K2 Hedge Fund Strategy Outlook

K2 HEDGE FUND STRATEGY OUTLOOK

Q2 2020 Q2 2020 Outlook: Summary

In our view, pricing dislocations between Strategy Highlights Discretionary Extreme volatility may provide compelling opportunities for companies, industries, regions and Global Macro cross-asset managers, especially those who can take a asset classes due to the impact of nimble approach. Asset class or regional specialists may be well-suited to profit as externally driven dislocations create COVID-19 and corresponding price attractive entry points. adjustments offer abundant opportunities Fixed Income Fixed income markets are experiencing significant levels of for select hedged strategies. The length Relative Value stress. These types of dislocations can present attractive trading opportunities for well-capitalized managers focused on and depth of both the economic relative value strategies. supply-and-demand curve adjustments Long/Short The technology opportunity set is a result of notable intra-sector are key to the richness and tenor of Equity— dispersion. Valuation and earnings metrics may be uncertain, the opportunities. Technology but fundamental dispersion is clear as segments of technology will win and others may lag post-COVID-19.

Strategy Outlook Long/Short Equity There is a beta opportunity as investors have priced in flat-to-negative corporate earnings growth and a recession. There is also an alpha opportunity as managers take advantage of increased dispersion and market dislocation.

Relative Value After the initial volatility spike, we expect to see continued significant dispersion between asset classes and individual securities, creating a very favorable environment for relative value investors regardless of the continued direction of the broader capital markets.

Event Driven Significantly wider spreads and more volatility should lead to profitable trading, but in the absence of opportunistic corporate activity, deal volumes are likely to remain muted. Disruptions in the capital markets are likely to negatively impact special situations investing.

Credit Market volatility can create winners and losers from which long/short credit managers may benefit. Structured products have sold off meaningfully due, in large part, to technical pressures rather than fundamentals, which could make for an attractive entry point.

Global Macro The macro opportunity set has been bolstered by an increase in cross-asset volatility. Dislocations present compelling directional and relative value trading opportunities, especially for agile managers.

Commodities Geopolitical tensions have led to extreme energy dislocations creating an attractive opportunity set given the price reset, but we are more cautious near-term given the lack of transparency on government intervention. Niche commodities continue to generate attractive performance and offer a better opportunity set, in our view.

Insurance-Linked We believe pricing was attractive across all ILS natural catastrophe risk tiers heading into Securities (ILS) the recent period of heightened market volatility. The need for liquidity led to increased selling pressure in the catastrophe (cat) bond market, providing an even more attractive near-term yield.

This presentation 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 presentation 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—Q2 2020 Macro Themes We Are Discussing

Sector, Geographical and Asset-Class Rotations in Full Swing historically low rates and employ leverage to enhance return on Even before COVID-19 affected global markets, we were investments. The leverage unwind and “dash for cash” put central expecting sector rotations, geographical movements and asset banks in the position of having to lower rates and buy securities class rebalancing to occur, creating a rich environment for from the crowd looking to unwind and reduce risk. This has alpha generation. Today, the theme is even stronger, but due to created dislocation in areas of sovereign fixed income, corporate the depth and length of the COVID-19 impact, the energy sector, credit and structured credit with the largest dislocation occurring as well as several industries including transportation, travel, in structured credit. restaurant and retail shopping now face challenges that were never part of the business plan. Technology, health care, online How Long Can Volatility Stay this High? gaming and entertainment, and food delivery are experiencing The best trade over the last ten years has been to be short tailwinds also not foreseen. Regional differences in social volatility, sell volatility spikes, and be short gamma. Numerous distancing, hence infection rates, will affect countries and regions firms were created and prospered utilizing such strategies and in various ways. We expect interest rates and foreign exchange methodologies. COVID-19 killed these strategies in one big rates to provide a “relief valve” for pressures elsewhere, creating swoop in March 2020, putting some firms out of business and a very rich opportunity set for managers deploying risk in those causing managers relying solely on this approach to have asset classes. unthoughtful losses and at a faster rate than ever imagined. As in most risk-off scenarios, volatility rose, liquidity evaporated and How Long and How Deep Will COVID-19 Impact the correlations spiked. For all hedged strategies, this was a huge Economy, Consumer and Government Actions? challenge to navigate such an environment. Managers that Clearly, both demand and supply curves are in the midst of adapted quickly fared better than those that did not. In general, repricing the impact of COVID-19, which we have labeled a health convergent strategies were very challenged and divergent crisis impacting the financial and labor markets. The length strategies performed better. and depth of COVID-19’s impact will affect the speed and degree of repricing going forward. If the global infection curves flatten In Conclusion… and/or a vaccination becomes available, then mean reversion We think the bull run of one-dimensional passive beta play has of risk-on repricing will quickly emerge. On the other hand, if the ended. The current market turmoil puts active investment death count rises to unimaginable numbers, the virus mutates management in-vogue again. We strongly believe that skilled or the lockdown continues longer than a few months, then active managers who have access to a full toolbox to express risk-off sentiment will return and be reflected in security pricing. their views are best positioned to take advantage of a very dynamic marketplace going forward. Has the Health Crisis Created a Deleveraging and Risk-Reducing Unwind? In mid-February, no one wanted to hold cash as money market rates were paying very little in yield, if anything, and the opportunity cost of missing out on other investment opportunities was estimated to be large—even larger if one were to borrow at

The above reflects the opinions of the K2 Investment & Research Management (IRM) group as of April 1, 2020, 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, security 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—Q2 2020 3 Q2 2020 Outlook: Strategy Highlights

Discretionary Global Macro Stress in Fixed Income Markets : FRA-OIS Spread 3M Periods of heightened volatility can provide a robust opportunity January 1, 2013–March 31, 2020 set for discretionary macro strategies, which may profit from Basis Points the dislocations themselves or from the resulting mispricings. We 90 think nimble cross-asset managers can find success in the 80 current environment as volatility remains above stubbornly low 70 60 levels endured in recent years and as macro trends continue to 50 dominate the prevailing market narrative. Recent dislocations 40 may also provide the foundations for an attractive opportunity set 30 for longer-term, value-driven strategies. 20 10 Cross-Asset Volatility 0 January 1, 2008–March 31, 2020 Jan-13 Jul-14 Jan-16 Jul-17 Jan-19 Mar-20

Level (Indexed) Source: Bloomberg, as of March 31, 2020. Important data provide notices and terms 400 available at www.franklintempletondatasources.com. A basis point is a unit of measurement. One basis point is equal to 0.01%. Indexes are unmanaged and one cannot 350 invest directly in them. 300 across the technology sector. There are technologies that have

250 been integral to the economy as companies have shifted to a nearly complete mobile working environment through cloud 200 infrastructure and other remote software while other companies 150 have seen business come to a halt. Examples of winners vs. losers could include cloud vs. on-premises; domestic production 100 vs. global supply chain; e-commerce vs. retail; e-payments 50 and banking vs. ATMs and point of sale; and software vs. 0 hardware. There is also a beta opportunity as technology Jan-08 Jul-10 Jan-13 Jul-15 Jan-18 Mar-20 companies historically emerge as winners following significant VIX Index CVIX Index MOVE Index drawdowns. In the past six periods when the S&P 500 Index sold Source: Bloomberg, as of March 31, 2020. Important data provide notices and terms off at least 20%, the technology sector has outperformed the available at www.franklintempletondatasources.com. Indexes are unmanaged and one S&P 500 Index in the subsequent three months as cyclical sectors cannot invest directly in them. They do not reflect any fees, expenses or sales charges. outperform defensive sectors. Past performance is not an indicator or a guarantee of future performance. Technology Sector Outperforms Post-S&P 500 Index 20% Drawdown Fixed Income Relative Value 1990–2020 Various metrics of risk and volatility in traditional fixed income are S&P Financials 32.6% showing historic levels of stress, propagating through to even the S&P Info Tech 29.6% most liquid parts of the capital markets. Significant coordinated S&P Real Estate 28.2% efforts by the various central banks and regulators are now S&P Industrials 23.8% laser-focused on restoring liquidity and stability in these markets, S&P Materials 22.7% which serve as the backbone of capital flow activity and the S&P Cons Disc 22.5% primary mechanism for delivering federal stimulus to the real S&P 500 Index 20.4% economy. These types of dislocations and subsequent recoveries S&P Comm Services 18.4% can present incredibly attractive trading opportunities for well- S&P Energy 16.0% capitalized managers focused on relative value strategies across S&P Utilities 14.0% a broad range of capital markets. S&P Healthcare 13.1% S&P Cons Staples 12.7% Long/Short Equity—Technology We expect Long/Short Equity—Technology managers to be able 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% to exploit both alpha and beta opportunities going forward. Source: Bloomberg. Important data provider notices and terms available at Dispersion, which is the alpha opportunity, should be broad-based www.franklintempletondatasources.com. Past performance is not an indicator or a guarantee of future performance.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 4 Hedge Fund Strategy Outlook—Q2 2020 Q2 2020 Outlook by Strategy

Long/Short We believe that there is a tailwind for Long/Short Equity managers given current market Equity levels. The COVID-19 pandemic resulted in the largest equity drawdown since the global financial crisis due to concerns of flat-to-negative corporate earnings growth and a looming recession. Since then, investors have been identifying companies that have been oversold and those that are set to benefit from a post-COVID-19 economic environment. Managers have significantly reduced gross and net exposures with cash ready to be redeployed. We believe they are equipped to take advantage of the elevated levels of market volatility and dispersion.

Relative Value An unprecedented pickup in volatility has led to a massive correlation spike across individual securities and broad asset classes. As long-term effects of the current shock and policy responses begin to propagate throughout the financial system, we expect a meaningful pickup in dispersion across all markets. This should have the potential to be very profitable for relative value strategies, which should find attractive trading opportunities regardless of the overall direction of the broader capital markets. As one example, the convertible bond basis has come under pressure given selling from directional accounts, significantly cheapening the market. This could represent a buying opportunity, even though issuance is likely to remain light until volatility declines.

Event Driven The magnitude of the recent shock has led to a short-term dislocation in merger- arbitrage spreads, which our managers are actively exploiting. Longer term, however, we expect deal volumes to remain low given the long-term uncertainties associated with the current health and economic crisis. Spreads and volatility are likely to remain wide, offering attractive trading opportunities for the more experienced managers in the space that have business stability and staying power, even as weaker hands get shaken out by the markets. Special situations strategies may face continued pressures because of the current dislocation in the capital markets, leading us to underweight the strategy in the near-term.

Credit The extreme volatility in credit markets in March has created near-term pain for some credit managers but could also result in a very compelling opportunity set. In Long/Short Credit, managers may be able to generate alpha by picking among sectors and issuers that will survive and those that will face serious challenges to business models and capital structures. Structured products have sold off meaningfully in March, making for a potentially attractive entry point. Certainly, some of the selloff is warranted considering the economic challenges, but the severity of the risk-off move is to a significant extent technical in nature due to forced selling by levered market participants given margin calls and fund redemptions. The outlook for distressed is improved on the margin given the expected increase in activity. Direct lending managers will likely face higher defaults, so having workout experience and asset management capabilities will be key.

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—Q2 2020 5 Q2 2020 Outlook by Strategy

Global Macro A heightened volatility environment can provide a fertile opportunity set for tactical cross- asset discretionary macro traders. These managers may profit from market moves that are dominated by macro shifts, including developments in monetary and fiscal policies. The dislocations observed in the first quarter of 2020 may also provide opportunities for longer-term managers to take advantage of stressed valuations, including in emerging markets. Quantitative macro strategies have potential to perform well but may be challenged if driving factors like market momentum fail to persist over a reasonable period as market participants seek to anticipate developments in policy responses.

Commodities Geopolitical tensions have led to extreme energy dislocations. In early March, Saudi Arabia and Russia embarked on an oil-price war, flooding the market with ample oil supply. The coronavirus outbreak and subsequent country-level lockdowns caused significant demand destruction. The combination of increased supply and reduced demand led to the lowest oil prices in nearly 18 years. We see an attractive future opportunity set given the price reset but are more cautious near term given lack of transparency on government intervention and timeframe in which COVID-19 will continue to impair demand. Additional price dispersion across niche strategies, including carbon, European natural gas and metals, provide attractive opportunities over the near term.

Insurance- The cat bond market is seeing attractive pricing as the need for liquidity elsewhere given Linked amplified global market volatility led to increased secondary market selling pressure. Securities This selling pressure has widened cat bond spreads going into the second quarter, and provides a potentially attractive near-term entry point. For private non-life strategies, focus is on the April 1 Japanese renewal period following another year of losses. After April 1 renewals is the June 1 Florida renewal period. We were expecting increased risk-adjusted rates prior to COVID-19. The virus outbreak will likely lead to additional positive rate pressure. The life securitization sector has faced minimal losses so far from the coronavirus outbreak, which continues to develop. Life strategy repricing is not as clear at this time.

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 6 Hedge Fund Strategy Outlook—Q2 2020 Outlook Trend for Strategies and Sub-Strategies Sub-Strategies Ranked by Z-Score Strategies Q1 2020 Q2 2020 Changes

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

Long/Short Equity Volatility Arbitrage 1.5

Equity Market Neutral Emerging Markets 1.3

Activist Discretionary 1.2

Europe Cat Bonds 0.9

Asia — Retrocessional 0.9

Technology Fixed Income 0.7

Healthcare — Structured Credit 0.5

Relative Value — Technology 0.5

Convertible Arbitrage — Activist 0.4

Volatility Arbitrage Private Transactions 0.4

Fixed Income ILWs 0.4

Event Driven — Long/Short Credit 0.4

Merger Arbitrage — Healthcare 0.3

Special Situations — Long/Short Equity 0.2

Credit — Systematic 0.1

Direct Lending Equity Market Neutral 0.1

Distressed — Convertible Arbitrage 0.1

Long/Short Credit Merger Arbitrage 0.0 — Structured Credit Europe -0.1

Global Macro US Natural Gas -0.1

Discretionary Asia -0.3 — Systematic Oil & Products -0.4

Emerging Markets Metals -0.5 — Commodities Agriculture -0.5 — Oil & Products Special Situations -1.4

Agriculture Distressed -1.6

Metals Direct Lending -1.9 — US Natural Gas Life Securitization -3.0 Insurance-Linked Securities —

Catastrophe Bonds

Private Transactions > +1 Strongly Overweight +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—Q2 2020 7 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 Backwardation A Z-score is a numerical measurement used in statistics of a value's A market condition in which the price of a commodity's forward or futures relationship to the mean (average) of a group of values, measured in contract is trading below the spot price. terms of standard deviations from the mean. If a Z-score is 0, it indicates that the data point's score is identical to the mean score. Correlation The degree of interaction between an investment’s return and that of the comparison Index. The correlation coefficient, expressed as a value between +1 and –1, indicates the strength and direction of the 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. 8 Hedge Fund Strategy Outlook—Q2 2020 Notes

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. Hedge Fund Strategy Outlook—Q2 2020 9 Notes

For Institutional/Professional Investor and Consultant Use Only—Not for Use with Retail Investors. 10 Hedge Fund Strategy Outlook—Q2 2020 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 alternative investment 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 Derivative 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—Q2 2020 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 April 13, 2020 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 Investments (“FTI”) has not independently verified, validated or audited such data. FTI 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 FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser 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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