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									Highland
Floating Rate Funds
Seeking higher income with
lower interest rate risk.




       High Standards. Highly Professional.
       Highland Capital Management, L.P.
     W
     What Are Senior Secured
     F
     Floating Rate Loans?

Senior
Senior secured floating rate loans typically
have the highest priority of claim on the
                                                  High
borrower's cash flow.
                                                             Senior Secured Debt

Secured
Non-investment-grade loans are typically
                                                  PRIORITY
                                                               Senior Unsecured Debt
"secured" by collateral, which may include
the borrower's assets and shares of stock.



                                                                Subordinated Unsecured Debt
Floating Rate
The rate paid by a senior secured floating
rate loan "floats" at a pre-determined spread
over a reference rate, usually the U.S. Dollar                              Preferred Stock
London Interbank Offered Rate (LIBOR).
For example, if three-month LIBOR were
yielding 2.00%, a senior secured floating
rate loan with a spread of 3.00% would                                             Common Stock
yield LIBOR + 3.00% or 5.00%. The
reference rate, in general, is then reset every   Low
30, 60, or 90 days, so that the aggregate rate
"floats" in lockstep with the reference rate.
           W
           Why Senior Secured Floating
           R
           Rate Loans?
      Historical Returns and Volatility (1992 through 2004)

        20.0%
                                                                     Average Annual Total Return                                         18.7%
        18.0%
                                                                      Annual Volatility
        16.0%


        14.0%


        12.0%
(%)




                                                                                                                                  10.7%
                                                    9.8%
        10.0%                                9.4%                                                                    9.5%

                                                                                          7.8%
        8.0%
                        6.7%                                        6.9%                                      6.7%
                                                                                                 6.2%
        6.0%
                                                                           4.6%
        4.0%
                               3.1%

        2.0%


        0.0%
                 CSFB Leveraged              CSFB High              ML Mortgage         ML Corporate          U.S. 10-Year           S&P 500
                   Loan Index                Yield Index               Index          Master Market Index   Treasuries Index          Index
                Source: CSFB, Bloomberg.
                Note:   ML= Merrill Lynch & Co.
                        CSFB= Credit Suisse First Boston
                        S&P= Standard & Poor’s

      While senior secured floating rate loans are considered speculative, historically:
                 As illustrated above, from January 1, 1992 through December 31, 2004, senior secured floating rate loans, represented by the
                 CSFB Leveraged Loan Index, matched the performance of U.S. 10-Year Treasuries and provided a return within 1.1 percent
                 of Corporate Bonds and less than one percent of Mortgages.


                 Senior secured floating rate loans have demonstrated lower price volatility than High Yield Bonds, Mortgages, Corporate
                 Bonds, U.S. 10-Year Treasuries and the S & P 500. Volatility is a statistical measure of the tendency of a market or security
                 to rise or fall sharply within a period of time.


                 Senior secured floating rate loans may help to reduce your portfolio’s overall volatility and losses during uncertain markets.

         Past performance is no guarantee of future results.
         The chart above is not intended to represent or predict the performance of the Highland Funds. For current performance data please
         visit our web site at www.highlandfunds.com.
         The performance represents unmanaged indexes, which assumes no taxes and does not reflect the payment of transaction costs, fees
         and expenses associated with investments in funds. The securities that comprise each index may differ substantially from a fund’s
         portfolio. An investor cannot invest directly into an index.
Benchmarks
  Credit Suisse First Boston (CSFB)
  Leveraged Loan Index
  ~ An index designed to mirror the
  investible universe of the $US-
  denominated leveraged loan market.



  CSFB High Yield Index
  ~ An index designed to mirror the
  investable universe of the $US-
  denominated high yield debt market.



  Merrill Lynch (ML) Mortgage Index
  ~ A broad index designed to track
  major agency mortgage-backed
  securities.



  ML Corporate Master Market Index
  ~ A statistical composite designed to
  track the performance of below
  investment grade $US-denominated
  corporate bonds publicly issued in the
  US domestic market.



   U.S. 10-Year Treasuries Index
   ~ An index designed to measure debt
   obligations of the US Treasury that
   have maturities of more than 10 years.



  S&P 500 Index
  ~ An unmanaged index that is widely
  regarded as the standard for measuring
  large-cap U.S. stock market performance.




Indexes are unmanaged, have no fees or
costs and are not available for investment.
    Price Stability in Varying Interest Rate Environments
     Unlike typical fixed-income investments that decline in value during periods of rising interest rates, senior secured floating
     rate loans may provide relative price stability, as illustrated below. In fact, senior secured floating rate loans have provided
     positive annualized total returns during each period of rising or declining interest rates since 1994, as tracked by the CSFB
     Leveraged Loan Index. That reflects year-on-year consistent performance. Of course, senior secured floating rate loans
     are speculative and past performance is no guarantee of future results.




                                                                Rising                e
                                                               Interest             om
                                                                                 Inc
                                                                Rates
                                           Income                                         Price


                                                 ic   e
                                              Pr


                                                                                                        Senior Secured
               Bonds                                                                                 Floating Rate Loans


                                                      Pr
                                                         ice


                                            Income                                       Price

                                                                                     Inc
                                                               Declining                om
                                                               Interest                     e
                                                                Rates


For illustration purposes only. Senior Secured Floating Rate Loans and Bonds may not perform as illustrated above in all instances.

      As you can see in the chart below, senior secured floating rate loan returns have been competitive with other fixed-income
      securities four out of five times during periods of short-term rising interest rates. The one year that floating rate loans did not
      perform as well in a rising rate environment was 2000, a year marked with the burst of the internet bubble, fears of recession,
      and the possibility the Fed would lower interest rates. Despite the turmoil, the CSFB Leveraged Loan Index still returned
      4.94%. Of course, past performance is no guarantee of future results.


       Total Returns During Short-Term Rising Interest Rate Environments
                                           CSFB Leveraged           CSFB High             Merrill Lynch       U.S. 10-Year
           Fed Rate Increase                 Loan Index             Yield Index            Corporate           Treasuries
           1994- 6 Times                       10.32%
                                               10.33%                 -1.01%
                                                                      -2.04%                    3.92%
                                                                                                -3.34%           3.37%
                                                                                                                 -7.89%
           1997- 1 Time                         8.30%
                                                8.28%                 12.22%
                                                                      12.77%                 10.38%
                                                                                             10.23%               9.58%
                                                                                                                 11.18%
           1999- 3 Times                        4.69%
                                                3.69%                  2.39%
                                                                       3.59%                    -1.89%
                                                                                                -1.94%           - 8.36%
                                                                                                                 -2.25%
           2000- 3 Times                        4.94%                 -5.65%
                                                                      -5.86%                    9.13%
                                                                                                9.40%            13.23%
                                                                                                                 14.51%
           2004- 5 Times                        5.60%                 11.95%
                                                                      11.12%                    5.41%
                                                                                                4.08%               ?
                                                                                                                  5.06%

           Source: CSFB, Ryan Labs, Federal Reserve
   I
   Is Your Portfolio Positioned for the
   Next Interest Rate Cycle?
For investors seeking to allocate the fixed-income portion
of their portfolios properly, the anticipation of rising interest
rates presents a dilemma. While longer-term fixed rate
securities may provide a higher yield than shorter-term bonds,
their value is more likely to decrease during periods of rising
interest rates.
To help ensure that the fixed-income component of your
portfolio is properly diversified, you may want to consider
the potential price stability and attractive historical yield
offered through a senior secured floating rate loan fund.
Senior secured floating rate loans are loans underwritten by                                For investors who can assume the risk associated with
banks and other financial institutions to corporations.                                     these investments, the Highland Floating Rate Funds
Rates are customarily reset every 30, 60, or 90 days based on                               (“the Funds”) seek to provide:
current short-term interest rates. Therefore, the rate paid to
investors by these loans “floats” up or down with the changes                                    A potential hedge against rising interest rates
in short-term interest rates, enabling senior secured floating                                   High current income
rate loan funds to provide a more stable price. This can
                                                                                                  Attractive risk-adjusted returns
potentially increase income when interest rates rise, as
opposed to funds investing primarily in securities with rates                                     Relative stability of principal
fixed over a longer period of time.
                                                                                                  Low duration
Senior secured floating rate loans are considered speculative
                                                                                                  An experienced management team
since they are made to corporations that are rated
“non-investment grade”.

     Senior Secured Floating Rate Loans - Benchmark Yield vs. LIBOR
                  12%


                  10%


                  8%
      Yield (%)




                  6%


                  4%


                  2%


                  0%
                   Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

                                                         CSFB Leveraged Loan Index                      LIBOR

                    1   The CSFB Leveraged Loan Index is an index of Credit Suisse First Boston designed to mirror the investible universe of the
                        U.S. dollar denominated Senior Loan market. Senior Loans in this index are typically rated BB+ or lower by Standard & Poor’s
                        and/or BB (high) or lower by Dominion Bond Rating Service (DBRS).
                    2   Month-end, one-month LIBOR sourced by British Bankers’ Association.
W
Why Invest in Highland Floating
R
Rate Funds?
Access to an Experienced Investment Management Team
The Highland Funds are managed by Highland Capital          Led by Chief Investment Officer Mark Okada and
Management, L.P., (”Highland” or “the Firm”).               Senior Portfolio Manager Joe Dougherty, the Highland
Based in Dallas, Texas with an office in New York           Funds team has access to the Firm’s vast resources,
and a London affiliate*, Highland is a registered           including expertise in credit, equity, and alternative
investment adviser specializing in credit and alternative   investments.
investment strategies. Current portfolios include
structured investment vehicles, separate accounts,          Highland was founded in 1993 and has become one of
hedge funds and retail funds.                               the largest independent investment managers in the loan
                                                            asset class, in terms of assets under management and
Highland’s Floating Rate Funds are continuously             investment professionals.
offered, non-diversified, closed-end investment
management companies. Continuously offered means            The portfolio managers at Highland seek to produce
that shares can be bought on any business day.              a high level of current income for the funds by tapping
Closed-end funds are designed primarily for long-term       the potential of the senior secured floating rate loan
investors and may not be readily marketable or used         market.
as a short-term trading vehicle. Highland’s Floating
Rate Funds, as a fundamental policy will make               Speak with your investment professional today to
quarterly repurchases, however the shares are less          determine which of our Highland Floating Rate
liquid than those of funds that trade on an exchange.       Funds may be the right fit for your portfolio.




Highland Floating Rate Advantage Fund
         Class A Shares                 XSFRX
         Class C Shares                 XLACX

Highland Floating Rate Fund
         Class A Shares                 XLFAX
         Class C Shares                 XLFCX


*Highland Capital Management Europe, Ltd.
                                                             Before You Invest

                                                             Risk
                                                             Rated as non-investment grade, senior secured
                                                             floating rate loans are not without risk and should
                                                             be considered a speculative investment. Before
                                                             investing in senior secured floating rate loans,
                                                             default risk of principal and interest, and recovery
                                                             rate, as well as economic and industry trends must
                                                             all be considered.

Highland Floating Rate Funds                                    Default risk of principal and interest
                                                                is the likelihood that an issuer will be unable to
 Investment Process                                             make good on its obligations. In most cases,
                                                                ratings services such as Standard & Poor’s
Objective:        Seeking to provide a high level               and Moody’s provide ratings based on their
                                                                assessment of the company’s financial condition.
of current income, consistent with preservation
of capital.
                                                                Recovery rate measures the holder’s ability
 Strategy:      The Funds seek to achieve their                 to receive assets from restructuring or disposition of
                                                                assets in the event of a default.
 objective by investing, under normal market
 conditions, at least 80% of the net assets in a portfolio
 of adjustable rate senior secured floating rate loans,         Economic and industry factors will have a
 the interest rates of which float or vary periodically         major impact on the performance of the senior
 based upon a benchmark indicator of prevailing                 secured floating rate loan market, as well as an
                                                                individual company’s ability to meet its obligations.
 interest rates, to corporations, partnerships and other
 entities that operate in a variety of industries and
 geographic regions. The Funds are continuously
 offered, non-diversified, closed-end investment             You should note that the investment objective of the
                                                             Funds may not be met as the underlying investments
 management companies.
                                                             are subject to market risk and may fluctuate in value
                                                             due to factors such as: non-diversification, borrower
                                                             industry concentration, and limited liquidity.
               Highland Floating Rate Advantage Fund
                          Class A Shares        XSFRX
                          Class C Shares        XLACX


                      Highland Floating Rate Fund
                          Class A Shares        XLFAX
                          Class C Shares        XLFCX




                          1.877.665.1287
                                Advisors Press 1
                          www.highlandfunds.com



You should consider the investment objectives, risks, charges and
expenses of the Highland Funds carefully before investing. Please call
1.877.665.1287 or visit www.highlandfunds.com for a prospectus
with this and other information about the Funds. Please read it
carefully before you invest.
Highland Funds are distributed by PFPC Distributors, Inc., which is not an
advisor affiliate.

       Not FDIC Insured          No Bank Guarantee        May Lose Value

								
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