3.6%
	2,237,478	Albertson’s LLC Term B-2 Loan, 5.500%, 03/21/19		2,233,283



Principal Amount ($)			Value ($)

	FOOD & DRUG (continued)
	6,452,494	Albertson’s LLC Term B-4 Loan, 5.500%, 08/25/21		6,408,972
	2,013,954	Supervalu, Inc. New Term Loan, 4.501%, 03/21/19		1,990,250

				10,632,505


	FOOD/TOBACCO - 0.6%
	1,213,987	Pinnacle Foods Finance, LLC New Term Loan G, 3.000%, 04/29/20		1,197,040
	489,362	Pinnacle Foods Finance, LLC Tranche H Term Loan, 3.000%, 04/29/20		482,480

				1,679,520


	FOREST PRODUCTS/CONTAINERS - 2.4%
	1,959,710	Berry Plastics Corporation Term D Loan, 3.500%, 02/08/20		1,926,973
	1,593,663	Berry Plastics Corporation Term E Loan, 3.750%, 01/06/21		1,573,846
	3,531,028	Reynolds Group Holdings, Inc. Incremental U.S. Term Loan, 4.500%, 12/01/18		3,502,709

				7,003,528


	GAMING/LEISURE - 6.1%
	1,348,247	Boyd Gaming Corporation Term B Loan, 4.000%, 08/14/20		1,343,913
	5,829,361	Hilton Worldwide Finance Initial Term Loan, 3.500%, 10/25/20		5,826,038
	3,446,108	Las Vegas Sands, LLC Term B Loan, 3.250%, 12/19/20 (b)		3,417,247
	2,713,133	MGM Resorts International Term B Loan, 3.500%, 12/20/19		2,681,485
	477,455	Mohegan Tribal Gaming Authority Term B Loan, 5.501%, 06/15/18		468,247
	2,480,788	Station Casinos, LLC B Term Loan, 4.250%, 03/02/20		2,436,605
	1,972,882	WMG Acquisitions Corporation Tranche B Refinancing Term Loan, 3.750%, 07/01/20		1,875,471

				18,049,006


	HEALTHCARE - 7.9%
	1,488,665	AmSurg Corp. Initial Term Loan, 3.500%, 07/16/21		1,478,006
	1,990,000	CHS/Community Health Systems, Inc. Incremental 2021 Term H Loan, 4.000%, 01/27/21		1,962,996
	5,926,084	DaVita HealthCare Partners, Inc. Tranche B Term Loan, 3.500%, 06/24/21		5,913,728
	3,684,136	HCA, Inc. Tranche B-4 Term Loan, 3.357%, 05/01/18		3,684,154
	2,998,029	HCA, Inc. Tranche B-5 Term Loan, 3.174%, 03/31/17		2,998,224
	3,473,418	Kinetic Concepts, Inc. Dollar Term E-1 Loan, 4.501%, 05/04/18		3,359,073


6						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland/iBoxx Senior Loan ETF



Principal Amount ($)			Value ($)

	US Senior Loans (continued)

	HEALTHCARE (continued)
	815,574	Life Time Fitness, Inc. Closing Date Term Loan, 4.250%, 06/03/22		797,228
	2,884,440	MPH Acquisition Holdings, LLC Initial Term Loan, 3.750%, 03/31/21		2,814,737
	294,324	Surgery Center Holdings, Inc. Initial Term Loan (First Lien), 5.250%, 11/03/20		291,625

				23,299,771


	INFORMATION TECHNOLOGY - 6.7%
	476,114	Applied Systems, Inc. Initial Term Loan (First Lien), 4.251%, 01/23/21		468,378
	2,546,985	CDW, LLC Term Loan, 3.250%, 04/29/20		2,490,633
	1,520,923	Dell International, LLC Term C Loan, 3.750%, 10/29/18		1,516,170
	4,232,126	Infor (US), Inc. Tranche B-5 Term Loan, 3.750%, 06/03/20		3,984,377
	3,467,487	Scientific Games International, Inc. Initial Term B-2 Loan, 6.001%, 10/01/21		3,172,127
	3,482,233	Scientific Games International, Inc. Initial Term Loan, 6.001%, 10/18/20		3,196,812
	1,402,364	SS&C Technologies Holdings, Inc. Term Loan B1, 4.000%, 06/29/22		1,394,623
	3,429,390	Zebra Technologies Corporation Initial Term Loan, 4.750%, 10/27/21		3,438,135

				19,661,255


	MANUFACTURING - 2.0%
	2,945,442	Gardner Denver, Inc. Initial Dollar Term Loan, 4.251%, 07/30/20		2,660,471
	2,977,157	Rexnord, LLC/RBS Global, Inc. Term B Loan, 4.000%, 08/21/20		2,893,440
	491,250	Southwire Company, LLC Initial Term Loan, 3.250%, 02/10/21		481,732

				6,035,643


	MEDIA/TELECOMMUNICATIONS - 8.7%
	1,227,400	Affinion Group, Inc. Tranche B Term Loan, 6.750%, 04/30/18		1,132,718
	489,956	AMC Entertainment, Inc. Initial Term Loan, 4.000%, 12/15/22		490,348
	1,642,552	Cequel Communications, LLC Term Loan, 3.813%, 02/14/19		1,619,967
	389,000	Fairpoint Communications, Inc. Term Loan, 7.502%, 02/14/19		387,541
	3,000,959	Getty Images, Inc. Initial Term Loan, 4.751%, 10/18/19		1,905,609
	1,726,836	Go Daddy Operating Company, LLC Initial Term Loan, 4.250%, 05/13/21		1,718,685
	1,492,500	Regal Cinemas Corporation Term Loan, 3.750%, 04/01/22		1,491,030



Principal Amount ($)			Value ($)

	MEDIA/TELECOMMUNICATIONS (continued)
	2,218,719	SBA Senior Finance II, LLC Incremental Tranche B-1 Term Loan, 3.250%, 03/24/21		2,177,905
	1,710,856	Univision Communications, Inc. 2013 Incremental Term Loan, 4.000%, 03/01/20		1,676,947
	5,300,739	Univision Communications, Inc. Replacement First-Lien Term Loan, 4.000%, 03/01/20		5,197,375
	3,000,000	Virgin Media Investment Holdings Limited F Facility, 3.500%, 06/30/23		2,942,115
	1,989,975	WideOpenWest Finance, LLC Replacement Term B Loan, 4.500%, 04/01/19		1,923,440
	3,040,165	Zayo Group, LLC Term Loan, 3.750%, 05/06/21		2,996,721

				25,660,401


	RETAIL - 8.8%
	1,947,565	Academy, Ltd. Initial Term Loan, 5.001%, 07/01/22		1,883,860
	2,459,356	BJ’s Wholesale Club New 2013 (November) Replacement Loan (First Lien), 4.501%, 09/26/19		2,364,056
	957,155	Burlington Coat Factory Warehouse Corporation Term B-3 Loan, 4.251%, 08/13/21		947,583
	2,493,750	Dollar Tree, Inc. Term B-1 Loan, 3.500%, 07/06/22		2,490,645
	2,352,941	Dollar Tree, Inc. Term B-2 Loan, 4.251%, 07/06/22		2,343,388
	997,468	J. Crew Group, Inc. Initial Term Loan, 4.000%, 02/28/21		649,851
	4,920,778	JC Penney Corporation, Inc. Loan, 6.001%, 05/22/18		4,846,967
	4,932,258	Neiman Marcus Group, Inc. Other Term Loan, 4.251%, 10/25/20		4,379,944
	5,486,216	PetSmart, Inc. Tranche B-1 Loan, 4.250%, 03/11/22 (b)		5,355,232
	527,648	PVH Corp. Tranche B Term Loan, 3.250%, 02/13/20		531,418

				25,792,944


	SERVICE - 11.9%
	2,992,481	Acosta, Inc. Tranche B-1 Loan, 4.250%, 09/26/21		2,854,618
	2,607,723	ADS Waste Holdings, Inc. Initial Tranche B-2 Term Loan, 3.750%, 10/09/19		2,531,121
	3,379,983	Advantage Sales & Marketing Inc. Initial Term Loan (First Lien), 4.250%, 07/25/21		3,259,808
	693,858	Aecom Technology Corporation Term B Commitment, 3.750%, 10/15/21		694,510


See accompanying Notes to Financial Statements.						7

INVESTMENT PORTFOLIO (unaudited) (continued)


As of December 31, 2015		Highland/iBoxx Senior Loan ETF



Principal Amount ($)			Value ($)

	US Senior Loans (continued)

	SERVICE (continued)
	3,246,552	Asurion, LLC (fka Asurion Corporation) Incremental Tranche B-1 Term Loan, 5.000%, 05/24/19		3,050,752
	2,476,061	Brickman Group Ltd. LLC Initial Term Loan (First Lien), 4.000%, 12/18/20		2,405,022
	4,000,000	First Data Corporation 2018 New Dollar Term Loan, 3.918%, 03/23/18		3,954,720
	4,000,000	First Data Corporation 2018B Second New Term Loan, 3.918%, 09/24/18		3,952,080
	1,250,000	First Data Corporation New 2022B Dollar Term Loan, 4.168%, 07/08/22		1,233,906
	1,989,744	Sabre, Inc. Term B Loan, 4.000%, 02/19/19		1,972,831
	3,218,383	Servicemaster Company, LLC Initial Term Loan, 4.250%, 07/01/21		3,189,417
	515,337	Waste Industries USA Inc. Initial Term Loan, 4.251%, 02/20/20		515,337
	3,159,033	Weight Watchers International, Inc. Initial Tranche B-2 Term Loan, 4.000%, 04/02/20		2,363,999
	3,065,620	West Corporation Term B-10 Loan, 3.250%, 06/30/18		3,021,827

				34,999,948


	TECHNOLOGY - 0.1%
	498,750	Sophia, L.P. Closing Date Term Loan, 4.750%, 09/30/22		493,763


	TRANSPORTATION - 3.6%
	4,910,749	FCA US LLC Term Loan B, 3.500%, 05/24/17		4,901,542
	2,456,250	FCA US LLC Tranche B Term Loan, 3.250%, 12/31/18		2,438,442
	1,571,573	MPG Holdco I Inc. (aka Metaldyne Performance Group) Tranche B-1 Term Loan (2015), 3.750%, 10/20/21		1,540,636
	1,742,424	US Airways, Inc. Tranche B-1 Term Loan (Consenting), 3.500%, 05/23/19		1,727,727

				10,608,347


	UTILITY - 2.8%
	3,186,492	NRG Energy, Inc. Term Loan (2013), 2.750%, 07/01/18		3,108,822
	6,000,000	Texas Competitive Electric Holdings Company, LLC 2014 Term Loan (Non-Extending), 4.908%, 06/30/16		1,826,280



Principal Amount ($)			Value ($)

	UTILITY (continued)
	11,000,000	Texas Competitive Electric Holdings Company, LLC 2017 Term Loan (Extending), 4.677%, 10/10/17		3,448,500

				8,383,602

		Total US Senior Loans (Cost $243,711,788)		226,920,049


	Foreign Domiciled Senior Loans (a) - 21.1%

	AUSTRALIA - 2.5%
	USD
	1,921,260	Aristocrat Leisure Limited Initial Term Loan, 4.751%, 10/20/21		1,916,457
	7,444,156	FMG Resources (August 2006) (FMG America Finance, Inc.) Loan, 4.251%, 06/30/19		5,557,360

				7,473,817


	CANADA - 4.4%
	USD
	3,970,044	1011778 B.C. Unlimited Liability Company (New Red Finance, Inc.) Term B-2 Loan, 3.750%, 12/10/21		3,940,269
	1,377,143	Bombardier Recreational Products, Inc. Term B Loan, 3.750%, 01/30/19		1,366,325
	736,794	Husky Injection Molding Systems, Ltd. New Term Loan, 4.251%, 06/30/21		710,085
	1,000,000	Valeant Pharmaceuticals International, Inc. Series C-2 Tranche B Term Loan, 3.750%, 12/11/19		967,750
	2,000,000	Valeant Pharmaceuticals International, Inc. Series D2 Term Loan B, 3.500%, 02/13/19		1,933,930
	4,093,177	Valeant Pharmaceuticals International, Inc. Series E1 Tranche B Term Loan, 3.750%, 08/05/20		3,937,637

				12,855,996


	CAYMAN ISLANDS - 3.8%
	USD
	6,351,271	Avago Technologies Term Loan, 3.750%, 05/06/21		6,342,029
	5,000,000	Avago Technologies Cayman Ltd. (Avago Technologies Holdings Luxembourg S.a r.l) Term Loan B, 4.250%, 11/11/22 (b)		4,956,650

				11,298,679


	IRELAND - 1.8%
	USD
	5,180,349	Grifols Worldwide Operations Limited U.S. Tranche B Term Loam, 3.424%, 02/27/21		5,140,201


8						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (concluded)


As of December 31, 2015		Highland/iBoxx Senior Loan ETF



Principal Amount ($)			Value ($)

	Foreign Domiciled Senior Loans (continued)

	LUXEMBOURG - 5.8%
	USD
	1,492,500	Altice Financing S.A. Dollar Denominated Tranche Loan, 5.250%, 02/04/22		1,489,239
	5,241,193	Delta 2 (Lux) S.a r.l Facility B3 (USD), 4.751%, 07/30/21		5,083,957
	5,000,000	Intelsat Jackson Holdings S.A. Tranche B-2 Term Loan, 3.750%, 06/30/19		4,741,075
	1,770,969	Mallinckrodt International Finance S.A. Initial Term B Loan, 3.250%, 03/19/21		1,723,374
	206,380	SS&C European Holdings, S.a.r.l Term B-2 Loan, 4.000%, 07/08/22		205,241
	3,870,000	Travelport Finance (Luxembourg) S.a.r.l Initial Term Loan, 5.751%, 09/02/21		3,796,838

				17,039,724


	MARSHALL ISLANDS - 0.6%
	USD
	4,463,317	Seadrill Operating LP (Seadrill Partners Finco LLC) Initial Term Loan, 4.000%, 02/21/21		1,882,024


	NETHERLANDS - 2.2%
	USD
	2,964,478	Amaya Holdings B.V. Initial Term B Loan (First Lien), 5.001%, 08/01/21		2,801,432
	2,555,555	Tronox Pigments BV New Term Loan, 4.500%, 03/19/20		2,273,907
	1,250,000	UPC Financing Partnership Facility AH, 3.344%, 06/30/21		1,229,494

				6,304,833

		Total Foreign Domiciled Senior Loans (Cost $66,460,657)		61,995,274

	Total Investments - 98.2%			288,915,323

	(Cost $310,172,445)
	Other Assets & Liabilities, Net - 1.8%			5,395,966

	Net Assets - 100.0%			294,311,289

(a)

Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Highland/iBoxx Senior Loan ETF (the “Fund”) invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread. (Unless otherwise denoted as a fixed rate loan, all senior loans carry a variable interest rate.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at December 31, 2015. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy less than the stated maturity shown.

(b)	All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.


LLC		Limited Liability Company
L.P.		Limited Partnership
Ltd.		Limited
USD		United States Dollars


Foreign Domiciled Senior Loans Industry Concentration Table: (% of Net Assets)
Chemicals	0.8	%
Energy	0.6	%
Financial	0.6	%
Food/Tobacco	1.3	%
Gaming/Leisure	2.1	%
Healthcare	4.1	%
Information Technology	3.9	%
Manufacturing	0.2	%
Media/Telecommunications	4.3	%
Metals/Minerals	1.9	%
Service	1.3	%

	21.1	%


See accompanying Notes to Financial Statements.						9

INVESTMENT PORTFOLIO (unaudited)


As of December 31, 2015		Highland HFR Global ETF



Shares			Value ($)

	Common Stock - 41.9%

	CONSUMER DISCRETIONARY - 6.2%
	4,399	ClubCorp Holdings, Inc (a)		80,370
	2,000	Diamond Resorts International, Inc (b)		51,020
	6,500	Fiat Chrysler Automobiles NV (b)		90,935
	2,780	General Motors Co. (a)		94,548
	1,022	Liberty Media Corp. (a)(b)		38,918
	993	Liberty Ventures, Ser A (a)(b)		44,794
	950	Time Warner Cable, Inc		176,310

				576,895

	CONSUMER STAPLES - 0.8%
	1,000	Kraft Heinz Co.		72,760

	FINANCIALS - 9.3%
	3,206	American International Group, Inc (a)		198,676
	700	Berkshire Hathaway, Inc, Cl B (b)		92,428
	3,649	Citigroup, Inc (a)		188,836
	4,581	Hilltop Holdings, Inc (a)(b)		88,047
	1,870	JPMorgan Chase & Co. (a)		123,476
	22,411	VEREIT, Inc (a)		177,495

				868,958


	HEALTH CARE - 10.7%
	1,502	AbbVie, Inc (a)		88,978
	478	Allergan (a)(b)		149,375
	874	Celgene Corp. (a)(b)		104,670
	1,000	Cigna Corp. (a)		146,330
	500	Humana, Inc		89,255
	1,000	Perrigo Co.		144,700
	2,878	Pfizer, Inc (a)		92,902
	1,000	Thermo Fisher Scientific, Inc (a)		141,850
	1,005	Zoetis, Inc, Cl A (a)		48,160

				1,006,220


	INDUSTRIALS - 5.9%
	129	AMERCO (a)		50,246
	3,677	American Airlines Group, Inc (a)		155,721
	2,600	Delta Air Lines, Inc (a)		131,794
	4,041	Hertz Global Holdings, Inc (a)(b)		57,503
	700	Precision Castparts Corp. (a)		162,407

				557,671


	INFORMATION TECHNOLOGY - 5.2%
	203	Alphabet, Inc, Cl A (a)(b)		157,936
	100	Alphabet, Inc, Cl C (b)		75,888
	919	Apple, Inc (a)		96,734
	845	EchoStar Corp., Cl A (a)(b)		33,048
	3,000	ManTech International Corp., Cl A		90,720
	1,424	Twitter, Inc (a)(b)		32,951

				487,277


	MATERIALS - 3.8%
	1,250	Eagle Materials, Inc		75,537
	6,592	Ferro Corp. (a)(b)		73,303
	12,022	Graphic Packaging Holding Co. (a)		154,242
	1,919	Innophos Holdings, Inc (a)		55,613

				358,695

		Total Common Stock (Cost $4,091,527)		3,928,476



Principal Amount ($)			Value ($)

	Corporate Bonds - 23.4%

	CONSUMER DISCRETIONARY - 1.3%
	200,000	Neiman Marcus Group Ltd. 8.750%, 10/15/21 (c)		124,000


	CONSUMER STAPLES - 4.8%
	240,000	Rite Aid Corp. 6.125%, 04/01/23 (c)		248,400
	200,000	US Foods, Inc 8.500%, 06/30/19		206,000

				454,400


	FINANCIALS - 4.0%
	200,000	Argos Merger Sub, Inc 7.125%, 03/15/23 (c)		198,300
	201,000	Jefferies Finance LLC 7.500%, 04/15/21 (a)		177,634

				375,934


	HEALTH CARE - 2.6%
	60,000	DJO Finco, Inc 8.125%, 06/15/21 (c)		53,250
	53,000	Kinetic Concepts, Inc 12.500%, 11/01/19		48,230
	150,000	Tenet Healthcare Corp. 6.750%, 06/15/23		139,406

				240,886


	INDUSTRIALS - 7.9%
	189,000	ADS Waste Holdings, Inc 8.250%, 10/01/20 (a)		190,418
	320,000	HD Supply, Inc 11.500%, 07/15/20 (a)		356,000
	188,000	Hertz Corp. 7.500%, 10/15/18 (a)		191,760

				738,178


	TELECOMMUNICATION SERVICES - 2.8%
	100,000	Sprint Corp. 7.625%, 02/15/25		73,000
	200,000	Wind Acquisition Finance S.A. (Luxembourg) 7.375%, 04/23/21 (c)		189,500

				262,500

		Total Corporate Bonds (Cost $2,408,404)		2,195,898


Shares

	Exchange Traded Funds - 10.3%
	2,700	AP Alternative Assets LP		85,212
	159	iShares Germany Government Bond UCITS ETF		23,390
	1,800	iShares JPX Nikkei 400 Index ETF		94,572
	1,100	iShares Nikkei 225 ETF		179,375
	1,000	Lyxor ETF DAX		112,229
	1,452	PIMCO Euro Short Maturity Source UCITS ETF Euro Income (a)		160,495


10						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (concluded)


As of December 31, 2015		Highland HFR Global ETF



Shares			Value ($)

	Exchange Traded Funds (continued)
	1,969	Powershares QQQ Trust Series 1		220,253
	2,624	SPDR EURO STOXX 50 ETF		90,344

		Total Exchange Traded Funds (Cost $990,045)		965,870


	Foreign Common Stock - 2.3%

	CANADA - 1.5%
	6,250	Intertape Polymer Group, Inc		84,420
	56,510	Rock Energy, Inc (a)(b)		59,626

				144,046


	FRANCE - 0.8%
	3,451	Vivendi S.A. (a)		74,483

		Total Foreign Common Stock (Cost $317,803)		218,529

	Total Investments - 77.9%			7,308,773

	(Cost $7,807,779)

	Securities Sold Short - (29.1)%

	Exchange Traded Funds - (19.2)%
	(950)	CurrencyShares Euro Trust		(101,080	)
	(1,000)	Energy Select Sector SPDR Fund		(60,550	)
	(1,484)	Health Care Select Sector SPDR Fund		(106,922	)
	(2,442)	Industrial Select Sector SPDR Fund		(129,451	)
	(400)	iShares Core S&P Small-Capital ETF		(44,044	)
	(444)	iShares Nasdaq Biotechnology ETF		(150,219	)
	(1,214)	iShares Russell 2000 ETF		(136,587	)
	(2,000)	iShares Silver Trust		(26,380	)
	(750)	Materials Select Sector SPDR Fund		(32,565	)
	(2,250)	SPDR Barclays 1-3 Month T-Bill, Cl 3		(102,780	)
	(1,200)	SPDR Barclays Intermediate Term Corporate Bond ETF		(40,116	)
	(1,403)	SPDR Gold Shares		(142,348	)
	(2,855)	SPDR S&P 500 ETF Trust		(582,106	)
	(1,200)	SPDR S&P Biotech ETF		(84,096	)
	(2,019)	SPDR S&P Oil & Gas Exploration & Production ETF		(61,014	)

		Total Exchange Traded Funds (Proceeds $1,896,955)		(1,800,258	)


	Common Stock - (7.9)%

	CONSUMER DISCRETIONARY - (2.5)%
	(650)	Charter Communications, Inc, Cl A (b)		(119,015	)
	(500)	Expedia, Inc		(62,150	)
	(13,493)	Sirius XM Holdings, Inc (b)		(54,917	)

				(236,082	)


	CONSUMER STAPLES - (1.4)%
	(3,250)	Coty, Inc, Cl A		(83,297	)
	(1,250)	Sysco Corp.		(51,250	)

				(134,547	)


	ENERGY - (1.5)%
	(10,000)	California Resources Corp.		(23,300	)
	(500)	Schlumberger Ltd.		(34,875	)
	(10,000)	United States Natural Gas Fund LP (b)		(86,700	)

				(144,875	)



Shares			Value ($)

	HEALTH CARE - (1.4)%
	(674)	Illumina, Inc (b)		(129,371	)


	INDUSTRIALS - (0.5)%
	(625)	Caterpillar, Inc		(42,475	)


	INFORMATION TECHNOLOGY - (0.6)%
	(647)	Red Hat, Inc (b)		(53,578	)

		Total Common Stock (Proceeds $795,602)		(740,928	)


	Foreign Common Stock - (2.0)%

	CHINA - (1.0)%
	(1,150)	Alibaba Group Holding Ltd. ADR (b)		(93,461	)


	UNITED KINGDOM - (1.0)%
	(3,250)	Experian		(57,542	)
	(1,750)	Royal Dutch Shell, Cl B		(39,807	)

				(97,349	)

		Total Foreign Common Stock (Proceeds $195,174)		(190,810	)

	Total Securities Sold Short - (29.1)%			(2,731,996	)

	(Proceeds $2,887,731)
	Other Assets & Liabilities, Net - 51.2%			4,808,940

	Net Assets - 100.0%			9,385,717

(a)	All or part of this security is pledged as collateral for short sales. The market value of the securities pledged as collateral was $3,827,630.

(b)	Non-income producing security.

(c)	Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At December 31, 2015, these securities amounted to $813,450 or 8.7% of net assets.


ADR		American Depositary Receipt
Cl		Class
DAX		Deutsche Borse AG German Stock Index
ETF		Exchange-Traded Fund
LLC		Limited Liability Company
LP		Limited Partnership
Ltd.		Limited
S&P		Standard & Poor’s
Ser		Series
SPDR		Standard & Poor’s Depositary Receipt
UCITS		Undertakings for the Collective Investments of Transferable Securities


See accompanying Notes to Financial Statements.						11

INVESTMENT PORTFOLIO (unaudited)


As of December 31, 2015		Highland HFR Event-Driven ETF



Shares			Value ($)

	Common Stock - 67.3%

	CONSUMER DISCRETIONARY - 17.6%
	8,698	ClubCorp Holdings, Inc (a)		158,912
	6,050	Diamond Resorts International, Inc (a)(b)		154,335
	12,500	Fiat Chrysler Automobiles NV (b)		174,875
	3,560	General Motors Co. (a)		121,076
	5,269	Liberty Media Corp. (a)(b)		200,644
	1,000	Panera Bread Co., Cl A (b)		194,780
	7,535	Pep Boys-Manny Moe & Jack (a)(b)		138,719
	6,000	SeaWorld Entertainment, Inc		118,140
	2,450	Time Warner Cable, Inc		454,696

				1,716,177

	CONSUMER STAPLES - 2.1%
	1,687	JM Smucker Co. (a)		208,075

	ENERGY - 0.9%
	1,800	Baker Hughes, Inc		83,070

	FINANCIALS - 5.5%
	750	Chubb Corp.		99,480
	1,600	JPMorgan Chase & Co.		105,648
	42,073	VEREIT, Inc (a)		333,218

				538,346

	HEALTH CARE - 12.8%
	7,800	Akorn, Inc (b)		291,018
	804	Allergan (a)(b)		251,250
	4,000	Baxalta, Inc		156,120
	680	Cigna Corp.		99,504
	800	Humana, Inc		142,808
	2,100	Perrigo Co.		303,870

				1,244,570

	INDUSTRIALS - 9.0%
	230	AMERCO (a)		89,585
	4,000	Delta Air Lines, Inc		202,760
	12,083	Hertz Global Holdings, Inc (a)(b)		171,941
	600	Owens Corning		28,218
	1,650	Precision Castparts Corp. (a)		382,817

				875,321

	INFORMATION TECHNOLOGY - 6.7%
	1,600	Broadcom Corp., Cl A		92,512
	4,000	EMC Corp.		102,720
	7,500	NCR Corp. (b)		183,450
	2,600	Solera Holdings, Inc		142,558
	4,000	Yahoo!, Inc (b)		133,040

				654,280

	MATERIALS - 11.0%
	4,000	Berry Plastics Group, Inc (b)		144,720
	5,000	Calgon Carbon Corp.		86,250
	3,500	Dow Chemical Co.		180,180
	1,000	Eagle Materials, Inc		60,430
	15,299	Ferro Corp. (a)(b)		170,125
	17,067	Graphic Packaging Holding Co. (a)		218,969
	4,257	Innophos Holdings, Inc (a)		123,368
	1,795	WestRock Co.		81,888

				1,065,930



Shares			Value ($)
	TELECOMMUNICATION SERVICES - 1.7%
	3,100	Level 3 Communications, Inc (b)		168,516

		Total Common Stock (Cost $6,832,743)		6,554,285


Principal Amount ($)

	Corporate Bonds - 14.9%

	CONSUMER DISCRETIONARY - 5.6%
	200,000	Caesars Entertainment Resort Properties LLC 11.000%, 10/01/21		182,000
	150,000	JC Penney Corp., Inc 7.400%, 04/01/37		100,125
	250,000	Rent-A-Center, Inc 4.750%, 05/01/21		186,875
	100,000	Scientific Games International, Inc 10.000%, 12/01/22		71,500

				540,500

	ENERGY - 1.6%
	274,000	Lightstream Resources Ltd. 8.625%, 02/01/20 (c)		61,650
	150,000	Transocean, Inc 6.375%, 12/15/21		96,938

				158,588

	FINANCIALS - 2.5%
	570,000	CNG Holdings, Inc 9.375%, 05/15/20 (c)		242,250

	HEALTH CARE - 2.0%
	225,000	Concordia Healthcare Corp. 7.000%, 04/15/23 (c)		195,187

	INDUSTRIALS - 0.9%
	150,000	Erickson, Inc 8.250%, 05/01/20		91,875

	TELECOMMUNICATION SERVICES - 2.3%
	300,000	Sprint Corp. 7.875%, 09/15/23		225,300

		Total Corporate Bonds (Cost $1,935,525)		1,453,700


Shares

	Foreign Common Stock - 11.5%
	CANADA - 7.3%
	115,333	Athabasca Oil Corp. (b)		128,361
	25,240	Dream Global REIT,		157,967
	17,835	Intertape Polymer Group, Inc		240,902
	130,000	Penn West Petroleum Ltd.		108,719
	66,255	Rock Energy, Inc (b)		69,908

				705,857

	FRANCE - 4.2%
	8,000	UBISOFT Entertainment (b)		231,870


12						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (concluded)


As of December 31, 2015		Highland HFR Event-Driven ETF



Shares			Value ($)

	Foreign Common Stock (continued)
	FRANCE (continued)
	8,322	Vivendi S.A.		179,613

				411,483

		Total Foreign Common Stock (Cost $1,380,475)		1,117,340

	Total Investments - 93.7%			9,125,325

	(Cost $10,148,743)

	Securities Sold Short - (31.2)%

	Exchange Traded Funds - (17.2)%
	(1,776)	Energy Select Sector SPDR Fund		(107,537	)
	(1,215)	iShares Russell 2000 Value ETF		(111,792	)
	(6,686)	SPDR S&P 500 ETF Trust		(1,363,208	)
	(365)	SPDR S&P MidCap 400 ETF Trust		(92,743	)

		Total Exchange Traded Funds (Proceeds $1,769,036)		(1,675,280	)


	Common Stock - (12.3)%

	CONSUMER DISCRETIONARY - (4.2)%
	(1,350)	Charter Communications, Inc, Cl A (b)		(247,185	)
	(40,550)	Sirius XM Holdings, Inc (b)		(165,038	)

				(412,223	)

	CONSUMER STAPLES - (2.0)%
	(3,500)	Coty, Inc, Cl A		(89,705	)
	(2,500)	Sysco Corp.		(102,500	)

				(192,205	)

	ENERGY - (2.0)%
	(20,000)	California Resources Corp.		(46,600	)
	(2,353)	Halliburton Co.		(80,096	)
	(950)	Schlumberger Ltd.		(66,263	)

				(192,959	)

	HEALTH CARE - (3.6)%
	(750)	Anthem, Inc		(104,580	)
	(4,500)	Mylan NV (b)		(243,315	)

				(347,895	)

	INDUSTRIALS - (0.5)%
	(800)	Caterpillar, Inc		(54,368	)

		Total Common Stock (Proceeds $1,241,797)		(1,199,650	)


	Foreign Common Stock - (1.7)%

	CHINA - (1.7)%
	(2,067)	Alibaba Group Holding Ltd. ADR (b)		(167,985	)

		Total Foreign Common Stock (Proceeds $171,842)		(167,985	)

	Total Securities Sold Short - (31.2)%			(3,042,915	)

	(Proceeds $3,182,675)
	Other Assets & Liabilities, Net - 37.5%			3,654,767

	Net Assets - 100.0%			9,737,177

(a)	All or part of this security is pledged as collateral for short sales. The market value of the securities pledged as collateral was $2,650,269.

(b)	Non-income producing security.

(c)	Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At December 31, 2015, these securities amounted to $499,087 or 5.1% of net assets.


ADR		American Depositary Receipt
Cl		Class
ETF		Exchange-Traded Fund
LLC		Limited Liability Company
Ltd.		Limited
REIT		Real Estate Investment Trust
S&P		Standard & Poor’s
SPDR		Standard & Poor’s Depositary Receipt


See accompanying Notes to Financial Statements.						13

INVESTMENT PORTFOLIO (unaudited)


As of December 31, 2015		Highland HFR Equity Hedge ETF



Shares			Value ($)

	Common Stock - 53.6%

	CONSUMER DISCRETIONARY - 8.3%
	2,600	CBS Corp., Cl B (a)		122,538
	4,813	General Motors Co. (a)		163,690
	1,304	Liberty Broadband Corp., Ser C, Cl C (a)(b)		67,625
	1,905	Liberty Interactive Corp. QVC Group, Cl A (a)(b)		52,045
	1,112	Liberty Media Corp. (b)		42,345
	3,259	Liberty Ventures, Ser A (a)(b)		147,013
	1,005	McDonald’s Corp. (a)		118,731
	700	Walt Disney Co. (a)		73,556

				787,543

	CONSUMER STAPLES - 1.4%
	1,000	Coca-Cola Co.		42,960
	1,250	Kraft Heinz Co.		90,950

				133,910

	ENERGY - 1.6%
	1,082	Halliburton Co. (a)		36,832
	3,410	Kinder Morgan, Inc (a)		50,877
	2,300	Suncor Energy, Inc		59,340

				147,049

	FINANCIALS - 9.5%
	2,162	American International Group, Inc (a)		133,979
	4,702	Apollo Global Management LLC, Cl A (a)(c)		71,376
	6,061	Bank of America Corp. (a)		102,007
	1,129	Berkshire Hathaway, Inc, Cl B (a)(b)		149,073
	1,698	Citigroup, Inc (a)		87,871
	9,162	Hilltop Holdings, Inc (a)(b)		176,094
	349	Howard Hughes Corp. (a)(b)		39,493
	2,170	JPMorgan Chase & Co. (a)		143,285

				903,178

	HEALTH CARE - 10.2%
	786	AbbVie, Inc (a)		46,563
	2,783	Air Methods Corp. (a)(b)		116,691
	752	Allergan (a)(b)		235,000
	224	Biogen, Inc (a)(b)		68,623
	874	Celgene Corp. (a)(b)		104,670
	412	DaVita HealthCare Partners, Inc (a)(b)		28,721
	891	Gilead Sciences, Inc (a)		90,160
	3,828	Pfizer, Inc (a)		123,568
	400	Thermo Fisher Scientific, Inc (a)		56,740
	2,009	Zoetis, Inc, Cl A (a)		96,271

				967,007

	INDUSTRIALS - 9.4%
	3,713	American Airlines Group, Inc (a)		157,246
	699	Boeing Co. (a)		101,068
	1,000	Danaher Corp.		92,880
	329	Honeywell International, Inc (a)		34,075
	900	Huron Consulting Group, Inc (b)		53,460
	2,016	Jacobs Engineering Group, Inc (a)(b)		84,571
	1,000	Macquarie Infrastructure Corp.		72,600
	2,400	MasTec, Inc (b)		41,712
	2,541	Mobile Mini, Inc (a)		79,101
	4,780	Quanex Building Products Corp. (a)		99,663
	3,411	Quanta Services, Inc (a)(b)		69,073

				885,449



Shares			Value ($)
	INFORMATION TECHNOLOGY - 10.9%
	340	Alphabet, Inc, Cl A (a)(b)		264,523
	125	Alphabet, Inc, Cl C (b)		94,860
	1,360	Apple, Inc (a)		143,154
	1,500	comScore, Inc (b)		61,725
	3,892	EchoStar Corp., Cl A (a)(b)		152,216
	6,411	ManTech International Corp., Cl A (a)		193,869
	3,257	PayPal Holdings, Inc (a)(b)		117,903

				1,028,250

	MATERIALS - 1.6%
	1,497	WR Grace & Co. (a)(b)		149,086


	TELECOMMUNICATION SERVICES - 0.7%
	1,301	Level 3 Communications, Inc (a)(b)		70,722

		Total Common Stock (Cost $5,240,809)		5,072,194


	Foreign Common Stock - 9.0%

	FRANCE - 1.2%
	2,500	Klepierre (a)		111,365


	IRELAND - 1.1%
	1,041	Accenture, Cl A (a)		108,785


	ISRAEL - 1.0%
	1,400	Teva Pharmaceutical Industries Ltd. ADR (a)		91,896


	JAPAN - 1.4%
	1,400	Shionogi & Co. Ltd. (a)		64,097
	4,200	Temp Holdings Co. Ltd. (a)		65,868

				129,965

	SPAIN - 1.1%
	908	Aena S.A. (b)		104,006


	UNITED KINGDOM - 3.2%
	1,200	Carnival		68,391
	931	InterContinental Hotels Group (a)		36,481
	1,177	Persimmon (a)		35,171
	4,805	Prudential (a)		108,450
	17,500	Taylor Wimpey (a)		52,397

				300,890

		Total Foreign Common Stock (Cost $813,680)		846,907


	Exchange Traded Fund - 1.5%
	4,576	AP Alternative Assets LP		144,418

		Total Exchange Traded Funds (Cost $167,671)		144,418

	Total Investments - 64.1%			6,063,519

	(Cost $6,222,160)

	Securities Sold Short - (25.6)%

	Exchange Traded Funds - (19.6)%
	(800)	CurrencyShares Euro Trust		(85,120	)
	(2,287)	Health Care Select Sector SPDR Fund		(164,778	)
	(1,710)	iShares Core S&P Small-Capital ETF		(188,288	)


14						See accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (concluded)


As of December 31, 2015		Highland HFR Equity Hedge ETF



Shares			Value ($)

	Securities Sold Short (continued)

	Exchange Traded Funds (continued)
	(869)	iShares Nasdaq Biotechnology ETF		(294,009	)
	(2,863)	iShares Russell 2000 ETF		(322,116	)
	(3,283)	SPDR S&P 500 ETF Trust		(669,371	)
	(1,899)	SPDR S&P Biotech ETF		(133,082	)

		Total Exchange Traded Funds (Proceeds $1,986,055)		(1,856,764	)


	Foreign Common Stock - (3.1)%

	FINLAND - (1.0)%
	(4,000)	Metso OYJ		(89,983	)


	UNITED KINGDOM - (2.1)%
	(10,407)	Experian		(184,259	)
	(2,000)	Standard Chartered		(16,620	)

				(200,879	)

		Total Foreign Common Stock (Proceeds $299,653)		(290,862	)


	Common Stock - (2.9)%

	CONSUMER DISCRETIONARY - (2.2)%
	(1,698)	Expedia, Inc		(211,061	)


	HEALTH CARE - (0.7)%
	(1,500)	Abbott Laboratories		(67,365	)

		Total Common Stock (Proceeds $254,068)		(278,426	)

	Total Securities Sold Short - (25.6)%			(2,426,052	)

	(Proceeds $2,539,776)
	Other Assets & Liabilities, Net - 61.5%			5,817,427

	Net Assets - 100.0%			9,454,894

(a)	All or part of this security is pledged as collateral for short sales. The market value of the securities pledged as collateral was $4,791,826.

(b)	Non-income producing security.

(c)	Security considered Master Limited Partnership. At December 31, 2015, these securities amounted to $71,376 or 0.8% of net assets.


ADR		American Depositary Receipt
Cl		Class
ETF		Exchange-Traded Fund
LLC		Limited Liability Company
LP		Limited Partnership
Ltd.		Limited
S&P		Standard & Poor’s
Ser		Series
SPDR		Standard & Poor’s Depositary Receipt


See accompanying Notes to Financial Statements.						15

STATEMENTS OF ASSETS AND LIABILITIES


As of December 31, 2015 (unaudited)		Highland Funds I



	Highland/iBoxx Senior Loan ETF ($)			Highland HFR Global ETF ($)			Highland HFR Event-Driven ETF ($)			Highland HFR Equity Hedge ETF ($)
Assets:
Total Investments, at value		288,915,323			7,308,773			9,125,325			6,063,519
Cash		9,571,561			4,734,652			3,674,810			5,657,142
Foreign currency		—			69,015			—			170,367
Dividend tax reclaim		—			570			2,805			(31	)
Receivable for:
Investments sold		13,274,438			—			—			—
Dividends and interest		1,171,253			50,290			54,448			2,061
Prepaid expenses		33,291			—			—			—

Total assets		312,965,866			12,163,300			12,857,388			11,893,058


Liabilities:
Securities sold short, at value (Notes 2 and 7)		—			2,731,996			3,042,915			2,426,052
Due to custodian		—			—			20,321			—

Payable for:
Investments purchased		18,455,000			—			—			—
Investment advisory fees (Note 4)		69,318			6,821			7,037			—
Audit fees		24,531			—			—			—
Administration fees (Note 4)		20,604			—			—			—
Trustees’ fees (Note 4)		7,493			—			—			—
Transfer agent fees		425			—			—			—
Dividends and fees on securities sold short		—			3,960			8,467			5,278
Distributions to shareholders		—			34,806			41,471			—
Accrued expenses and other liabilities		77,206			—			—			6,834

Total liabilities		18,654,577			2,777,583			3,120,211			2,438,164

Net Assets		294,311,289			9,385,717			9,737,177			9,454,894

Total Investments, at cost		310,172,445			7,807,779			10,148,743			6,222,160
Proceeds from securities sold short		—			2,887,731			3,182,675			2,539,776
Foreign currency, at cost		—			71,876			(21,297	)		177,506

Composition of Net Assets:
Paid-in capital		323,823,871			10,000,000			10,888,661			10,000,000
Undistributed (Distributions in excess of) net investment income/(Accumulated net investment loss)		156,989			(5,493	)		2,263			(50,484	)
Accumulated net realized loss on investments and foreign currency transactions		(8,412,449	)		(262,636	)		(270,975	)		(442,566	)
Net unrealized depreciation on investments, securities sold short and foreign currency translation		(21,257,122	)		(346,154	)		(882,772	)		(52,056	)

Net Assets		294,311,289			9,385,717			9,737,177			9,454,894

Shares outstanding (unlimited authorization—no par value)		16,300,000			500,000			550,000			500,000
Net asset value, per share (Net assets/shares outstanding)		18.06			18.77			17.70			18.91

Amounts

designated as “—” are $0.


16						See accompanying Notes to Financial Statements.

STATEMENTS OF OPERATIONS


For the Six Months Ended December 31, 2015 (unaudited)		Highland Funds I



	Highland/iBoxx Senior Loan ETF ($)			Highland HFR Global ETF ($)			Highland HFR Event-Driven ETF ($)			Highland HFR Equity Hedge ETF ($)
Investment Income:
Dividend income		—			37,402			74,362			40,200
Interest income		7,734,267			133,956			114,351			2
Less: Foreign taxes withheld		—			695			(2,857	)		(651	)

Total investment income		7,734,267			172,053			185,856			39,551


Expenses:
Investment advisory fees (Note 4)		704,571			41,403			41,237			41,157
Administration fees (Note 4)		126,977			—			—			—
Trustees’ fees (Note 4)		17,781			—			—			—
Legal fees		61,872			11,172			11,172			11,172
Licensing fees		57,727			—			—			—
Audit fees		31,287			—			—			—
Custodian fees		29,065			—			—			—
Pricing fees		27,797			—			—			—
Printing fees		25,082			—			—			—
Transfer agent fees		7,638			—			—			—
Registration fees		2,783			—			—			—
Dividends and fees on securities sold short (Note 2)		—			45,555			48,545			34,566
Other		31,521			—			—			—

Total operating expenses		1,124,101			98,130			100,954			86,895

Fees and expenses waived by Investment Adviser (Note 4)		(262,996	)		—			—			—

Net operating expenses		861,105			98,130			100,954			86,895

Net investment income (loss)		6,873,162			73,923			84,902			(47,344	)


Net Realized and Unrealized Gain (Loss) on Investments Realized gain (loss) on:
Investments		(5,063,422	)		(463,677	)		(382,734	)		(478,413	)
Securities sold short (Note 2)		—			200,764			120,766			45,039
Foreign currency related transactions		—			6,490			1,113			(8,047	)

Change in unrealized appreciation (depreciation) on:
Investments		(14,154,053	)		(244,853	)		(810,412	)		(15,632	)
Securities sold short (Note 2)		—			88,627			97,154			79,082
Foreign currency related translations		—			(2,852	)		995			(7,139	)

Net realized and unrealized loss on investments		(19,217,475	)		(415,501	)		(973,118	)		(385,110	)

Net decrease in net assets resulting from operations		(12,344,313	)		(341,578	)		(888,216	)		(432,454	)

Amounts

designated as “—” are $0.


See accompanying Notes to Financial Statements.						17

STATEMENTS OF CHANGES IN NET ASSETS


		Highland Funds I



	Highland/iBoxx Senior Loan ETF

	Six Months Ended December 31, 2015 (unaudited) ($)			Year Ended June 30, 2015 ($)
Increase (Decrease) in Net Assets:

From Operations
Net investment income		6,873,162			11,292,490
Net realized loss on investments		(5,063,422	)		(2,988,929	)
Net change in unrealized appreciation (depreciation) on investments		(14,154,053	)		(6,782,536	)

Net increase (decrease) in net assets resulting from operations		(12,344,313	)		1,521,025


Distributions Declared to Shareholders
From net investment income		(6,716,173	)		(11,292,490	)
From return of capital		—			(54,483	)

Total distributions declared to shareholders		(6,716,173	)		(11,346,973	)

Share Transactions
Subscriptions		3,805,821			164,095,767
Redemptions		(14,804,896	)		(29,265,926	)

Net increase (decrease) from share transactions		(10,999,075	)		134,829,841

Total increase (decrease) in net assets		(30,059,561	)		125,003,893


Net Assets:
Beginning of year/period		324,370,850			199,366,957

End of year/period		294,311,289			324,370,850

Undistributed net investment income		156,989			—


Changes in Shares
Subscriptions		200,000			8,400,000
Redemptions		(800,000	)		(1,500,000	)

Net increase (decrease)		(600,000	)		6,900,000

Amounts

designated as “—” are $0.


18						See accompanying Notes to Financial Statements.

STATEMENTS OF CHANGES IN NET ASSETS


		Highland Funds I



	Highland HFR Global ETF

	Six Months Ended December 31, 2015 (unaudited) ($)			Period Ended June 30, 2015^(a) ($)
Increase (Decrease) in Net Assets:

From Operations
Net investment income		73,923			23,245
Net realized loss on investments, securities sold short and foreign currency transactions		(256,423	)		(3,248	)
Net change in unrealized appreciation (depreciation) on investments, securities sold short and foreign currency translations		(159,078	)		(187,076	)

Net decrease in net assets resulting from operations		(341,578	)		(167,079	)


Distributions Declared to Shareholders
From net investment income		(105,626	)		—

Total distributions declared to shareholders		(105,626	)		—


Share Transactions
Subscriptions		—			10,000,000

Net increase from share transactions		—			10,000,000

Total increase (decrease) in net assets		(447,204	)		9,832,921


Net Assets:
Beginning of period		9,832,921			—

End of period		9,385,717			9,832,921

Undistributed (Distributions in excess of) net investment income		(5,493	)		26,210


Changes in Shares
Subscriptions		—			500,000

Net increase		—			500,000

(a)	The Fund commenced operations on June 1, 2015.

Amounts designated as “—” are $0.


See accompanying Notes to Financial Statements.						19

STATEMENTS OF CHANGES IN NET ASSETS


		Highland Funds I



	Highland HFR Event-Driven ETF

	Six Months Ended December 31, 2015 (unaudited) ($)			Period Ended June 30, 2015^(a) ($)
Increase (Decrease) in Net Assets:

From Operations
Net investment income		84,902			7,420
Net realized loss on investments, securities sold short and foreign currency transactions		(260,855	)		(8,062	)
Net change in unrealized appreciation (depreciation) on investments, securities sold short and foreign currency translations		(712,263	)		(170,509	)

Net decrease in net assets resulting from operations		(888,216	)		(171,151	)


Distributions Declared to Shareholders
From net investment income		(92,117	)		—

Total distributions declared to shareholders		(92,117	)		—


Share Transactions
Subscriptions		888,661			10,000,000

Net increase from share transactions		888,661			10,000,000

Total increase (decrease) in net assets		(91,672	)		9,828,849


Net Assets:
Beginning of period		9,828,849			—

End of period		9,737,177			9,828,849

Undistributed net investment income		2,263			9,478


Changes in Shares
Subscriptions		50,000			500,000

Net increase		50,000			500,000

(a)	The Fund commenced operations on June 1, 2015.

Amounts designated as “—” are $0.


20						See accompanying Notes to Financial Statements.

STATEMENTS OF CHANGES IN NET ASSETS


		Highland Funds I



	Highland HFR Equity Hedge ETF

	Six Months Ended December 31, 2015 (unaudited) ($)			Period Ended June 30, 2015^(a) ($)
Increase (Decrease) in Net Assets:

From Operations
Net investment loss		(47,344	)		(4,155	)
Net realized loss on investments, securities sold short and foreign currency transactions		(441,421	)		(130	)
Net change in unrealized appreciation (depreciation) on investments, securities sold short and foreign currency translations		56,311			(108,367	)

Net decrease in net assets resulting from operations		(432,454	)		(112,652	)


Share Transactions
Subscriptions		—			10,000,000

Net increase from share transactions		—			10,000,000

Total increase (decrease) in net assets		(432,454	)		9,887,348


Net Assets:
Beginning of period		9,887,348			—

End of period		9,454,894			9,887,348

Accumulated net investment loss		(50,484	)		(3,140	)


Changes in Shares
Subscriptions		—			500,000

Net increase		—			500,000

(a)	The Fund commenced operations on June 1, 2015.

Amounts designated as “—” are $0.


See accompanying Notes to Financial Statements.						21

FINANCIAL HIGHLIGHTS


		Highland/iBoxx Senior Loan ETF

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			Year Ended June 30,						For the Period Ended 06/30/13^(a)
	For the Six Months Ended 12/31/15 (unaudited)			2015			2014			For the Period Ended 06/30/13^(a)

Net Asset Value, Beginning of Year/Period	$	19.19		$	19.94		$	19.93		$	20.00
Income from Investment Operations:
Net investment income^(b)		0.41			0.76			0.93			0.73
Net realized and unrealized gain/(loss)		(1.14	)		(0.75	)		0.08			(0.13	)

Total from investment operations		(0.73	)		0.01			1.01			0.60
Less Distributions Declared to Shareholders:
From net investment income		(0.40	)		(0.76	)		(0.93	)		(0.67	)
From net realized gains		—			—			(0.06	)		—
From return of capital		—			(0.00	)^(h)		(0.01	)		—


Total distributions declared to shareholders		(0.40	)		(0.76	)		(1.00	)		(0.67	)
Net Asset Value, End of Year/Period	$	18.06		$	19.19		$	19.94		$	19.93
Total return^(c)		(3.83	)%^(g)		0.09	%		5.19	%		3.04	%^(g)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year/period (000s)	$	294,311		$	324,371		$	199,367		$	89,672
Gross operating expenses		0.72	%^(d)		0.73	%		0.92	%		1.62	%^(d)
Waiver/reimbursement		(0.17	)%^(d)		(0.18	)%		(0.37	)%		(1.07	)%^(d)
Net operating expenses^(f)		0.55	%^(d)		0.55	%		0.55	%		0.55	%^(d)
Net investment income		4.39	%^(d)		3.90	%		4.68	%		5.60	%^(d)
Portfolio turnover rate		21	%^(e)		9	%		35	%		38	%^(e)

(a)	The Highland/iBoxx Senior Loan ETF commenced operations on November 6, 2012.

(b)	Per share data was calculated using average shares outstanding for the period.

(c)	Total return is at net asset value assuming all distributions are reinvested. For periods with waivers/reimbursements, had the Fund’s Investment Adviser not waived or reimbursed a portion of expenses, total return would have been reduced.

(d)	Annualized.

(e)	Not annualized.

(f)	Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.

(g)	Total return is for the period indicated and is not annualized.

(h)	Amount represents less than $0.01 per share.

Amounts designated as “—” are $0.


22						See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS


		Highland HFR Global ETF

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Period Ended 06/30/15^(a)

Net Asset Value, Beginning of Period	$	19.67		$	20.00
Income from Investment Operations:
Net investment income^(b)		0.15			0.05
Net realized and unrealized loss		(0.84	)		(0.38	)

Total from investment operations		(0.69	)		(0.33	)
Less Distributions Declared to Shareholders:
From net investment income		(0.21	)		—


Total distributions declared to shareholders		(0.21	)		—
Net Asset Value, End of Period	$	18.77		$	19.67
Total return^(c)		(3.50	)%^(d)		(1.65	)%^(d)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (000s)	$	9,386		$	9,833
Gross operating expenses^(f)		2.01	%^(e)		1.99	%^(e)(g)
Net operating expenses^(f)		2.01	%^(e)		1.99	%^(e)(g)
Dividends and fees on securities sold short		0.94	%		1.14	%^(e)(g)
Net operating expenses (excluding dividends and fees on securities sold short)		1.07	%		0.85	%^(e)
Net investment income		1.52	%^(e)		2.94	%^(e)
Portfolio turnover rate		94	%^(h)		25	%^(h)

(a)	The Highland HFR Global ETF commenced operations on June 1, 2015.

(b)	Per share data was calculated using average shares outstanding for the period.

(c)	Total return is at net asset value assuming all distributions are reinvested.

(d)	Total return is for the period indicated and is not annualized.

(e)	Annualized.

(f)	Includes dividends and fees on securities sold short.

(g)	Expense ratios for start-up periods may not be representative of longer-term operating periods.

(h)	Not annualized.

Amounts designated as “—” are $0.


See accompanying Notes to Financial Statements.						23

FINANCIAL HIGHLIGHTS


		Highland HFR Event-Driven ETF

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Period Ended 06/30/15^(a)

Net Asset Value, Beginning of Period	$	19.66		$	20.00
Income from Investment Operations:
Net investment income^(b)		0.16			0.01
Net realized and unrealized loss		(1.94	)		(0.35	)

Total from investment operations		(1.78	)		(0.34	)
Less Distributions Declared to Shareholders:
From net investment income		(0.18	)		—


Total distributions declared to shareholders		(0.18	)		—
Net Asset Value, End of Period	$	17.70		$	19.66
Total return^(c)		(9.06	)%^(d)		(1.70	)%^(d)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (000s)	$	9,737		$	9,829
Gross operating expenses^(f)		2.08	%^(e)		2.32	%^(e)(g)
Net operating expenses^(f)		2.08	%^(e)		2.32	%^(e)(g)
Dividends and fees on securities sold short		1.00	%^(e)		1.47	%^(e)(g)
Net operating expenses (excluding dividends and fees on securities sold short)		1.08	%^(e)		0.85	%^(e)
Net investment income		1.75	%^(e)		0.94	%^(e)
Portfolio turnover rate		91	%^(h)		23	%^(h)

(a)	The Highland HFR Event-Driven ETF commenced operations on June 1, 2015.

(b)	Per share data was calculated using average shares outstanding for the period.

(c)	Total return is at net asset value assuming all distributions are reinvested.

(d)	Total return is for the period indicated and is not annualized.

(e)	Annualized.

(f)	Includes dividends and fees on securities sold short.

(g)	Expense ratios for start-up periods may not be representative of longer-term operating periods.

(h)	Not annualized.

Amounts designated as “—” are $0.


24						See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS


		Highland HFR Equity Hedge ETF

Selected data for a share outstanding throughout each period is as follows:


	For the Six Months Ended 12/31/15 (unaudited)			For the Period Ended 06/30/15^(a)

Net Asset Value, Beginning of Period	$	19.77		$	20.00
Income from Investment Operations:
Net investment loss^(b)		(0.09	)		(0.01	)
Net realized and unrealized loss		(0.77	)		(0.22	)


Total from investment operations		(0.86	)		(0.23	)
Net Asset Value, End of Period	$	18.91		$	19.77
Total return^(c)		(4.35	)%^(d)		(1.15	)%^(d)
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (000s)	$	9,455		$	9,887
Gross operating expenses^(f)		1.79	%^(e)		1.69	%^(e)(g)
Net operating expenses^(f)		1.79	%^(e)		1.69	%^(e)(g)
Dividends and fees on securities sold short		0.71	%^(e)		0.84	%^(e)(g)
Net operating expenses (excluding dividends and fees on securities sold short)		1.08	%^(e)		0.85	%^(e)
Net investment loss		(0.98	)%^(e)		(0.52	)%^(e)
Portfolio turnover rate		65	%^(h)		16	%^(h)

(a)	The Highland HFR Equity Hedge ETF commenced operations on June 1, 2015.

(b)	Per share data was calculated using average shares outstanding for the period.

(c)	Total return is at net asset value assuming all distributions are reinvested.

(d)	Total return is for the period indicated and is not annualized.

(e)	Annualized.

(f)	Includes dividends and fees on securities sold short.

(g)	Expense ratios for start-up periods may not be representative of longer-term operating periods.

(h)	Not annualized.


See accompanying Notes to Financial Statements.						25

NOTES TO FINANCIAL STATEMENTS (unaudited)


December 31, 2015		Highland Funds I

Note 1. Organization

Highland Funds I (the “Trust”) was organized as a Delaware statutory trust on February 28, 2006. The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company with eight separate portfolios. The financial statements herein are those of the Highland/iBoxx Senior Loan ETF, Highland HFR Global ETF (“HFR Global ETF”), Highland HFR Event-Driven ETF (“HFR Event-Driven ETF”) and Highland HFR Equity Hedge ETF (“HFR Equity Hedge ETF”) (each a “Fund” and, collectively, the “Funds”). Each Fund is a non-diversified exchange-traded fund (“ETF”). The financial statements of the remaining funds of the Trust are presented separately. On November 6, 2012, the Highland/ iBoxx Senior Loan ETF issued 1,500,000 shares. The beginning net assets of the Fund on such date were $30,000,000. On June 1, 2015, HFR Global ETF, HFR Event-Driven ETF and HFR Equity Hedge ETF each issued 500,000 shares. The beginning net assets of each Fund on such date were $10,000,000.

Investment Objectives

The investment objectives of the Funds are as follows:

Highland/iBoxx Senior Loan ETF. To provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Markit iBoxx USD Liquid Leveraged Loan Index.

HFR Global ETF. To provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the HFRL Global Index.

HFR Event-Driven ETF. To provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the HFRL Event-Driven Index.

HFR Equity Hedge ETF. To provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the HFRL Equity Hedge Index.

Fund Shares

Shares of each Fund are listed and traded on the NYSE Arca, Inc. Market prices for the shares of the Funds may be different from their net asset value (“NAV”). The Funds issue and redeem shares on a continuous basis at NAV only to authorized participants who have entered into agreements with the Funds’ distributor (“Authorized Participants”) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as Creation Units, each of which comprises 100,000 shares for Highland/iBoxx Senior Loan ETF and 50,000 shares for HFR Global ETF, HFR Event-Driven ETF and HFR Equity Hedge

ETF. Once created, shares will trade in a secondary market at market prices that change throughout the day in amounts less than a Creation Unit.

Note 2. Significant Accounting Policies

The following summarizes the significant accounting policies consistently followed by the Funds in the preparation of their financial statements.

Use of Estimates

The Funds are investment companies that follow the accounting and reporting guidance of Accounting Standards Codification Topic 946 applicable to investment companies. Each Funds’ financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Valuation of Investments

In computing each Fund’s net assets attributable to shares, securities with readily available market quotations on the New York Stock Exchange, NASDAQ or other nationally recognized exchange use the closing quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market quotation will be valued pursuant to policies adopted by the Funds’ Board of Trustees. Typically, such securities will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Investments in mutual funds are valued at their respective net asset values as determined by those mutual funds each business day. Generally, each Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that Highland Capital Management Fund Advisors, L.P. (the “Investment Adviser”) has determined generally have the capability to provide appropriate pricing and have been approved by the Funds’ Board of Trustees (the “Board”).


26						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Securities for which market quotations are not readily available and for which each Fund has determined the price received from a pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and calculation of each Fund’s NAV), will be valued by each Fund at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably determined to be relevant, including, among other things: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, each Fund’s NAV will reflect the affected portfolio securities’ fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their net asset values. Determination of fair value is uncertain because it involves subjective judgments and estimates.

There can be no assurance that each Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact on the Funds.

The NAV shown in a Fund’s financial statements may vary from the NAV published by the Fund as of its fiscal year end because portfolio securities transactions are accounted for on the trade date (rather than the day following the trade date) for financial statement purposes and/or because of information relating to the value of the Fund’s portfolio securities as of the Fund’s fiscal year end that became available prior to the completion of this annual report that was not available at the time the Fund’s NAV as of its fiscal year end was published.

Fair Value Measurements

The three levels of the fair value hierarchy are described below:

Level 1 —

Quoted unadjusted prices for identical instruments in active markets to which the Funds have access at the date of measurement;

Level 2 —

Level 3 —

Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Funds have obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Funds’ own assumptions that market participants would use to price the asset or liability based on the best available information.

The Investment Adviser has established policies and procedures, as described above and approved by the Board, to ensure that valuation methodologies for investments and financial instruments that are categorized within all levels of the fair value hierarchy are fair and consistent. A Pricing Committee has been established to provide oversight of the valuation policies, processes and procedures, and is comprised of personnel from the Investment Adviser. The Pricing Committee meets monthly to review the proposed valuations for investments and financial instruments and is responsible for evaluating the overall fairness and consistent application of established policies.

As of December 31, 2015, the Funds’ investments consisted of senior loans, corporate bonds and notes, common stocks, exchange traded funds and securities sold short. The fair value of the Funds’ loans and bonds are generally based on quotes received from brokers or independent pricing services. Loans and bonds with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans and bonds that are priced using quotes derived from implied values, indicative bids, or a limited


Semi-Annual Report						27

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

Exchange traded funds (“ETFs”) traded on a recognized securities exchange are valued at the last reported sale price that day or the official closing price on a recognized securities exchange they trade on, if applicable. The fair value of the Funds’ common stocks and exchange-traded funds that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

At the end of each calendar quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is

willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Funds’ investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Funds may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the levels of inputs used to value the Funds’ assets as of December 31, 2015 is as follows:


	Total Market Value at 12/31/15		Level 1 Quoted Prices		Level 2 Other Significant Observable Inputs		Level 3 Significant Unobservable Inputs
Highland/iBoxx Senior Loan ETF
Assets
US Senior Loans*	$	226,920,049	$	—	$	226,920,049	$	—
Foreign Domiciled Senior Loans*		61,995,274		—		61,995,274		—

Total	$	288,915,323	$	—	$	288,915,323	$	—

*	Please refer to the Investment Portfolio for industry/country breakout.

Amounts designated as “—” are $0.


	Total Market Value at 12/31/15			Level 1 Quoted Prices			Level 2 Other Significant Observable Inputs		Level 3 Significant Unobservable Inputs
Highland HFR Global ETF
Assets
Common Stock*	$	3,928,476		$	3,928,476		$	—	$	—
Corporate Bonds*		2,195,898			—			2,195,898		—
Exchange Traded Funds		965,870			965,870			—		—
Foreign Common Stock*		218,529			218,529			—		—

Total	$	7,308,773		$	5,112,875		$	2,195,898	$	—

Securities Sold Short
Exchange Traded Funds	$	(1,800,258	)	$	(1,800,258	)	$	—	$	—
Common Stock*		(740,928	)		(740,928	)		—		—
Foreign Common Stock*		(190,810	)		(190,810	)		—		—

Total Securities Sold Short	$	(2,731,996	)	$	(2,731,996	)	$	—	$	—

*	Please refer to the Investment Portfolio for industry/country breakout.

Amounts designated as “—” are $0.


28						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I


	Total Market Value at 12/31/15			Level 1 Quoted Prices			Level 2 Other Significant Observable Inputs		Level 3 Significant Unobservable Inputs
Highland HFR Event-Driven ETF
Assets
Common Stock*	$	6,554,285		$	6,554,285		$	—	$	—
Corporate Bonds*		1,453,700			—			1,453,700		—
Foreign Common Stock*		1,117,340			1,117,340			—		—

Total	$	9,125,325		$	7,671,625		$	1,453,700	$	—

Securities Sold Short
Exchange Traded Funds	$	(1,675,280	)	$	(1,675,280	)	$	—	$	—
Common Stock*		(1,199,650	)		(1,199,650	)		—		—
Foreign Common Stock*		(167,985	)		(167,985	)		—		—

Total Securities Sold Short	$	(3,042,915	)	$	(3,042,915	)	$	—	$	—

*	Please refer to the Investment Portfolio for industry/country breakout.

Amounts designated as “—” are $0.


	Total Market Value at 12/31/15			Level 1 Quoted Prices			Level 2 Other Significant Observable Inputs		Level 3 Significant Unobservable Inputs
Highland HFR Equity Hedge ETF
Assets
Common Stock*	$	5,072,194		$	5,072,194		$	—	$	—
Foreign Common Stock*		846,907			846,907			—		—
Exchange Traded Fund		144,418			144,418			—		—

Total	$	6,063,519		$	6,063,519		$	—	$	—

Securities Sold Short
Exchange Traded Funds	$	(1,856,764	)	$	(1,856,764	)	$	—	$	—
Foreign Common Stock*		(290,862	)		(290,862	)		—		—
Common Stock*		(278,426	)		(278,426	)		—		—

Total Securities Sold Short	$	(2,426,052	)	$	(2,426,052	)	$	—	$	—

*	Please refer to the Investment Portfolio for industry/country breakout.

Amounts designated as “—” are $0.

For the period ended December 31, 2015 there were no transfers within the Funds between Level 1, Level 2 or Level 3. For the period ended December 31, 2015, there were no Level 3 investments.

Security Transactions

Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of the specific identification method for both financial statement and U.S. federal income tax purposes.

Cash and Cash Equivalents

The Funds consider liquid assets deposited with a bank, and certain short term debt instruments with original

maturities of 3 months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of the Statement of Assets and Liabilities.

Foreign Currency

Accounting records of the Funds are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities denominated in foreign currencies are


Semi-Annual Report						29

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

translated into U.S. dollars at the exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and liabilities resulting from changes in exchange rates, between trade and settlement dates on securities transactions and between the accrual and payment dates on dividends, interest income and foreign withholding taxes, are recorded as unrealized foreign currency gains/(losses). Realized gains/(losses) and unrealized appreciation/(depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.

Securities Sold Short

HFR Global ETF, HFR Event-Driven ETF and HFR Equity Hedge ETF may sell securities short. A security sold short is a transaction in which a Fund sells a security it does not own in anticipation that the market price of that security will decline. When a Fund sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. A Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any dividends or other payments received on such borrowed securities. As of December 31, 2015, the HFR Global ETF, HFR Event-Driven ETF and HFR Equity Hedge ETF held securities sold short. Securities valued at $3,827,630, $2,650,269 and $4,791,826 were posted as collateral in the HFR Global ETF, HFR Event-Driven ETF and HFR Equity Hedge ETF, respectively.

Creation Units

Except when aggregated in Creation Units, shares are not redeemable securities of the Funds. Shares of each Fund may only be purchased or redeemed by Authorized Participants. An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation or (ii) a Depository Trust Company (“DTC”) participant and, in each case, must have executed an Authorized Participant Agreement with the Funds’ distributor. Most retail investors will not qualify as Authorized Participants or have the resources to buy and sell whole Creation Units. Therefore, they will be unable to purchase or redeem the shares directly from a Fund. Rather, most retail investors will purchase shares in the secondary market with the assistance of a broker and will be subject to customary brokerage commissions or fees.

Income Recognition

Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums of debt instruments.

U.S. Federal Income Tax Status

Each Fund intends to continue to qualify each year as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended, and will distribute substantially all of their taxable income and gains, if any, for the tax year, and as such will not be subject to U.S. federal income taxes. In addition, each Fund intends to distribute, in each calendar year, all of its net investment income, capital gains and certain other amounts, if any, such that it should not be subject to U.S. federal excise tax. Therefore, no U.S. federal income or excise tax provisions are recorded.

Management has analyzed the Funds’ tax positions taken on federal income tax returns for all open tax years (current and prior tax year), and has concluded that no provision for federal income tax is required in the Funds’ financial statements. The Funds’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

Distributions to Shareholders

Each Fund intends to pay distributions from net investment income, if any, on a monthly basis. Each Fund intends to pay net realized capital gains, if any, on an annual basis.

Note 3. U.S. Federal Tax Information

The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. GAAP. As a result, net investment income (loss) and net realized gain/(loss) on investment transactions for a reporting period may differ significantly from distributions during such period.

Reclassifications are made to the Funds’ capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations.

For the year or period ended June 30, 2015, permanent differences chiefly resulting from dividend expense reclasses, return of capital and foreign currency


30						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

transactions were identified and reclassified among the components of the Funds’ net assets as follows:


	Undistributed Net Investment Income		Accumulated Net Realized Loss			Paid-in Capital
Highland/iBoxx Senior Loan ETF	$	54,483	$	—		$	(54,483	)
Highland HFR Global ETF		2,965		(2,965	)		—
Highland HFR Event- Driven ETF		2,058		(2,058	)		—
Highland HFR Equity Hedge ETF		1,015		(1,015	)		—

The tax character of distributions paid during the prior two fiscal years ended June 30, was as follows:


	Distributions paid from:
	Ordinary Income*		Long- Term Capital Gains		Return of Capital
Highland/iBoxx Senior Loan ETF
2015	$	11,292,490	$	—	$	54,483
2014		6,633,867		—		72,785

*	For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions.

As of June 30, 2015, the Funds’ most recent tax year end, the components of distributable earnings on a tax basis were as follows:


	Capital Loss Carryforward			Net Unrealized Depreciation*			Undistributed Ordinary Income		Other Temporary Differences		Late-Year Loss Deferral
Highland/iBoxx Senior Loan ETF	$	(3,331,085	)	$	(7,121,012	)	$	—	$	1	$	—
Highland HFR Global ETF		(6,213	)		(187,076	)		26,210		—		—
Highland HFR Event-Driven ETF		(6,482	)		(174,147	)		9,478		—		—
Highland HFR Equity Hedge ETF		(1,145	)		(108,367	)		—		—		(3,140	)

*	Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to deferral of losses from wash sales.

Deferred Late-Year Losses represent ordinary losses realized on investment transactions from January 1, 2015 through June 30, 2015 and specified losses realized on investment transactions from November 1, 2014 through June 30, 2015, that, in accordance with Federal income tax regulations, the Fund defers and treats as having arisen in the following fiscal year.

Under the Regulated Investment Company Modernization Act of 2010, Funds are permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law. Losses carried forward under these new provisions as of June 30, 2015 are as follows:


	Short- Term Loss			Long- Term Loss			Total
Highland/iBoxx Senior Loan ETF	$	(2,163,036	)	$	(1,168,049	)	$	(3,331,085	)
Highland HFR Global ETF		(6,213	)		—			(6,213	)
Highland HFR Event-Driven ETF		(6,482	)		—			(6,482	)
Highland HFR Equity Hedge ETF		(1,145	)		—			(1,145	)

Unrealized appreciation and depreciation at December 31, 2015, based on cost of investments for U.S. federal income tax purposes (excluding securities sold short), was:


	Gross Appreciation		Gross Depreciation			Net Depreciation*			Cost
Highland/iBoxx Senior Loan ETF	$	47,176	$	(21,304,298	)	$	(21,257,122	)	$	310,172,445
Highland HFR Global ETF		143,900		(642,906	)		(499,006	)		7,807,779
Highland HFR Event- Driven ETF		341,537		(1,364,955	)		(1,023,418	)		10,148,743
Highland HFR Equity Hedge ETF		241,816		(400,457	)		(158,641	)		6,222,160

*	Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to deferral of losses from wash sales.


Semi-Annual Report						31

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Note 4. Advisory, Administration, Service and Distribution, Trustee, and Other Fees

Investment Advisory Fees

The Investment Adviser receives from the Highland/iBoxx Senior Loan ETF, HFR Global ETF, HFR Event-Driven ETF and HFR Equity Hedge ETF monthly investment advisory fees, computed and accrued daily based on the Average Daily Managed Assets of each Fund, at the annual rate of 0.45%, 0.85%, 0.85% and 0.85%, respectively.

“Average Daily Managed Assets” of a Fund means the average daily value of the total assets of the Fund less all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage). The Adviser is responsible for all of the expenses of HFR Global ETF, HFR Event-Driven ETF and HFR Equity Hedge ETF, excluding the management fee, acquired fund fees and expenses, interest expense, trading expenses, taxes and extraordinary expenses.

Administration Fees

SEI Investments Global Funds Services (the “Administrator”) serves as the Funds’ Administrator pursuant to an Administration Agreement. For its services under the Administration Agreement, the Administrator receives a monthly administration fee from the Funds, calculated and assessed in arrears based on the aggregate net assets of the Funds, subject to an annual minimum fee. For the period ended December 31, 2015, Highland/iBoxx Senior Loan ETF paid $126,977 for these services.

Service and Distribution Fees

SEI Investments Distribution Co. (the “Distributor) serves as the Funds’ underwriter and distributor of shares pursuant to a Distribution Agreement. Under the Distribution Agreement, the Distributor, as agent, receives orders to create and redeem shares in Creation Unit Aggregations and transmits such orders to the Funds’ custodian and transfer agent. The Distributor has no obligation to sell any specific quantity of Fund shares. The Distributor bears the following costs and expenses relating to the distribution of shares: (i) the costs of processing and maintaining records of creations of Creation Units; (ii) all cost of maintaining the records required of a registered broker/dealer; (iii) the expenses of maintaining its registration or qualification as a dealer or broker under Federal or state laws; (iv) filing fees; and (v) all other expenses incurred in connection with the distribution services as contemplated in the Distribution Agreement. The Distributor does not maintain any secondary market in Fund shares.

Expense Limits and Fee Reimbursements

The Investment Adviser has contractually agreed to limit the total annual operating expenses (exclusive of taxes, brokerage commissions and other transaction costs, acquired fund fees and expenses and extraordinary expenses (collectively, the “Excluded Expenses”)) of the Highland/iBoxx Senior Loan ETF (for purposes of this section only, the “Fund”) to 0.55% of average daily net assets of the Fund (the “Expense Cap”). The Expense Cap will continue through at least October 31, 2016, and may not be terminated prior to this date without the action or consent of the Board. The Trust, on behalf of the Fund, has contractually agreed to pay the Adviser all amounts previously paid, waived or reimbursed by the Adviser with respect to the Fund pursuant to the Expense Cap, provided that the amount of such additional payment in any year, together with all other expenses (excluding Excluded Expenses) of the Fund, in the aggregate, would not cause the Fund’s total annual operating expenses in any such year to exceed the amount of the Expense Cap or any other agreed upon expense limitation for that year, and provided further that no additional payments by the Trust will be made with respect to amounts paid, waived or reimbursed by the Adviser more than thirty-six (36) months from the date such amounts were paid, waived or reimbursed. The Adviser may not recoup any amounts previously paid, waived or reimbursed under the Expense Cap before payment of the Fund’s operating expenses for the year in which the Adviser intends to recoup such amounts.

As of December 31, 2015, pursuant to the above, fees previously waived and reimbursed by the Investment Adviser that may be subject to possible future reimbursement to the Investment Adviser were $371,764 expiring in 2016, $490,642 expiring in 2017, $526,374 expiring in 2018 and $262,996 expiring in 2019.

Fees Paid to Officers and Trustees

Each Trustee who is not an “interested person” of the Funds as defined in the 1940 Act (the “Independent Trustees”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies and NexPoint Capital, Inc., a closed-end management investment company that has elected to be treated as a business development company under the 1940 Act, which are each advised by the Investment Adviser or its affiliated advisers as of the date of this report. Although the Funds believe that Mr. Powell is technically no longer an “interested person” of the Funds, in light of his previous employment with the Investment Adviser and an affiliate of the Investment


32						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an “interested person” of the Funds. Therefore, the Funds intend to treat Mr. Powell as an “interested person” of the Funds for all purposes other than compensation (Mr. Powell will be compensated at the same rate as the Independent Trustees) from December 16, 2015 until December 4, 2017 (the second anniversary of his resignation). The Funds pay no compensation to their officers, all of whom are employees of the Investment Adviser.

Note 5. Portfolio Information

For the period ended December 31, 2015, the cost of purchases and the proceeds from sales of the Funds’ portfolio securities (excluding in-kind transactions and short-term investments) amounted to the following:


	U.S. Government Securities*				Other Securities
	Purchases		Sales		Purchases		Sales
Highland/iBoxx Senior Loan ETF	$	—	$	—	$	66,992,692	$	65,756,069
Highland HFR Global ETF		—		—		8,785,923		11,102,151
Highland HFR Event-Driven ETF		—		—		9,826,044		8,158,425
Highland HFR Equity Hedge ETF		—		—		4,599,104		6,305,476

*	The Funds did not have any purchases or sales of U.S. Government Securities for the period ended December 31, 2015.

Note 6. Indemnification

Each Fund has a variety of indemnification obligations under contracts with their service providers. The Funds’ maximum exposure under these arrangements is unknown. However, each Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

Note 7. Disclosure of Significant Risks and Contingencies

Counterparty Risk

A counterparty (the other party to a transaction or an agreement or the party with whom a Fund executes transactions) to a transaction with a Fund may be unable or unwilling to make timely principal, interest or settlement payments, or otherwise honor its obligations.

Credit Risk

Investments rated below investment grade are commonly referred to as “high yield securities” or “junk securities”. They are regarded as predominantly speculative with respect to the issuing company’s continuing ability to meet

principal and interest payments. Investments in high-yield securities may result in greater NAV fluctuation than if the Funds did not make such investments.

Corporate debt obligations, including senior loans, are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to a Fund, a reduction in the value of the corporate debt obligation experiencing non-payment and a potential decrease in the NAV of a Fund.

Currency Risk

Debt Securities and Leveraged Loans Risk

The market prices of debt securities generally fluctuate inversely with changes in interest rates so that the value of investments in such securities can be expected to decrease as interest rates rise and increase as interest rates fall. Such changes may be greater among debt securities with longer maturities. Leveraged loans are subject to the same risks typically associated with debt securities. In addition, leveraged loans, which typically hold a senior position in the capital structure of a borrower, are subject to the risk that a court could subordinate such loans to presently existing or future indebtedness or take other action detrimental to the holders of leveraged loans. Leveraged loans are also especially subject to the risk that the value of the collateral, if any, securing a loan may decline, be insufficient to meet the obligations of the borrower or be difficult to liquidate.

Focused Investment Risk

The Funds’ investments in senior loans arranged through private negotiations between a borrower and several financial institutions may expose the Funds to risks associated with the financial services industry. The financial services industry is subject to extensive government regulation, which can limit both the amounts and types of loans and other financial commitments financial services companies can make and the interest rates and fees they


Semi-Annual Report						33

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

can charge. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest rates change. Because financial services companies are highly dependent on short-term interest rates, they can be adversely affected by downturns in the U.S. and foreign economies or changes in banking regulations. Losses resulting from financial difficulties of borrowers can negatively affect financial services companies.

Industry Concentration Risk

Because a Fund may invest 25% or more of the value of its assets in an industry or group of industries to the extent that the Underlying Index concentrates in an industry or group of industries, a Fund’s performance largely depends on the overall condition of such industry or group of industries and a Fund is susceptible to economic, political and regulatory risks or other occurrences associated with that industry or group of industries.

Lender Liability Risk

A number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories founded upon the premise that an institutional lender has violated a duty of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in a creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. Because of the nature of certain of the Funds’ investments, the Funds or the Investments Adviser could be subject to such liability.

Market Risk

The Funds’ share price will fluctuate with changes in the market value of its portfolio securities. Many factors can affect this value and you may lose money by investing in the Funds.

Non-Diversification Risk

Due to the nature of each Fund’s investment strategy and its non-diversified status, it is possible that a material amount of the Funds’ portfolio could be invested in the securities of one or a few issuers. Investing a significant portion of the Funds’ portfolios in any one or a few issuers may result in the Funds’ shares being more sensitive to the economic results of those few issuers.

Non-Payment Risk

Debt securities are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to the Fund, a reduction in the value of the obligation experiencing non-payment and

a potential decrease in the Funds’ NAV and the market price of the Funds’ shares.

Ongoing Monitoring Risk

On behalf of the several lenders, the agent generally will be required to administer and manage the senior loans and, with respect to collateralized senior loans, to service or monitor the collateral. Financial difficulties of agents can pose a risk to each Fund. Unless, under the terms of the loan, a Fund has direct recourse against the borrower, a Fund may have to rely on the agent or other financial intermediary to apply appropriate credit remedies against a borrower.

Regulatory Risk

To the extent that legislation or state or federal regulators impose additional requirements or restrictions with respect to the ability of financial institutions to make loans in connection with highly leveraged transactions, the availability of Senior Loan interests for investment by the Funds may be adversely affected.

Short Sale Risk

Note 8. Credit Agreement

Effective November 2, 2012, the iBoxx Senior Loan ETF entered into a $25,000,000 credit agreement (the “Credit Agreement”) with State Street Bank, with an expiration date of November 1, 2013. On May 24, 2013, the Credit Agreement expiration date was extended to May 23, 2014. On May 23, 2014, the Credit Agreement expiration date


34						Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)


December 31, 2015		Highland Funds I

was extended to May 22, 2015. On October 27, 2014, the Credit Agreement was amended to raise the maximum borrowing amount to $150,000,000. On May 22, 2015, the Credit Agreement expiration date was extended to May 20, 2016. On August 31, 2015 the Credit Agreement was amended to include the addition of three new funds; (a) Highland HFR Equity Hedge ETF, (b) Highland HFR Event-Driven ETF and (c) Highland HFR Global ETF, each a series of Highland Funds I. Interest is charged at a rate equal to the higher of the federal funds rate or adjusted LIBOR plus 1.25% per annum based on any outstanding borrowings. In addition, a commitment fee of 0.20% per annum is charged. The Commitment fees are included in Other Expenses in the Statement of Operations.

During the period ended December 31, 2015, the Funds did not have any outstanding borrowings.

Note 9. Change of Independent Registered Public Accounting Firm

The Funds have selected KPMG, LLP (“KPMG”) to serve as the Funds’ independent registered public accounting firm for the Funds’ fiscal year ended June 30, 2016. The decision to select KPMG was recommended by the Funds’ Audit Committee and approved by the Board on September 11, 2015. With respect to the Funds’ fiscal years ended June 30, 2014 and June 30, 2015, for which PricewaterhouseCoopers, LLP (“PwC”) served as the Funds’ independent registered public accounting firm, neither the Funds, nor anyone on their behalf, consulted with KPMG on items which: (i) concerned the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Funds’ financial statements; or (ii) concerned the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K) or reportable events (as described in paragraph (a)(1)(iv) of said Item 304). The selection of KPMG does not reflect any disagreements with or dissatisfaction by the Funds or the Board with the performance of PwC. The decision not to renew the engagement of PwC, effective upon its completion of its audit for the fiscal year ended June 30, 2015, and to select KPMG was recommended by the Funds’ Audit Committee and approved by the Board. PwC’s report on the Funds’ financial statements for the fiscal years ended June 30, 2014 and June 30, 2015 contained no adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. With respect to the Funds’ fiscal years ended June 30, 2014 and June 30, 2015, (i) there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of

PwC, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the Funds’ financial statements for such years; and (ii) there were no “reportable events” of the kind described in Item 304(a)(1)(v) of Regulation S-K.

Note 10. New Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02 regarding “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. The amendments in this update are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. ASU No. 2015-02 will modify the evaluation of limited partnerships and similar legal entities as variable interest entities (VIEs). This update will eliminate the presumption that a general partner should consolidate a limited partnership. This update also affects the consolidation analysis of reporting entities that are involved with VIEs. The update also provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to Rule 2a-7 of the investment Company Act of 1940 for registered money market funds.

In April 2015, FASB issued ASU No. 2015-03 regarding “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. ASU No. 2015-03 will simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments.

At this time management is evaluating the implications of these ASU’s and their impact on the financial statement disclosures has not yet been determined.


Semi-Annual Report						35

NOTES TO FINANCIAL STATEMENTS (unaudited) (concluded)


December 31, 2015		Highland Funds I

Note 11. Subsequent Events

Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were issued, and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.


36						Semi-Annual Report

ADDITIONAL INFORMATION (unaudited)


December 31, 2015		Highland Funds I

Additional Portfolio Information

Net asset value, or “NAV,” is the price per share at which each Fund issues and redeems shares. It is calculated in accordance with the standard formula for valuing mutual fund shares. The “Market Price” of each Fund generally is determined using the midpoint between the bid and the ask on the stock exchange on which the shares of the Fund are listed for trading, as of the time that the Fund’s NAV is calculated. Each Fund’s Market Price may be at, above or below its NAV. The NAV of each Fund will fluctuate with changes in the market value of its holdings. The Market Price of each Fund will fluctuate in accordance with changes in its NAV, as well as market supply and demand. Shareholders may pay more than NAV when they buy Fund shares and receive less than NAV when they sell those shares, because shares are bought and sold at current Market Prices. Premiums or discounts are the differences (expressed as a percentage) between the NAV and Market Price of each Fund on a given day, generally at the time NAV is calculated. A premium is the amount that a Fund is trading above the reported NAV, expressed as a percentage of the NAV. A discount is the amount that a Fund is trading below the reported NAV, expressed as a percentage of the NAV. Further information regarding premiums and discounts for the Fund is available on the Funds’ website at www.highlandfunds.com.

The Investment Adviser and its affiliates manage other accounts, including private funds and individual accounts. Although investment decisions for the Funds are made independently from those of such other accounts, the Investment Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts that may be the same or different from those made to the Funds, including investments in different levels of the capital structure of a company, such as equity versus senior loans, or that involve taking contradictory positions in multiple levels of the capital structure. The Investment Adviser has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, this may create situations where a client could be disadvantaged because of the investment activities conducted by the Investment Adviser for other client accounts. When a Fund and one or more other accounts is prepared to invest in, or desires to dispose of, the same security, available investments or opportunities for each are allocated in a manner believed by the Investment Adviser to be equitable over time. The Investment Adviser may aggregate orders, which may include orders for accounts in which the Investment Adviser or its affiliates have an interest, to purchase and

sell securities to obtain favorable execution or lower brokerage commissions, to the extent permitted by applicable laws and regulations. Although the Investment Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all participating accounts, in some cases these activities may adversely affect the price paid or received or the size of the position obtained by or disposed of for a Fund.

Where trades are aggregated, the investments or proceeds, as well as the expenses incurred, will be allocated by the Investment Adviser in a manner designed to be equitable and consistent with the Investment Adviser’s fiduciary duty to the Funds and its other clients (including its duty to seek to obtain best execution of client trades).

Disclosure of Fund Expenses

As a shareholder of a Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees, and other Fund expenses. This example is intended to help you understand the ongoing costs (in dollars) of investing in your Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

The example is based on an investment of $1,000 invested at the beginning of the period and held for the six-month period July 1, 2015 through December 31, 2015, unless otherwise indicated. This table illustrates your Fund’s costs in two ways:

Hypothetical Example for Comparison Purposes: The second part of the table provides information about hypothetical account values and hypothetical expenses based on your Funds’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Funds’ actual return. The actual expense ratio includes voluntary fee waivers or expense reimbursements by the Funds’ investment adviser. The expense ratio would be higher had the fee waivers or expense reimbursements not been in effect. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You


Semi-Annual Report						37

ADDITIONAL INFORMATION (unaudited) (continued)


December 31, 2015		Highland Funds I

may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second part of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.


	Beginning Account Value 07/01/15		Ending Account Value 12/31/15		Annualized Expense Ratios			Expenses Paid During Period*		Actual Returns for Period
Highland/iBoxx Senior Loan ETF
Actual Fund Return	$	1,000.00	$	961.70		0.55	%	$	2.72		(3.83	)%
Hypothetical	$	1,000.00	$	1,022.43		0.55	%	$	2.80		2.24	%
Highland HFR Global ETF
Actual Fund Return	$	1,000.00	$	965.00		2.01	%	$	9.96		(3.50	)%
Hypothetical	$	1,000.00	$	1,015.07		2.01	%	$	10.21		1.69	%
Highland HFR Event-Driven ETF
Actual Fund Return	$	1,000.00	$	909.40		2.08	%	$	10.01		(9.06	)%
Hypothetical	$	1,000.00	$	1,014.72		2.08	%	$	10.56		1.63	%
Highland HFR Equity Hedge ETF
Actual Fund Return	$	1,000.00	$	956.50		1.79	%	$	8.83		(4.35	)%
Hypothetical	$	1,000.00	$	1,016.18		1.79	%	$	9.10		1.79	%

*	Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the hypothetical six-month period, multiplied by 184/365 (to reflect the one-half year period).

Approval of Highland/iBoxx Senior Loan ETF

Advisory Agreement

The Fund has retained the Investment Adviser to manage the assets of the Fund pursuant to an investment advisory agreement between the Investment Adviser and the Fund (the “Advisory Agreement”). The Advisory Agreement has been approved by the Fund’s Board of Trustees, including a majority of the Independent Trustees.

The Advisory Agreement continues in effect from year-to-year, provided that such continuance is specifically approved at least annually by the vote of holders of at least a majority of the outstanding shares of the Fund or by the Board of Trustees and, in either event, by a majority of the Independent Trustees of the Fund casting votes in person at a meeting called for such purpose.

At a meeting held on August 27, 2015, the Board of Trustees gave preliminary consideration to information bearing on the continuation of the Advisory Agreement for a one-year period commencing September 21, 2015. The primary purpose of the meeting was to ensure that the Trustees had ample opportunity to consider matters they deemed relevant in evaluating the continuation of the Advisory Agreement, and to request any additional information they considered reasonably necessary to their deliberations.

At a meeting held on September 10-11, 2015, the Board of Trustees, including the Independent Trustees, approved the continuance of the Advisory Agreement for a one-year period commencing September 21, 2015. As part of its review process, the Board of Trustees requested, through its independent legal counsel, and received from the Investment Adviser, various information and written materials in connection with meetings of the Board of Trustees held on August 27, 2015 and September 10-11, 2015, including: (1) information regarding the financial soundness of the Investment Adviser and the profitability of the Advisory Agreement to the Investment Adviser; (2) information on the advisory and compliance personnel of the Investment Adviser, including compensation arrangements for portfolio managers; (3) information on the internal compliance procedures of the Investment Adviser; (4) comparative information showing how the Fund’s fees and operating expenses compare to those of other registered investment companies and comparable funds that follow investment strategies similar to those of the Fund; (5) information on the investment performance of the Fund, including comparisons of the Fund’s performance against that of other registered investment companies and comparable funds that follow investment strategies similar to those of the Fund; (6) information regarding brokerage and portfolio transactions; and


38						Semi-Annual Report

ADDITIONAL INFORMATION (unaudited) (continued)


December 31, 2015		Highland Funds I

(7) information on any legal proceedings or regulatory audits or investigations affecting the Investment Adviser. The Trustees also relied on information provided at periodic meetings of the Board of Trustees over the course of the year. In addition, the Trustees received an independent report from Morningstar Associates LLC (“Morningstar”), an independent source of investment company data, relating to the Fund’s performance, volatility and expenses compared to the performance, volatility and expenses of a peer group determined by Morningstar to be comparable. The Trustees reviewed various factors discussed in independent counsel’s legal memoranda, the detailed information provided by the Investment Adviser and other relevant information and factors. The Trustees’ conclusion as to the approval of the Advisory Agreement was based on a comprehensive consideration of all information provided to the Trustees without any single factor being dispositive in and of itself.

Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors.

The nature, extent, and quality of the services to be provided by the Investment Adviser

The Board of Trustees considered the portfolio management services to be provided by the Investment Adviser under the Advisory Agreement and the activities related to portfolio management, including use of technology, research capabilities, and investment management staff.

The Board of Trustees discussed the relevant experience and qualifications of the personnel providing advisory services, including the background and experience of the members of the Fund’s portfolio management team and portfolio manager compensation arrangements. The Trustees reviewed the management structure, assets under management and investment philosophies and processes of the Investment Adviser. The Trustees also reviewed and discussed information regarding the Investment Adviser’s compliance policies, procedures and personnel. The Trustees concluded that the Investment Adviser had the quality and depth of personnel and investment methods essential to performing its duties under the Advisory Agreement, and that the nature and the quality of such advisory services were satisfactory.

The Investment Adviser’s historical performance in managing the Fund

With respect to the Advisory Agreement, the Board of Trustees reviewed the historical performance of the Investment Adviser and the Fund’s portfolio management team in

managing the Fund over various time periods and reflected on previous discussions regarding matters bearing on the Investment Adviser’s performance at their meetings throughout the year. With respect to the Fund, the Trustees discussed relative performance and contrasted the performance of the Fund and its portfolio management team to that of the Fund’s peers, as represented by certain other registered investment companies that follow investment strategies similar to the Fund as well as a comparable index and the Fund’s Morningstar peer group. The Trustees also considered the quarterly tracking error reports they receive with respect to the Fund.

Among other data relating specifically to the Fund’s performance, the Board of Trustees considered that the Fund had underperformed its category median and its peer group median, as well as its benchmark for the one-year period ended June 30, 2015. The Trustees also took into account management’s discussion of the Fund’s performance. The Trustees concluded that the Fund’s performance and other relevant factors supported the renewal of the Advisory Agreement.

The costs of the services to be provided by the Investment Adviser and the profits to be realized by the Investment Adviser and its affiliates from their relationship with the Fund

The Board of Trustees also gave substantial consideration to the fees payable under the Advisory Agreement, the expenses that the Investment Adviser incurs in providing advisory services and the profitability to the Investment Adviser of managing the Fund, including: (1) information regarding the financial condition of the Investment Adviser; (2) information regarding the total fees and payments received by the Investment Adviser for its services and whether such fees are appropriate given economies of scale and other considerations; and (3) comparative information showing (a) the fees payable under the Advisory Agreement and the actual fees paid by the Fund to the Investment Adviser versus the investment advisory fees of certain registered investment companies and comparable funds that follow investment strategies similar to those of the Fund and (b) the expense ratios of the Fund relative to the expense ratios of certain registered investment companies and comparable funds that follow investment strategies similar to those of the Fund. The Trustees also considered the so-called “fall-out benefits” to the Investment Adviser with respect to the Fund, such as the reputational value of serving as Investment Adviser to the Fund and the benefits of research made available to the Investment Adviser by reason of brokerage commissions (if any) generated by the Fund’s securities transactions. The Board of Trustees considered that the Fund’s


Semi-Annual Report						39

ADDITIONAL INFORMATION (unaudited) (continued)


December 31, 2015		Highland Funds I

actual management fees and total expense ratio (before any fee waivers or expense reimbursements) were lower than its peer group median and its category median. The Trustees further noted that the Investment Adviser had agreed to waive fees and/or reimburse expenses to cap the total annual fund operating expense to 0.55% of the average daily net assets of the Fund through at least October 31, 2016, and that this waiver may not be terminated prior to this date without the action or consent of the Fund’s Board of Trustees. After such review, the Trustees determined that the profitability to the Investment Adviser with respect to the Advisory Agreement was fair and reasonable. The Trustees also took into consideration the amounts waived and/or reimbursed, if any, under the expense cap/fee waiver.

The extent to which economies of scale would be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of shareholders

The Board of Trustees considered the asset levels of the Fund, the information provided by the Investment Adviser relating to its costs and information comparing the fee rate charged by the Investment Adviser with fee rates charged by other unaffiliated investment advisers to their clients.

The Trustees concluded that the fee structure is reasonable, and appropriately should result in a sharing of economies of scale in view of the information provided by the Investment Adviser. The Board determined to continue to review ways, and the extent to which, economies of scale might be shared between the Investment Adviser on the one hand and shareholders of the Fund on the other. The Board of Trustees also requested that the Investment Adviser consider ways in which economies of scale can be shared with Fund shareholders.

Conclusion

Following a further discussion of the factors above and the merits of the Advisory Agreement and its various provisions, it was noted that in considering the approval of the Advisory Agreement, no single factor was determinative to the decision of the Board of Trustees. Rather, after weighing all of the factors and reasons discussed above, the Trustees, including the Independent Trustees, unanimously agreed that the Advisory Agreement, including the advisory fees to be paid to the Investment Adviser is reasonable to the Fund in light of the services that the Investment Adviser provides, the expenses that it incurs and the reasonably foreseeable asset levels of the Fund.


40						Semi-Annual Report

IMPORTANT INFORMATION ABOUT THIS REPORT

Investment Adviser

Highland Capital Management Fund Advisors, L.P.

200 Crescent Court, Suite 700

Dallas, TX 75201

Transfer Agent

State Street Bank and Trust Company

200 Clarendon Street, 16^th Floor

Boston, MA 02116

Distributor

SEI Investments Distribution Co.

One Freedom Valley Drive

Oaks, PA 19456

Custodian

State Street Bank and Trust Company

200 Clarendon Street, 16^th Floor

Boston, MA 02116

Independent Registered Public

Accounting Firm

KPMG LLP

Two Financial Center

60 South Street

Boston, MA 02111

Fund Counsel

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

This report has been prepared for shareholders of the Highland/iBoxx Senior Loan ETF, Highland HFR Global ETF, Highland HFR Event-Driven ETF and Highland HFR Equity Hedge ETF (collectively, the “Funds”). The Funds mail one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-855-799-4757 to request that additional reports be sent to you.

A description of the policies and procedures that the Funds use to determine how to vote proxies relating to their portfolio securities, and the Funds’ proxy voting records for the most recent 12-month period are available (i) without charge, upon request, by calling 1-855-799-4757 and (ii) on the Securities and Exchange Commission’s website at http://www.sec.gov.

The Funds file their complete schedules of portfolio holdings with the Securities and Exchange Commission (the ��Commission”) for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on the Commission’s website at http://www.sec.gov and also may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. Shareholders may also obtain the Form N-Q by visiting the Funds’ website at www.highlandfunds.com.

The Statement of Additional Information includes additional information about the Funds’ Trustees and are available upon request without charge by calling 1-855-799-4757.


Semi-Annual Report						41

LOGO

HIGHLAND CAPITAL
MANAGEMENT
200 Clarendon Street, 16th Floor Boston, MA 02116
Highland Funds I Semi-Annual Report December 31, 2015
www.highlandfunds.com HFI-ETF-SAR-1215

Item 2. Code of Ethics.

Not applicable.

Item 3. Audit Committee Financial Expert.

Not applicable.

Item 4. Principal Accountant Fees and Services.

Not applicable.

Item 5. Audit Committee of Listed Registrants.

Not applicable.

Item 6. Investments.

(a) Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the Reports to Shareholders filed under Item 1 of this form.

(b) Not applicable.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable.

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

Not applicable.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable.

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which the shareholders may recommend nominees to the Highland Fund I’s (the “Registrant”) Board of Trustees.

Item 11. Controls and Procedures.

(a) The Registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act (17 CFR 270.30a-3(c)) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

(b) There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the Registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

Item 12. Exhibits.

(a)(1) Not applicable.

(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.

(a)(3) Not applicable.

(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HIGHLAND FUNDS I


By (Signature and Title):		/s/ J. Bradley Ross
		J. Bradley Ross
		President and Principal Executive Officer

Date: March 4, 2016

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


By (Signature and Title):		/s/ J. Bradley Ross
		J. Bradley Ross
		President and Principal Executive Officer

Date: March 4, 2016


By (Signature and Title):		/s/ Brian Mitts
		Brian Mitts
		Secretary, Principal Accounting Officer
		and Principal Financial Officer

Date: March 4, 2016

Highland Funds I N-CSRSCertified semi-annual shareholder report (management investment company)