K2 FUND STRATEGY OUTLOOK

Q3 2021 Q3 2021 Outlook: Summary

With society and economies in Strategy Highlights transition, investors must underwrite to Relative Value A robust primary market represents a tailwind for convertible bond a wide range of potential outcomes. managers. More bonds to underwrite, improved liquidity and trading Progress on vaccinations, central banks opportunities, and the ability to flip bonds into the secondary market are beginning a cycle of tightening policy, among the positives. and earnings growth are important Global Managers focused on macro factors may benefit from a rich opportunity variables that are difficult to gauge. Macro set as data releases and policy paths continue to play a critical role Given the uncertainty embedded in the across markets. underlying core markets, we believe it is prudent to focus - Flows into the market brought on a very active second-quarter (Q2) new Linked issuance period. While spreads have tightened, they remain attractive investments on generating non- Securities (ILS) versus corporate high yield entering the key summer ILS risk period. directional strategies.

Strategy Outlook Long/ Equity Active, long-duration, fundamental long/short equity managers may be challenged by the market’s volatile rotations. Investors are focused on macro, and companies are navigating toward “back to normal” while their stocks simultaneously trade at high valuations.

Relative Value Favorable outlook for convertible and given continued strong issuance and inefficient pricing. Outlook for arbitrage is more muted due to central banks’ success in depressing global rate volatility.

Event Driven Expect continued active supply of corporate events due to ample liquidity, peak valuations, and continued management team incentives to grow market share and earnings. We remain mindful of potential risks to the strategy should liquidity conditions deteriorate.

Credit Spreads remain near historic tights, which favors trading-oriented strategies such as long/short credit at the expense of more directional ones such as distressed and direct lending. Pricing in structured credit remains inefficient, and managers expect dispersion to persist in certain sectors.

Global Macro Macro developments continue to drive global markets with managers focused on these factors facing a potentially rich opportunity set over the medium term. Recent data releases have contributed to shifting market narratives around future policy paths, which may favor nimble and opportunistic trading styles.

Commodities Tighter supply and demand will likely lead to more relative value trading opportunities. We are encouraged by the discipline of many long/short commodity managers as they are tightly managing capacity unlike the prior cycle.

Insurance-Linked June 1 renewals continued the trend of higher reinsurance pricing over a multi-year Securities (ILS) period. While spreads have tightened, they remain attractive versus corporate high yield entering the key summer ILS risk period. As Q3 is peak hurricane season, its outcome will have an influence on forward pricing.

This outlook is provided to you for informational purposes and is not intended for redistribution. It shall not constitute an offer to sell or a solicitation of an offer to buy an interest in any investment product or fund. This outlook discusses strategies that are available through a variety of structures such as separate accounts, mutual funds and private funds. Not all structures are available for all strategies shown. Interests or shares of an investment fund are offered only through the fund’s offering documents, such as a Prospectus or Confidential Private Offering Memorandum.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 2 Hedge Fund Strategy Outlook—Q3 2021 Macro Themes We Are Discussing

As we reach halftime of the calendar year, investors go into the Will tax resolution be bullish or will increased taxes reprice locker room with some knowledge of the pandemic recovery and the market? some new concerns to monitor in the second half of 2021 and into Taxes are front-and-center topics at both the corporate and 2022. The world is likely not returning to the same as before and personal levels. The G7 have reached a historic deal backing a there will likely be companies and countries better positioned for global minimum corporate tax rate with technology companies the new environment than others. The speed of recovery may and tax havens potential targets of this deal. Domestically in the vary among regions due to disparate global vaccine distribution United States, personal tax rates and vehicles are under leading to potentially divergent central banks policies. The increased scrutiny with changes expected in the second half of underlying fuel of market valuations, investor preferences, and 2021. Globally, there is a trend of wealth re-distribution towards relative valuations is liquidity (central bank issuance). Key the less fortunate. questions to watch are when will these accommodative measures How much good news is left? Is good news already priced be reduced and how will investors react? into the market? Going forward the environment for active management looks very Actual earnings and associated guidance are both expected to be rich. Hedge funds are the ultimate expression of active very strong in the second half of this year. Economic surprises management with the ability to invest from both the long and short have been to the upside, employment is trending higher, housing side of securities as well as tactically adjust gross exposure. is very strong, and central bankers have been very accommodative. That said, we find ourselves asking “how much Is inflation transitory or a big problem brewing? good news is left?” Recent Federal Reserve (Fed) comments Our base case is inflation is transitory; however, we are watching suggesting a stance of less dovishness rattled the markets for a the data very closely in acknowledgement the tail scenario is few days. Central banks are walking a tight rope of being possible, and any upside surprises would have a large impact accommodative to keep the economic engine running and on markets. We expect supply chains and pent-up excess avoiding a scenario of either sustained inflation or deflation. They demand due to COVID-19 to normalize in the second half of 2021 have been over- communicative in preferring to have the into early 2022. Commodity managers had a good start to the economy run hot as opposed to run cold. year, on both directional and relative value risk taking. We expect emerging markets to benefit from delayed reopenings and Generally, all news has been good for now, but market sentiment normalization of global trade. managers were can change very quickly—and positioning even faster. We see mostly loaded up on the “reflation trade” early in the year, signs of excess liquidity and are on heightened inflation watch, but then as the trade gets crowded and inflation expectations while at the same time monitoring how forward earnings growth became subdued, there was a rollover in positioning by the end estimates might slow and how the end of stimulus checks and of 2Q 2021. debt forbearance policies might impact consumer spending.

In short, the equity, bond, commodity and currency markets may be approaching a fork in the road during the second half of 2021. Nimble hedge fund managers who are able to “turn both ways” may best be able to actively manage through the upcoming fundamental “traffic.”

The above reflects the opinions of the K2 Investment Management (IM) group as of July 1, 2021 and may not reflect the views of other groups within K2 or Franklin Templeton. The information provided is not a complete analysis of every material fact regarding any country, market, industry, or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager’s assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund’s portfolio selection process.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. Hedge Fund Strategy Outlook—Q3 2021 3 Q3 2021 Outlook: Strategy Highlights

Relative Value Global Macro The convertible has experienced a resurgence of As the economic recovery from last year’s doldrums has new issuance since the onset of the pandemic. In 2020, issuers continued, macro trends have started to take hold. The Citigroup flocked to the market to quickly raise rescue deals, and others Economic Surprise Index, which tracks economic data sought to monetize the volatility in their stock prices. That activity relative to forecasts, has recently indicated strong macro attracted new investors, which in turn created a positive outperformance compared to the expectations of many feedback loop. Momentum carried into 2021, and the primary economists. An environment in which such trends persist may market is on pace to surpass last year’s record issuance. Strong support managers and strategies that are principally focused new issuance represents a tailwind for on such factors. strategies for several reasons. First, a greater number of bonds means an expanded opportunity set. Experts in the space Exhibit 2: Inflation Surging as Economies Reopen can discern attractive new issues from those that are likely to Inflation persistence may drive policy measures and asset prices going forward trade poorly. Second, the positive feedback loop previously January 1990–May 2021 mentioned means improved liquidity characteristics and trading Year-Over-Year Change (%) opportunities given new market participants. Investors that 6.00% cross over from high yield, for example, into convertibles may demonstrate different behavior and preferences than dedicated 5.00% funds, creating a more diverse investor base. Finally, an active primary market represents an opportunity for investors with 4.00% strong connections to the Street to secure allocations and flip bonds into the secondary market for a profit. As a result, we find 3.00% the opportunity set in converts to be attractive.

Exhibit 1: Convertible Bond Issuance 2.00% January 2008 to May 2021 $ billions 1.00% 140 Annualized 0.00% 120 Jan-90 Dec-93 Nov-97 Oct-01 Sep-05 Aug-09 Jul-13 Jun-17 May-21

100 Consumer Price Index (CPI) ex-Food and Energy (YoY % Change) Source: FRED database. Important data provider notices and terms available at 80 www.franklintempletondatasources.com.

60

40

20

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 YTD (May) Source: Barclays. Important data provider notices and terms available at www.franklintempletondatasources.com.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. Hedge Fund Strategy Outlook—Q3 2021 4 Q3 2021 Outlook: Strategy Highlights

Insurance-Linked Securities Exhibit 3: Catastrophe Bond Market Spread vs. High Yield BB Spread Investors favor lower-risk ILS strategies, primarily catastrophe April 2014 to May 2021 (cat) bonds, which offer the most liquidity. Despite a very active Spread calendar in Q2, we expect a seasonal decline in issuance as we 9.00% enter US hurricane season. ILS continues to offer attractive 8.00% relative valuation versus corporate credit. We will closely monitor Q3 event activity, which should provide insight into forward- 7.00% looking pricing and sub-strategy valuations. 6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00% Apr-14 Sep-15 Feb-17 Jul-18 Dec-19 May-21

Cat Bond Market Spread ML BB HY OAS

Source: Swiss Re, Aon Benfield, ICE BofAML, Bloomberg. Important data provider notices and terms available at www.franklintempletondatasources.com. Past performance is not an indicator or a guarantee of future results.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 5 Hedge Fund Strategy Outlook—Q3 2021 Q3 2021 Outlook by Strategy

Long/Short The current market environment has been and will remain challenging for long/short Equity equity investing. Though stocks have rallied extensively this year, there have been more frequent short-term swings as investors grapple with record high valuations and unclear monetary policy. These various uncertainties should continue to negatively impact active, long-term fundamental managers, particularly those focused on secular growth. Though these companies have rerated lower, managers are poised for asymmetric upside in the long book once these concerns, which include inflation and interest rate hikes, are outweighed by exuberance in “back to normal.” Nonetheless, managers’ elevated gross and net exposures reinforce their medium-to-long-term constructive outlooks.

Relative Value Given peak valuations across many traditional risk assets, relative value strategies appear particularly attractive today due to their less directional nature and ability to benefit from pricing inefficiencies that exist at intersection points of multiple markets. Convertible arbitrage remains a favored strategy due to a strong new issue calendar and the positive externalities on the trading opportunity set for arbitrageurs. We are similarly positive in our outlook for volatility-related strategies, as current pricing of volatility is offering an attractive entry point. pricing continues to be dominated by retail flows, leading to significant inefficiencies that experienced managers can capture and capitalize on. Our outlook for is muted for now, given the continued success by central banks of depressing fixed income market volatility.

Event Driven Significant excess liquidity and peak equity valuations are contributing to record-setting volumes of merger and acquisition (M&A) activity, leveraged buyout (LBO) transactions, cross-border activity, buybacks, and other types of events. Corporate boards and management teams look ahead to a potential pickup in inflation, rising rates, and possible changes in tax regimes and regulation. In response, they are engaging in defensive corporate actions by shoring up their capital structures and seeking to diversify and grow market share. We do not see this trend abating any time soon, even in response to the known risks of the potential rise in rates and inflation. From an investment perspective, a robust corporate activity calendar is expected to continue to supply managers with a strong pipeline of investable opportunities across both merger arbitrage and special situations sub-strategies. However, we remain mindful of those strategies’ potential sensitivity to being repriced in response to a selloff in risk assets.

Understanding the Pendulum Graphic

Strongly Strongly Underweight Overweight

Underweight Overweight

Neutral Arrows represent any change since the last quarter-end.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. Hedge Fund Strategy Outlook—Q3 2021 6 Q3 2021 Outlook by Strategy

Credit A rebounding global economy, strong issuer fundamentals and accommodative monetary policy are all supportive of credit. From the demand side, the global search for yield continues unabated as investors move out on the credit spectrum to hit return targets. As a result, the asset class has generally been in grind-tighter mode for over a year with few exceptions, and some market participants suggest credit is now priced to perfection. Our underweight at the strategy level reflects this headwind, and we favor less directional strategies as a result. In long/short credit, managers point to an improved outlook for M&A as supportive of an event-driven approach. In addition, the upside to tight spreads is an opportunity to generate returns on the short side. The rebound in structured credit has continued, and the reopening phase should create dispersion for sectors like (CMBS) and aviation as the reopening continues. We maintain a strong underweight in distressed as defaults have simply not materialized, especially weighed against the massive amount of dry powder in the strategy yet to be deployed. Direct lending managers remain focused on their existing portfolios, and borrowers are turning to accommodative capital markets.

Global Macro Data releases and policy responses remain in focus as global economies emerge from the COVID-19 crisis. Disparate recoveries between regions and countries may affect market direction across and relative value opportunities within asset classes. Discretionary managers may be well placed to identify opportunities as the recovery matures, including in currencies and along yield curves. Regional specialists within emerging markets may find attractive relative value opportunities given notable differences between country recoveries while also having to navigate potential shifts in developed market policy paths. Systematic trend followers may benefit if recovery momentum persists, while non-price systematic macro strategies may benefit if economic data become less extreme in the months ahead.

Commodities While the trading environment has improved, most established long/short commodity hedge funds have limited to no capacity. We view this positively as today’s commodity hedge funds have learned from the prior cycle. Significant growth in can lead to constraints in risk management, performance degradation and a poor outcome for investors. As we enter a period of tighter supply and demand, these more capital disciplined managers are positioned to take advantage of relative value trading opportunities.

Insurance- Inflows into cat bonds are supporting market growth and secondary trading. The lower- Linked risk strategies have performed well during the prior stress event period and offer Securities attractive relative valuations. We note that as fewer investors favor higher-risk strategies due to prior performance, lower levels of competition could lead to a more favorable environment for investors. Overall, our focus remains on the liquid part of the market given strong new issuance in the first half of the year has led to a broader investable universe. We will closely monitor peak US hurricane season for potential trading opportunities.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 7 Hedge Fund Strategy Outlook—Q3 2021 Outlook Trend for Strategies and Sub-Strategies Sub-Strategies Ranked by Z-Score Strategies Q2 2021 Q3 2021 Changes

Long/Short Equity — Rankings (Top Down) Z-Score

Long/Short Equity — Agriculture 1.4

Equity Discretionary 1.2

Activist — Cat Bonds 0.9

Europe — Europe 0.9

Asia — Asia 0.9

Technology Oil & Products 0.8

Healthcare — Emerging Markets 0.8

Relative Value Private Transactions 0.8

Convertible Arbitrage Metals 0.6

Volatility Arbitrage ED - Special Situations 0.6

Fixed Income Long/Short Credit 0.6

Event Driven — US Natural Gas 0.3

Merger Arbitrage — Structured Credit 0.3

Special Situations Activist 0.2

Credit — ED - Merger Arbitrage 0.2

Direct Lending Healthcare 0.2

Distressed — Convertible Arbitrage 0.0

Long/Short Credit Volatility Arbitrage -0.1

Structured Credit — ILWs -0.1

Global Macro — Systematic -0.3

Discretionary Fixed Income -0.3

Systematic Retrocessional -0.5

Emerging Markets Technology -0.6 — Commodities Direct Lending -0.9

Oil & Products Equity Market Neutral -1.2 — Agriculture Long Short Equity -1.7

Metals Distressed -2.4

US Natural Gas — Life -2.5 Insurance-Linked Securities

Catastrophe Bonds — > +1 Strongly Overweight Private Transactions +0.5 to +1 Overweight Life Securitization — -0.5 to +0.5 Neutral Retrocessional -1 to -0.5 Underweight Industry Loss Warranties < -1 Strongly Underweight

The K2 Investment Research & Management (IRM) Outlook Scores are the opinions of the K2 IRM group as of the date indicated and may not reflect the views of other groups within K2 or Franklin Templeton. Scores are determined relative to other hedge fund strategies and do not represent an opinion regarding absolute expected future performance or risk of any strategy or substrategy. Scores are determined by the K2 IRM group based on a variety of factors deemed relevant to the analyst(s) covering the strategy or substrategy and may change from time to time in K2’s sole discretion. In certain sections of this presentation, outlook scores are rounded to the nearest whole number. These scores are only one of several factors that K2 uses in making investment recommendations, which may vary based on a client’s specific investment objectives, risk tolerance and other considerations. Therefore, underweightings and overweightings as shown are meant to indicate K2's view of relative attractiveness of hedge strategies and are not meant to indicate that a particular strategy or sub-strategy should be overweighted or underweighted, respectively, in any given portfolio. This information contains a general discussion of certain strategies pursued by underlying hedge strategies, which may be allocated across several K2 strategies. This discussion is not meant to represent a discussion of the overall performance of any K2 strategy. Specific performance information relating to K2 strategies is available from K2.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. Hedge Fund Strategy Outlook—Q3 2021 8 Glossary

Alpha Retrocessional A mathematical value indicating an investment's excess return relative to A type of insurance contract that allows a re-insurer to transfer risks it has a benchmark. Measures a manager's value added relative to a passive re-insured to another re-insurer. strategy, independent of the market movement. Z-score Correlation A Z-score is a numerical measurement used in statistics of a value’s The degree of interaction between an investment’s return and that relationship to the mean (average) of a group of values, measured in of the comparison Index. The correlation coefficient, expressed as a terms of standard deviations from the mean. If a Z-score is 0, it indicates value between +1 and –1, indicates the strength and direction of the that the data point's score is identical to the mean score. linear relationship between the investment’s returns and the returns of the index.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 9 Hedge Fund Strategy Outlook—Q3 2021 Notes

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 10 Hedge Fund Strategy Outlook—Q3 2021 DISCLOSURE The K2 Investment Research & Management (IRM) Outlook Scores are the opinions of the K2 IRM group as of the date indicated and may not reflect the views of other groups within K2 or Franklin Templeton. Scores are determined relative to other hedge fund strategies and do not represent an opinion regarding absolute expected future performance or risk of any strategy or substrategy. Scores are determined by the K2 IRM group based on a variety of factors deemed relevant to the analyst(s) covering the strategy or substrategy and may change from time to time in K2's sole discretion. These scores are only one of several factors that K2 uses in making investment recommendations, which may vary based on a client's specific investment objectives, risk tolerance and other considerations. Therefore, a positive or negative score may not indicate that a particular strategy or substrategy should be overweighted or underweighted, respectively, in any given portfolio. This information contains a general discussion of certain strategies pursued by underlying hedge strategies, which may be allocated across several K2 strategies. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any of the funds employing K2 strategies. Nothing in this document should be construed as investment advice. Specific performance information relating to K2 strategies is available from K2. This presentation should not be reproduced without the written consent of K2. Past performance is not an indicator or guarantee of future results. Certain information contained in this document represents or is based upon forward-looking statements or information, including descriptions of anticipated market changes and expectations of future activity. K2 believes that such statements and information are based upon reasonable estimates and assumptions. However, forward-looking statements and information are inherently uncertain and actual events or results may differ from those projected. Therefore, too much reliance should not be placed on such forward-looking statements and information. Professional care and diligence have been exercised in the collection of information in this document. However, data from third party sources may have been used in its preparation and Franklin Templeton/K2 has not independently verified, validated or audited such data. Any research and analysis contained in this document has been procured by Franklin Templeton/K2 Investments for its own purposes and is provided to you only incidentally. Franklin Templeton/K2 shall not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission.

WHAT ARE THE RISKS? All investments involve risks, including possible loss or principal. Investments in strategies and hedge funds (collectively, “Alternative Investments”) are complex and speculative investments, entail significant risk and should not be considered a complete investment program. Financial instruments are often used in alternative investment strategies and involve costs and can create economic leverage in the fund's portfolio which may result in significant volatility and cause the fund to participate in losses (as well as gains) in an amount that significantly exceeds the fund's initial investment. Depending on the product invested in, an investment in Alternative Investments may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. There can be no assurance that the investment strategies employed by K2 or the managers of the investment entities selected by K2 will be successful. The identification of attractive investment opportunities is difficult and involves a significant degree of uncertainty. Returns generated from Alternative Investments may not adequately compensate investors for the business and financial risks assumed. An investment in Alternative Investments is subject to those market risks common to entities investing in all types of securities, including market volatility. Also, certain trading techniques employed by Alternative Investments, such as leverage and hedging, may increase the adverse impact to which an investment portfolio may be subject. Depending on the structure of the product invested, Alternative Investments may not be required to provide investors with periodic pricing or valuation and there may be a lack of transparency as to the underlying assets. Investing in Alternative Investments may also involve tax consequences and a prospective investor should consult with a tax advisor before investing. In addition to direct asset- based fees and expenses, certain Alternative Investments such as funds of hedge funds incur additional indirect fees, expenses and asset-based compensation of investment funds in which these Alternative Investments invest.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. Hedge Fund Strategy Outlook—Q3 2021 11 IMPORTANT LEGAL INFORMATION This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at July 13, 2021 and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction. The information in this document is provided by K2 Advisors. K2 Advisors is a wholly owned subsidiary of K2 Advisors Holdings, LLC, which is a majority-owned subsidiary of Franklin Templeton Institutional, LLC, which, in turn, is a wholly owned subsidiary of Franklin Resources, Inc. (NYSE: BEN). K2 operates as an investment group of Franklin Templeton Alternative Strategies, a division of Franklin Resources, Inc., a global investment management organization operating as Franklin Templeton. Issued in the U.S. by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Investments are not FDIC insured; may lose value; and are not bank guaranteed.

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