K2 STRATEGY OUTLOOK

Q4 2019 Q4 2019 Overview

In our view, the benign volatility Our Top Convictions Volatility The benign volatility environment in equities is not reflective of environment on the back of global Arbitrage the high degree of global geopolitical and economic uncertainty, geopolitical and economic uncertainty as evidenced by occasional sudden price shocks in fixed and depressed catastrophe income and commodity markets. pricing provide attractive entry Catastrophe Catastrophe bond pricing is near the most attractive level since Bonds 2013 with the market yield at a premium relative to similarly points for select strategies. Our top rated corporate high yield indices. strategy convictions: Volatility Long/Short Managers anticipate volatility to be elevated for the remainder Arbitrage, Catastrophe Bonds, and Equity of the year as macro events continue to influence the direction Long/Short Equity. of the markets.

Long/Short Equity While macroeconomic events continue to influence the direction of equity markets, we believe managers will find opportunities in both sides of their books.

Relative Value In our view, greater uncertainty and the resulting market volatility is favorable for volatility arbitrage and arbitrage managers.

Event Driven We believe there is a significant amount of pent-up demand for corporate activity to take place once uncertainty around global growth and the US-China trade war is abated.

Credit Given the catalyst rich environment, long/short credit managers are actively managing net exposures while seeking alpha opportunities from both the long and short side.

Global Macro We think active central banks, higher volatility, and perceptions of slowing growth continue to present an attractive opportunity set for discretionary managers, while systematic strategies may benefit from longer term policy changes but remain susceptible to short term volatility and factor reversals.

Commodities Trade uncertainty continues to create a challenging environment for sensitive commodities, while niche commodities are generating what we view as attractive performance and offer greater opportunities in our opinion.

Insurance-Linked The combination of moderating flows and loss creep has weighed on performance but Securities led to more attractive pricing across the -linked securities market.

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 a 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.

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Hedge Fund Strategy Outlook—Q4 2019 2 Macro Themes We Are Discussing What is the correct forecast for the US economy? Fourth Quarter Equity Volatility • Are long equity AND long bond positions a crowded theme? • Sector and geographical rotation could present alpha • Which hedge fund strategies will do well if bonds are correct opportunities and a recession is pending? • Regime shift in sector earnings may present opportunity (own past laggards and hedge with past leaders) Which hedge fund strategies will benefit if/when Brexit • Is bad news already priced into European and emerging is resolved? equity markets? • Do emerging macro hedge strategies present the best possible positive asymmetric exposures? Has global government bond rally gone too far too fast? • European focused hedge fund strategies? Cyclical and/or • Consensus sees US Fed Funds near 1.25% in 12 months. Are “value” friendly strategies? Fed cuts already priced in? • $13 trillion in negative yields in Bloomberg Barclays Global Volatility Arbitrage Aggregate Index as of October 18, 2019 The benign volatility environment in equities is not reflective of the high degree of global geopolitical and economic uncertainty, Global inflation expectations are very low and may as evidenced by occasional sudden price shocks in fixed income increase in 2020 and commodity markets. In our view, the low levels of implied • Will inflation ever return? Are inflation expectations too low? volatility in equities present a very attractive entry point for • Will the yield curve steepen in 2020? volatility arbitrage managers to maintain a long optionality • Are relative value bond hedge funds attractive? profile, possibly benefiting from sudden market moves to provide potentially significant diversification benefits for both traditional and alternative portfolios.

Difference between 3-month Implied and Realized Volatility in S&P 500, Euro Stoxx 50, and Nikkei 225 Indexes January 1, 2013–October 10, 2019 25

20

15

10

5

0

-5

-10

-15

-20 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Jul-17 Apr-18 Jan-19 Oct-19

S&P 500 Euro Stoxx 50 Nikkei 225 Source: Barclays Live. Important data provide notices and terms available at www.franklintempletondatasources.com. Indexes are unmanaged and one cannot invest directly in them. They do not reflect any fees, expenses, or sales charges. Past performance is not an indicator or a guarantee of future performance.

The above reflects the opinions of the K2 Investment & Research Management (IRM) group as of October 18, 2019 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 manager’s portfolio selection process.

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Hedge Fund Strategy Outlook—Q4 2019 3 Catastrophe Bonds Average Forward 52-Week S&P 500 Return Catastrophe bond pricing is near the most attractive level since January 2009–October 2019 2013 with the market yield at a premium relative to similarly 30% 28.0% rated corporate high yield indices. Catastrophe bonds have 25% continued to outperform insurance-linked securities (ILS) private transactions this year through August 31. Our outlook remains 20% 17.4% 14.2% constructive as the combination of moderating ILS investor flows 15% 12.9% 12.6% 12.2% and losses has led to higher yields and expected returns. 10.0% 8.3% 8.2% 10% 7.1% 7.1%

Historical Catastrophe Bond Market Spread 5% June 30, 2013–August 31, 2019 0% 12% 1 2 3 4 5 6 7 8 9 10 All 10% Hedge Fund Net Exposure in Deciles (1=Low to 10=High)

8% Average Forward 52-Week Hedge Fund Long Alpha 6% January 2009–October 2019 9% 8.4% 4% 8% 7.2% 2% 7% 5.6% 6% 0% Jun-13 Jul-14 Aug-15 Sep-16 Oct-17 Nov-18 Sep-19 5% 4.3% 3.7% 4% 3.3% Catastrophe Bond Spread Average Historical Spread 2.7% 3% 2.6% 1.7% 1.9% Source: Elementum Advisors. Approximate per value weighted bid-side discount margin of 2% 1.4% non-distressed natural catastrophe bonds as categorized by Elementum, which does not 1% necessarily include all issuances. Past performance is not an indicator or a guarantee of future performance. 0% 1 2 3 4 5 6 7 8 9 10 All Weekly Hedge Fund Net Exposure in Deciles (1=Low to 10=High) Long/Short Equity Managers anticipate volatility to be elevated for the remainder of Source: Bloomberg, . Data as of October 4, 2019. Net exposure data is provided by Morgan Stanley Prime Brokerage. Data sample includes US long/short the year as macro events continue to influence the direction accounts with at least $50 million in equity and has been rebalanced every 6–12 months to of the markets. Based on their positioning, we feel that long/short keep sample representative of historical accounts. Alpha calculations reflect alpha equity managers are well-situated to potentially generate alpha generated by the Goldman Sachs Hedge Fund VIP Index relative to the S&P 500 TR Index. The Index consists of hedge fund managers’ “Very-Important-Positions,” or in this environment. the US-listed whose performance is expected to influence the long portfolios of hedge funds. Those stocks are defined as the positions that appear most frequently As illustrated, when managers have low net positioning, this among the top 10 long equity holdings within the portfolios of fundamentally-driven generally translates to maintaining flexibility to add market risk hedge fund managers. Important data provide notices and terms available at www.franklintempletondatasources.com. Indexes are unmanaged and one cannot back into their portfolios. When we group managers' net invest directly in them. They do not reflect any fees, expenses, or sales charges. exposures into deciles, we historically see that times when hedge Past performance is not an indicator or a guarantee of future performance. funds are positioned with very low net exposures have typically been followed by periods of higher U.S. equity returns. Even with the strong market returns, the flexibility managers have maintained allowed them to access the subsequent upside while generating alpha in their long positions relative to the S&P 500.

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Hedge Fund Strategy Outlook—Q4 2019 4 Strategy Outlook Summary

Long/Short We maintain our constructive view of long/short equity managers. While macroeconomic Equity events, including the trade war, central bank policies, Brexit, and the unwinding of synchronized global growth continue to influence the direction of equity markets, we believe managers will find opportunities in both sides of their books. Long/short equity managers appeared generally defensively positioned with low net exposures and are seemingly ready to take advantage of the market volatility to redeploy risk.

Relative The strategy continues to benefit from greater uncertainty and the resulting market volatility, Value which is particularly favorable for volatility arbitrage and fixed income arbitrage managers (and to a less extent for convertible arbitrage managers). We further appreciate the diversification benefits of these less directional investment styles when compared to potentially some more traditional equity-sensitive hedge fund strategies.

Event Driven Merger arbitrage spreads remain attractive, but event driven strategies overall are suffering from lower levels of corporate activity due to uncertainty around global growth and the US-China trade war. We believe there is a significant amount of pent-up demand for corporate activity to take place once these concerns are abated. In the meanwhile, we expect the strategy to deliver positive but muted returns with limited correlation to the broader equity markets.

Credit Given the catalyst rich environment, long/short credit managers are actively managing net exposures while seeking alpha opportunities from both the long and short side. Distressed managers note that defaults remain low with limited new opportunities. In structured credit, yields look attractive on a relative basis versus sovereign securities but the overall market may be susceptible to rates moving higher. In private credit, we prefer niche strategies.

Global Macro We think active central banks, higher volatility, and perceptions of slowing growth continue to present an attractive opportunity set for discretionary managers. We have some concerns around periodic bouts of illiquidity in certain emerging markets but still think specialist managers can identify attractive trading opportunities. Systematic strategies may benefit from longer-term policy changes but remain susceptible to short-term volatility and factor reversals.

Commodities Trade uncertainty continues to create a challenging environment for sensitive commodities. Meanwhile, niche commodities are generating what we view as attractive performance and offer greater opportunities in our view. The Saudi event and January 1 implementation of a new shipping fuel standard act as potential catalysts.

Insurance- The combination of moderating flows and loss creep has weighed on performance but led to Linked higher pricing across the insurance-linked securities (ILS) market. The cat bond market is Securities seeing the most attractive pricing environment since 2013. ILS managers in general have increased their expected returns supported by higher yields.

Strong Strong Underweight Overweight Underweight Overweight

Neutral

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Hedge Fund Strategy Outlook—Q4 2019 5 Outlook Trend for Strategies and Sub-Strategies Sub-Strategies Ranked by Z-Score Strategies Q3 2019 Q4 2019 Changes

Long/Short Equity — Rankings (Top Down) Score Long/Short Equity Catastrophe Bonds 1.99

Equity Market Neutral — Volatility Arbitrage 1.32

Activist Retrocessional 1.05

Europe — Long/Short Credit 0.99

Asia — Activist 0.65

Technology — Private Transactions 0.65

Healthcare Long/Short Equity 0.52

Relative Value Discretionary 0.52 Convertible Arbitrage — Europe 0.52

Volatility Arbitrage — Insurance Loss Warranties 0.52

Fixed Income — Equity Market Neutral 0.45

Event Driven Fixed Income 0.39 Merger Arbitrage Emerging Markets 0.39

Special Situations Oil & Products 0.32

Credit — Agriculture 0.27 Direct Lending — Direct Lending -0.08

Distressed — Asia -0.08

Long/Short Credit — Convertible Arbitrage -0.15

Structured Credit US Natural Gas -0.15 — Global Macro Technology -0.18 — Discretionary Metals -0.49

Systematic Structured Credit -0.68 — Emerging Markets Systematic -0.68 — Commodities Merger Arbitrage -0.75 — Oil & Products Special Situations -0.95

Agriculture — Distressed -1.82 Metals Healthcare -2.02

US Natural Gas — Life -2.55

Insurance-Linked Securities — Catastrophe Bonds > +1 Strong 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 Strong 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.

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Hedge Fund Strategy Outlook—Q4 2019 6 Glossary Alpha Correlation A mathematical value indicating an investment's excess return relative to The degree of interaction between an investment’s return and that a benchmark. Measures a manager's value added relative to a passive of the comparison Index. The correlation coefficient, expressed as a strategy, independent of the market movement. 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.

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. 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, 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 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.

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Hedge Fund Strategy Outlook—Q4 2019 7 IMPORTANT LEGAL INFORMATION This material is intended to be of general interest only and should not be construed as individual investment advice or a recom- mendation 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 October 18, 2019 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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