Franklin Templeton Solutions
April 2016
Quarterly Hedge Fund Strategy Outlook
Q2 2016
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Table of Contents
Strongest Convictions
2
Score Definitions
3
Strategies Overview
4
Sub-Strategy Scores
5
Best to Worst Outlook Ranking by Sub-Strategy
6
Q2 2016 vs. Historical Outlook Ranking by Sub-Strategy
7
Long/Short Equity
8
Relative-Value
10
Event Driven
11
Credit
12
Macro
13
Commodities
14
Insurance-Linked Securities
15
1
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Strongest Convictions1
• Expect factor volatility to move closer to historical normal level – a condition which has been
#1
#2
favorable for Long Short Equity/Equity Market Neutral and Long Short Equity Europe in the
past
• Conditions including high corporate cash levels, robust transactions volumes and deal
spreads are supportive of future returns for Merger Arbitrage
• The opportunity set in Emerging Markets and Energy related securities is attractive given the
#3
recent stabilization of commodity prices, albeit with somewhat higher relative risk to the
previously mentioned strategies.
As of March 31, 2016.
1. Source: K2 Advisors.
The K2 Research Convictions are the opinions of the K2 Research group as of the date indicated and may not reflect the views of other groups within K2 or FT. Please see Important Disclosures and Disclaimers at the end of this
presentation, which provide detailed information regarding information presented herein and form an integral part hereof.
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2
Quarterly Hedge Fund Strategy Outlook - Q2 2016
Score Definitions
Score
Definition
+2
Positive
+1
Modestly Positive
0
Neutral
-1
Modestly Negative
-2
Negative
The K2 Research Outlook Scores are the opinions of the K2 Research group as of the date indicated and may not reflect the views of other groups within K2 or FT. Scores are
determined relative to other hedge fund strategies and do not represent an opinion on absolute expected future performance or risk of a strategy or sub-strategy. Please see Important
Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding information presented herein and form an integral part hereof.
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Strategies Overview
Strategy Class
12 Month Outlook
-2
-1
0
Long / Short Equity
(HFRXEH)
Inception: Jan-98
+1
+1
Relative Value
(HFRXRVA)
Inception: Jan-98
0
Event Driven
(HFRXED)
Inception: Jan-98
+1
Credit (HFRXDS)
Inception: Jan-98
+1
Global Macro
(HFRXM)
Inception: Jan-98
+1
Commodities
(HFRXCOM)
Inception: Jan-05
ILS
(EHFI300)
Inception: Jan-06
Q1 2016
Outlook
+1
-1
+2
Trailing 12 Month
Benchmark
Perf
Annualized
Return
Ending
Mar 16
Since
Inception
+5.06%
Keyed by heightened market volatility and favorable equity dispersion, we
expect to see an improved environment for alpha generation on both sides of
the portfolio. We believe earnings growth and balance sheet strength will
become increasingly important factors driving stock returns. While persistent
innovation in the Technology and Healthcare sectors should continue to drive
these two sectors, the hostile political environment in Healthcare in the current
election year could cap upside to that sector. Commodity price pressure and
the economic slowdown in China have had an uneven impact in Europe,
creating an improved environment for long/short investing in the region.
-7.26%
+3.11%
While remaining an attractive diversifier, the strategy is constrained by limited
liquidity and market uncertainty due to flat-to-negative interest rates. The
strategy is further constrained by its reliance on leverage and the need for
financing for successful trading.
-9.38%
+4.08%
The opportunity set is expected to remain healthy as many companies
proactively pursue value enhancing actions (spin-offs, buybacks, etc.) to avoid
being targeted by activists. Merger arb spreads remain attractive while special
situations and activism will be more equity market dependent.
+2.19%
Sharp selloffs followed by sharp rallies in credit markets are providing trading
opportunities for long/short credit managers but have also increased the risk of
getting whipsawed. Distressed and less liquid special situation names continue
to underperform. Corporate defaults are expected to increase from current low
levels, especially in the Energy and Metals sectors. In structured credit, yields
look attractive, but near term technicals remain challenging.
+4.94%
Discretionary managers face a challenging environment in developed markets
due to uncertainty around Fed policy, China growth, effectiveness of
unconventional monetary policy, and the health of European financials.
Emerging markets present a favorable environment with idiosyncratic
opportunities in Brazil, Mexico, Greece, Venezuela, and Argentina. Trend
followers are positioned to perform well in a volatile market environment.
+3.45%
Being back in the “exploitation phase” for most commodity markets, price moves
and volatility have increased. Overall, our factors and feedback from managers
lead us to believe that the trading environment for discretionary commodity
managers has substantially improved relative to previous years.
+6.43%
Strategy has generated favorable performance while valuations remain
challenged. Cat bonds have a slightly improved outlook with more favorable
pricing and technical support. Retrocessional remains the least attractive
strategy as investors reach for higher yield.
+1
-7.24%
0
+1
+1
+1
Commentary
-12.88%
-5.11%
+1
-1.50%
-1
+4.51%
Source: K2, Bloomberg. As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding
information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future results.
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Sub-Strategy Scores
Negative
Positive
-2
-1
0
1
Activist
Asia
Sector Tech/Healthcare
Long Short Equity
Equity Market Neutral
Europe
Fixed Income
Convertible Arbitrage
Volatility Arbitrage
Event Driven
Special Situations
Activist
Merger Arbitrage
Credit
Distressed
Structured Credit
Direct Lending
Credit Long Short
Macro
Discretionary
Systematic
Emerging Markets
Agriculture
Metals
Natural Gas
Scandinavia Power
Oil & Products
Private Transaction
Catastrophe Bonds
Long Short Equity
Relative Value
Commodities
ILS
Life Securitization
Retrocessional
Industry Loss
Warranties
As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding information presented herein and
form an integral part hereof. Past performance is not indicative or a guarantee of future results.
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2
5
Quarterly Hedge Fund Strategy Outlook - Q2 2016
Best to Worst Outlook Ranking by Sub-Strategy
Q2 2016 Rankings
Oil & Products
Emerging Markets
Long/Short Credit
ED - Merger Arbitrage
Long Short Equity
Scandinavia Power
Direct Lending
Equity Market Neutral
Europe
US Natural Gas
Convertible Arbitrage
Systematic
Volatility Arbitrage
Sector Technology/Healthcare
Asia
ED - Activist
Discretionary
Metals
Structured Credit
Activist
ED - Special Situations
Distressed
Cat Bonds
Fixed Income
Agriculture
Private Transactions
Life Securitization
ILWs
Retrocessional
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Outlook Score
As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding information presented herein and
form an integral part hereof. Past performance is not indicative or a guarantee of future results.
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6
Quarterly Hedge Fund Strategy Outlook - Q2 2016
Q2 2016 vs. Historical Outlook Ranking by Sub-Strategy
Outlook Score
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Long Short Equity
Equity Market Neutral
Activist
Europe
Asia
Sector Technology/Healthcare
Convertible Arbitrage
Volatility Arbitrage
Fixed Income
ED - Merger Arbitrage
ED - Special Situations
ED - Activist
Direct Lending
Distressed
Long/Short Credit
Structured Credit
Discretionary
Systematic
Emerging Markets
Oil & Products
Agriculture
Metals
US Natural Gas
Scandinavia Power
Cat Bonds
Private Transactions
Life Securitization
Retrocessional
ILWs
Q4 2015
Q1 2016
Q2 2016
As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding information presented herein and
form an integral part hereof. Past performance is not indicative or a guarantee of future results.
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Long/Short Equity
Summary of Current Market Views – 12 Month Forward Outlook
In the wake of a volatile first quarter, which was characterized by heightened economic concerns, significant market deleveraging and large factor moves, we maintain our
constructive outlook for long/short equity investing. US equities sold off during January on heightened concerns regarding slowing economic growth in China and the strength of the
US consumer. Disappointing Chinese manufacturing data weighed on equity markets and put continued pressure on commodity prices. The Federal Reserve’s January statement
subsequently acknowledged signs of softness in the global economy and sparked uncertainty relating to future interest rate policy. Volatility in oil prices and weak fourth quarter
earnings negatively impacted energy-linked names, while biotechnology stocks sold off significantly as investors rotated out of the sub-sector. After retreating sharply during the first
half of the February, U.S. equities have recovered to positive territory after stabilizing commodity prices and relatively-encouraging US manufacturing data served as a tailwind for
US equities. Since February 11, oil prices have rallied together with risky assets, supported by better sentiment on global growth, declines in US oil production, and increasing
indication of oil supply rationalization.
Long/Short Equity managers have cited hedge fund industry de-leveraging, particularly among large multi-manager funds, as a driver of poor year-to-date performance. Managers
believe that the simultaneous reduction of exposure led to selling of popular longs and buying of popular shorts, which in turn led to significant underperformance of common hedge
fund trades. There was also unprecedented volatility in fundamental factors (e.g. return on equity, growth, value), which persisted throughout the quarter despite a precipitous drop
in overall market volatility from mid-February. The factor volatility resulted in a particularly challenging environment for long/short investing and risk management. Many factors that
have historically led to outperformance and are consequently popular investment characteristics have underperformed significantly during the quarter. Finally, because of the steep
selloff in popular shorts prior to February 11, these names were squeezed in the second half of the quarter causing them to outperform the markets and detract significantly from
Long/Short Equity short books.
The turbulence in the first quarter was unusual and we expect it to prove temporary. We expect long/short investing to normalize as factor dislocations historically have tended to
reverse quickly. Once factor dislocations abate, we expect a favorable environment for long/short. The historically low interest rates over the past eight years likely contributed to a
misallocation of capital, creating a rising tide in the equity markets where it was difficult to separate good capital allocators from poor capital allocators. Long/Short Equity funds
have historically generated more alpha in high or rising rate environments than in low or declining rate environments. The FOMC rate hike in December 2015 and the likelihood of
further rate hikes should benefit Long/Short Equity performance. Moreover, with S&P 500 earnings showing negative growth, P/E ratios near a 12-year peak, and earnings inflated
by record levels of non-GAAP earnings adjustments, we expect choppy markets for the remainder of 2016. The resulting high volatility and dispersion should lead to a more
attractive environment for stock picking and Long/Short Equity strategies – particularly those with low net exposures.
Sub-Strategy Class
-2
Long / Short Equity
(HFRXEH)
Inception: Jan-98
Q1 2016
Outlook
12mth Outlook
-1
0
+1
+1
+2
+1
Trailing
12 Month
Benchmark
Perf
Annualized
Return
Ending
Mar 16
Since
Inception
-7.24%
+5.06%
Commentary
The first quarter was marked by unprecedented factor volatility as many funds
reduced gross exposure precipitously, which led to widespread negative alpha
from both longs and shorts. Historically, factor dislocations have reverted
quickly. We expect the underperformance to be temporary and for
fundamentals to resume driving stock returns, leading to a favorable
environment for long/short. The prospect of rising rates should lead to
increased volatility and lower correlation, which is positive for long/short
investing.
Source: K2, Bloomberg. As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding
information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future results.
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Long/Short Equity (continued)
Sub-Strategy Class
-2
-1
0
Equity Market Neutral
(HFRXEMN)
Inception: Jan-98
Activist
(HFRXACT)
Inception: Jan-05
Tech/Healthcare
(HFRXTH)
Inception: Jan-05
+1
+1
0
Europe
(HFRXEHE)
Inception: Apr-03
Asia
(HFRXASC)
Inception: Jan-04
Q1 2016
Outlook
12mth Outlook
+2
+1
+1
+1
0
0
+1
+1
+1
Trailing
12 Month
Benchmark
Perf
Annualized
Return
Ending
Mar 16
Since
Inception
+1.02%
+0.37%
-8.24%
+2.02%
-5.68%
Commentary
+1.18%
Once we see a reduction in factor volatility, we expect fundamental equity
market neutral strategies to benefit from strong performance as market
neutral funds redeploy capital in many of the dislocated names. Amidst a
higher volatility environment and with less of a beta tailwind in place, we
believe funds with lower net exposure are well positioned to outperform.
+6.93%
Although most activists are overweight the value factor, which held up
relatively well in the first quarter, they are also long-biased, concentrated, and
subject to crowding. Unfortunately, these latter three exposures overwhelmed
the value bias and led to underperformance. Although we believe activists
continue to gain influence, we worry that the beta tailwind that activists have
enjoyed since the financial crisis has begun to diminish. Consequently, we
have lowered our outlook for the activist strategy to neutral.
+0.33%
The depreciation of the euro and expanded quantitative easing should
continue to provide directional opportunities in European equities. At the
same time, factors including the slowdown in China and a decline in
commodity prices have disproportionately weighed on certain sectors. This
should lead to increased dispersion and an improved environment for
long/short investing in Europe.
+6.30%
Risk appetite for Asian equities remains depressed, and volatility in the Asian
markets is likely to continue. Policies focused on ROE and governance are
creating opportunities for shareholder engagement in Japan. Chinese policy
makers’ growing tolerance for a gradually weakening yuan, greater
acceptance of slower economic growth, and frequent interventions make
directional opportunities unattractive. China’s commitment to structural
economic reform favors long/short investing in the offshore markets.
+7.39%
While innovation in the Technology and Healthcare sectors should continue to
drive these two sectors, the hostile political environment in Healthcare in the
current election year could cap upside to that sector. In Technology,
innovation in areas such as cloud computing and virtual reality continues to
disrupt sectors and established players. In Healthcare, we are seeing the
benefits of the advancement of technology and innovation in the identification
and treatment of diseases, but the drug pricing debate and the justice
department’s limitations on inversion transactions could limit upside.
Source: K2, Bloomberg. As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding
information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future results.
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Relative Value
Summary of Current Market Views – 12 Month Forward Outlook
After a brief spike earlier in the year, equity market volatility has retrenched to recent lows, presenting attractive directional buying opportunities. Market dynamics and pricing of
certain volatility instruments indicate that fear remains elevated. Managers focused on volatility trading continue to benefit from their privileged position as market liquidity providers
even though active trading remains hamstrung by limited liquidity. Similar factors are at play in the convertible bond markets where weakness in credit and equities has driven
convertible bond valuations to levels of cheapness last seen in the summer of 2009. Liquidity and trading risks remain, causing managers to be cautious and selective in adding
exposures even at currently cheap levels. The outlook for the strategy remains favorable in absence of a sizable systemic shock to the capital markets. Fixed income arbitrage
remains the one relative value sub-strategy with a less favorable trading environment. While niche opportunities exist, the unpredictable central bank policies are likely to continue
adding volatility and uncertainty to the markets.
Sub-Strategy Class
-2
Fixed Income
(HFRXFSV)
Inception: Jan-05
Convertible Arbitrage
(HFRXCA)
Inception: Jan-98
Volatility Arbitrage
(HFRXVOL)
Inception: Jan-04
Q1 2016
Outlook
12mth Outlook
-1
0
+1
0
+2
0
+1
+1
+1
+1
Trailing
12 Month
Benchmark
Perf
Annualized
Return
Ending
Mar 16
Since
Inception
+3.42%
-2.70%
+8.65%
Commentary
+3.44%
While there are still areas of opportunity in certain strategies, headwinds from
the flat to negative interest rates across a significant portion of the global
sovereign bond markets are creating a new paradigm with respect to pricing
and trading of fixed income and related instruments. Constraints on balance
sheet usage, leverage, and financing costs are further hindering the strategy.
+0.95%
Elevated credit and equity market volatility has driven convertible bond
valuations to levels of cheapness last seen in 2009. While this makes for an
attractive entry point for the strategy with respect to pricing, volatility has had
a noticeable negative effect on the pace of new issuance. The outlook has
improved marginally, but managers continue to be cautious given the still
limited market liquidity and low interest rates, resulting in increased risks for
the strategy.
+4.54%
After a brief spike earlier in the quarter, implied volatility has returned to
depressed levels in many markets, most notably in the US. Managers in the
strategy were generally successful in managing exposures throughout this
period, once again highlighting the value of dynamic exposure management in
this mean-reverting asset class. At current low levels volatility presents an
attractive entry point for directional exposure, even as relative value trading
remains hamstrung to a degree by limited liquidity.
Source: K2, Bloomberg. As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding
information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future results.
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Event Driven
Summary of Current Market Views – 12 Month Forward Outlook
Despite a robust opportunity set, event driven managers have not been able to capture significant returns as the volatility in the equity markets has overwhelmed the catalysts.
However, the opportunity set is expected to remain healthy as many companies proactively pursue value enhancing actions to avoid being targeted by activists. Companies are also
under pressure to meet earnings targets, and the slow growth environment could lead to further consolidation. Merger arb spreads remain at attractive levels as the number of
deals, especially large ones, has overwhelmed demand due to prop desks closing and the terminations of many senior merger arbitrage analysts following the Shire-AbbVie deal
break in late 2014. However, the volatility of merger arb returns will likely be higher than historic averages due to the longer duration of current deals and heightened antitrust risks,
especially during an election cycle. Special situations have continued to disappoint investors as the market volatility has been a significant headwind. In addition, many event
names became crowded, which hurt the risk/reward profiles and increased volatility. Activists continue to gain influence but the “quick fixes,” such as buybacks, are playing a less
pronounced role. Activists will need more time for strategies to come to fruition when employing a restructuring approach as opposed to financial engineering.
Sub-Strategy Class
-2
-1
0
Merger Arbitrage
(HFRXMA)
Inception: Jan-98
Special Situations
(HFRXSS)
Inception: Jan-05
Activist
(HFRXACT)
Inception: Jan-05
Q1 2016
Outlook
12mth Outlook
+1
+1
0
0
+2
+1
0
+1
Trailing
12 Month
Benchmark
Perf
Annualized
Return
Ending
Mar 16
Since
Inception
+7.38%
-8.98%
+0.37%
Commentary
+5.47%
Merger arbitrage spreads are at attractive levels as a number of arb desks
have closed and as the volume of deals, especially mega-deals, remain close
to historic highs. However, volatility of returns will likely be significantly higher
than historic averages due to the longer duration of the current deal universe
in addition to heightened antitrust risks, especially during an election cycle.
+1.38%
Despite a robust opportunity set, special situations returns have been
disappointing as equity market volatility has overwhelmed the positive
catalysts. However, the opportunity set is expected to remain healthy as
many companies proactively pursue value enhancing actions (spin-offs,
buybacks, etc.) to avoid being targeted by activists. Consolidation themes
have expanded and include healthcare, telecom, media, and insurance.
+6.93%
Activists continue to gain influence. Despite some pushback from certain
companies, well-reasoned proposals continue to gain acceptance, and we
have seen several new campaigns announced recently. Tailwinds for
activism include large corporate cash positions and greater acceptance at the
board level. Strategic reviews are also driving corporate activity. Activists will
need more time for strategies to come to fruition when employing a
restructuring approach as opposed to financial engineering.
Source: K2, Bloomberg. As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding
information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future results.
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Credit
Summary of Current Market Views – 12 Month Forward Outlook
We remain positive on long/short credit and neutral on structured credit and distressed credit. Sharp selloffs followed by sharp rallies in corporate credit markets are providing
trading opportunities for long/short credit managers but have also increased the risk of getting whipsawed. Much of the price action is being driven by the Energy and Metals
sectors, which are underweighted sectors for most credit managers. Distressed and less liquid special situation names continue to underperform the broader market. Corporate
defaults are expected to increase from current low levels in the Energy and Metals sectors and perhaps even Retail, Broadcasting, and Telecom. In structured credit, yields are
getting more attractive as that sector has lagged the recent rally in high yield and equities. However, near term technicals remain challenging, particularly in CMBS mezzanine and
other lower rated sectors of the structured credit market. Private credit markets also look attractive given a higher illiquidity premium and demand for financing.
Sub-Strategy Class
-2
-1
0
Direct Lending
(HFRXDS)
Inception: Jan-98
Distressed
(HFRXDS)
Inception: Jan-98
+1
+1
0
Credit Long/Short
(HFRXFCO)
Inception: Jan-05
Structured Credit
(HFRXFAB)
Inception: Jan-05
Q1 2016
Outlook
12mth Outlook
+2
+1
0
+1
0
+1
0
Trailing 12
Month
Benchmark
Perf
Annualized
Return
Ending
Mar 16
Since
Inception
-12.88%
-12.88%
-1.03%
+2.11%
Commentary
+2.19%
Basel III and Volcker Rule have reduced banks’ ability to lend globally. With
limited credit available, particularly to smaller companies that cannot access
the syndicated debt market, investors have been able to command attractive
liquidity premiums for direct loans with strong covenant protection. While
attractive on a relative basis, however, yields are still not as high as they have
been historically on an absolute basis.
+2.19%
Distressed and less liquid special situation names continue to underperform
due to longer restructuring timelines and some hedge fund deleveraging.
Default rates are expected to pick up in late 2016, particularly in the Energy
and Metals & Mining sectors. In addition, spread widening has begun to extend
beyond Energy into other sectors. However, the maturity schedule has been
extended, and CCC price risk remains high due to commodity price volatility,
macro sentiment, and Fed headwinds.
+4.04%
Sharp selloffs followed by sharp rallies in the corporate credit markets are
providing trading opportunities for long/short credit managers but have also
increased the risk of getting whipsawed. Much of the price action is being
driven by the Energy and Metals sectors, which are underweighted sectors for
most credit managers. With the primary markets reopening after a several
month lull, managers should be able to take advantage of high quality new
issues offered at attractive levels in the next quarter.
+11.44%
Yields are becoming more attractive as structured credit has lagged the recent
rally in high yield and equities. New money is expected to flow into the space,
particularly in the CLO sector. RMBS fundamentals remain stable. However,
near term technicals remain challenging, particularly in legacy CMBS
mezzanine due to potential refinancing challenges and other lower rated
sectors where hedge funds remain the marginal buyer.
Source: K2, Bloomberg. As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding
information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future results.
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Quarterly Hedge Fund Strategy Outlook - Q2 2016
Macro
Summary of Current Market Views – 12 Month Forward Outlook
Outlook for developed markets is uncertain, presenting challenges for Discretionary Macro managers. Concerns include the effectiveness of unconventional monetary policy, China,
the price of oil, and the path of the Fed. Underlying many of these issues and general market anxiety is a realization that global growth is not robust, inflation remains low, and
central banks may no longer have the ammunition to support markets. Despite recent significant easing measures from the ECB and BOJ, both the yen and euro rallied
significantly, and European equity markets exhibited volatility as markets became concerned with the effect of negative interest rates on financials. Additionally, the Fed has sent
mixed messages with Yellen putting forth dovish rhetoric while some FOMC members have given more hawkish speeches. Meanwhile, US data has been somewhat mixed but
trending positively recently, further confusing markets on what to expect from the Fed. The opportunity set for emerging markets continues to be strong. Long risk assets in Brazil,
Mexico, and Greece are some of the common themes for Emerging Markets managers for the near- to medium-term. Brazil has become a focus for many managers as the
likelihood of a Dilma impeachment has dramatically increased, and many Brazilian assets continue to hold value opportunities. Managers believe the Dilma impeachment could
unlock value and lead to a broad re-pricing of Brazilian assets. China remains a risk to both emerging and developed markets price movements. Another round of China currency
devaluation could once again panic markets. Many managers hold short Chinese yuan positions as a hedge. While Systematic Macro managers have been whipsawed so far this
year, they are positioned to benefit from a rise in market volatility.
Sub-Strategy Class
-2
Discretionary
(HFRXDT)
Inception: Jan-05
Systematic
(HFRXSDV)
Inception: Jan-05
Q1 2016
Outlook
12mth Outlook
-1
0
+1
+2
0
+1
+1
Emerging Markets
(HFRXTEM)
Inception: Jan-05
+1
+2
+1
Trailing
12 Month
Benchmark
Perf
Annualized
Return
Ending
Mar 16
Since
Inception
-0.87%
-2.12%
+2.60%
Commentary
+5.62%
Managers are concerned about the effectiveness of unconventional monetary
policy, especially after the unexpected additional easing measures announced
by the ECB and the BOJ in the first quarter. The combination of those
concerns and the uncertain path of the Fed have contributed to a reduced
opportunity set for the strategy. Bearish opportunities exist in the UK,
particularly in the British pound, as the referendum on Britain’s membership in
the European Union is set for June.
+4.18%
A pickup in volatility across asset classes should continue to benefit the
strategy. Managers have lightened up positioning following a reversal in
trends in March which should allow managers to be nimble enough to take
advantage of whichever way markets trend from here. Managers who trade
systematically based on fundamentals continue to be challenged given the
low correlation between value and sentiment indicators.
+5.58%
The opportunity set in emerging markets is rich. Some of the major themes
include Brazil, Mexico, Greece, Venezuela, and Argentina. Brazil has become
a popular trade as markets expect a repricing of assets due to the probable
impeachment of President Dilma. Near-term catalyst exists for a further rally
in Greek bonds if the country’s upcoming review with the IMF is successfully
completed.
Source: K2, Bloomberg. As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding
information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future results.
A Franklin Templeton Investments company
13
Quarterly Hedge Fund Strategy Outlook - Q2 2016
Commodities
Summary of Current Market Views – 12 Month Forward Outlook
Being back in the “exploitation phase” of most commodity markets, price moves and volatility have increased. Our factors and feedback from managers lead us to believe that the
trading environment for discretionary commodity managers has substantially improved relative to previous years. We are most optimistic about the oil & products sub-strategy
where we see the low price of oil finally having its impact. There are a lot of moving parts, particularly on the supply-side of the equation. We maintain a favorable outlook for US
natural gas and Scandinavia power trading. There are early signs for metals market activities to rebound, but we decided to leave our outlook at neutral for the time being. The
biggest question mark has been the agriculture sub-strategy where our factors would indicate a rather unfavorable trading setup for this crop year. However, there is one big caveat,
which is the potential weather development of La Niña. This could change our outlook and create some volatility.
Sub-Strategy Class
-2
-1
0
+1
Oil & Products
(HFRXENEG)
Inception: Jan-07
US Natural Gas
(HFRXCOM)
Inception: Jan-05
Scandinavia Power
(HFRXCOM)
Inception: Jan-05
+2
+2
Metals
(HFRXMETL)
Inception: Jan-05
Agriculture
(HFRXAGRI)
Inception: Jan-05
Q1 2016
Outlook
12mth Outlook
0
+1
0
-1
+1
+1
+1
+1
+1
Trailing
12 Month
Benchmark
Perf
Annualized
Return
Ending
Mar 16
Since
Inception
-0.41%
-2.51%
+0.64%
-1.50%
-1.50%
Commentary
+1.94%
We are in the middle of the supply adjustment process. The longer oil prices
remain low, the more likely we are to see dramatic price changes in the future.
There are a lot of moving parts in the oil and product markets, which is
reflected through higher volatility. We maintain a favorable outlook for this
sub-strategy across flat price risks, term structure positioning, and volatility
trading.
+3.83%
For the time being, we keep our outlook at neutral. Dispersion measures and
volatility in metals remain at low levels. We expect a continuation of a rather
range-bound price behavior. There are signs of a rebound in activity from end
users. We could see a more favorable rating in the future.
+3.04%
Agriculture markets, particularly grains, continue to be mostly over-supplied.
Planned acreage across the grains is at healthy levels, and we expect new
crop production to be large if weather is normal. Hence, absolute price risk
and volatility will most likely remain low. However, the impact of La Niña could
potentially change our assessment.
+3.45%
The much warmer-than-normal winter is in the books, and the historic low
price environment is starting to have some ramifications on the supply side.
Assuming normal weather in the future, the demand picture could be much
stronger than in the more recent past, which should increase trading
opportunities.
+3.45%
We expect volatility to remain high with the market being pulled in two
directions (i.e. bearish on the front and bullish at the back given the current
fundamentals). We would expect this setup to provide good trading
opportunities but not without volatility.
Source: K2, Bloomberg. As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding
information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future results.
A Franklin Templeton Investments company
14
Quarterly Hedge Fund Strategy Outlook - Q2 2016
Insurance-Linked Securities
Summary of Current Market Views – 12 Month Forward Outlook
Cat bond new issuance expanded in Q1 relative to prior years, and the cat bond market yield improved on the margin. Overall performance within the strategy remains positive with
a low level of volatility as no material events impacted the market. Looking ahead, we expect reinsurance pricing to continue its year-over-year declines as experienced this January
and April. The rate of these declines is now slowing over a multi-period, which indicates the market may be bottoming. Some see this also through the slightly improved pricing in
the cat bond market, which can be a forward indicator of pricing for the industry. We are more cautious than some industry participants on a possible market bottom as the industry
remains well capitalized. At the same time, we do see “green shoots” appearing that may signal improving conditions. Examples include reinsurance demand increasing, no
material changes in terms and conditions versus the same period last year, and potentially higher interest rates. We continue to favor lower risk over higher risk strategies.
Interestingly enough, as higher yielding strategies continue to see valuations tighten with investors reaching for yield, we have also seen an improvement in lower risk valuations.
Sub-Strategy Class
-2
-1
Cat Bonds
(EHFI300)
Inception: Jan-06
0
+1
0
Private Transactions
(EHFI300)
Inception: Jan-06
Life Securitization
(EHFI300)
Inception: Jan-06
Q1 2016
Outlook
12mth Outlook
-1
-2
+2
-1
Trailing
12 Month
Benchmark
Perf
Annualized
Return
Ending
Mar 16
Since
Inception
+4.51%
Commentary
+6.43%
Cat bonds experienced marginal improvement in pricing and technicals. Our
upgrade is a near term view as some sponsors have decided not to renew cat
bonds in 2016 given more favorable pricing in the private transaction market.
This should act as a tail wind from a technical perspective in the second
quarter as there are more buyers than sellers.
-1
+4.51%
+6.43%
Similar to January 1, April 1 renewals are estimated to be down 7.5% versus
last year. April 1 is a much smaller renewal market focused on Japan risks.
Nonetheless, this data point is a reaffirming indicator that the rate of change in
price declines is slowing. In addition, we have seen increased demand for
reinsurance in certain markets.
-2
+4.51%
+6.43%
New issuance remains very light in this area of the market, and pricing
remains weak. Regulatory changes (Solvency II) may lead to faster growth in
this area, most likely with a longer-term investment horizon.
Retrocessional
(EHFI300)
Inception: Jan-06
-2
-2
+4.51%
+6.43%
We remain very cautious regarding retrocessional. Notably, one
retrocessional manager shared our view last quarter and returned capital to
investors. Many other retrocessional funds maintained or increased AUM.
Despite experiencing the largest decline in pricing and terms and conditions,
the growth in this sub-strategy indicates that investors continue to reach for
yield even when conditions are much less favorable (i.e. MLPs).
Industry Loss
Warranties
(EHFI300)
Inception: Jan-06
-2
-2
+4.51%
+6.43%
No material changes to our view in ILWs, but market moves have led to
additional hedging opportunities for our managers as they buy protection at
cheaper levels.
Source: K2, Bloomberg. As of March 31, 2016. Please see Important Disclosures and Disclaimers at the end of this presentation, which provide detailed information regarding
information presented herein and form an integral part hereof. Past performance is not indicative or a guarantee of future results.
A Franklin Templeton Investments company
15
Quarterly Hedge Fund Strategy Outlook - Q2 2016
Important Disclosures and Disclaimers
The K2 Research Outlook Scores are the opinions of the K2 Research 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 sub-strategy. Scores are determined by the K2 Research group based on a variety of factors deemed relevant to the analyst(s) covering the
strategy or sub-strategy 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 clients’ specific investment objectives, risk tolerance and other considerations. Therefore, a positive or negative score
may not 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 funds, which may be allocated across several K2 funds. This discussion is not meant to represent a discussion of the overall performance of any K2
fund. Specific performance information relating to K2 funds is available from K2. This presentation is confidential and should not be reproduced or distributed to any other person without the written consent of K2
Past performance is not indicative or a guarantee of future results. Additionally, there is the possibility for loss when investing in any K2 Fund.
Certain of the information contained herein may be based on information received from sources K2 considers reliable. K2 does not represent that such information is accurate or complete. Certain statements provided herein are based solely on
the opinions of K2 and are being provided for general information purposes only. Any opinions provided on economic trends should not be relied upon for investment decisions and are solely the opinion of K2. Certain of the information contained
herein 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, undue reliance should not be placed on such forward-looking
statements and information.
GLOSSARY
Alpha - A mathematical value indicating an investment's excess return relative to a benchmark. Measures a manager's value added relative to a passive strategy, independent of the market movement.
Correlation - The degree of interaction between the Fund’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 Fund’s
returns and the returns of the index.
Average Annualized Return – Annualized geometric average return comprised of compounded monthly returns
BENCHMARK DEFINITIONS
S&P 500 Index – The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s which consists of 500 stocks chosen for market size, liquidity, and industry group representation. Includes reinvestment of dividends.
HFR Monthly Indices (HFR) are equally weighted performance indexes, utilized by numerous hedge fund managers as a benchmark for their own hedge funds. The HFR are broken down into four main strategies, each with multiple sub-strategies.
All single-manager HFR Index constituents are included in the HFR Fund Weighted Composite, which accounts for over 2000 funds listed on the internal HFR Database. to the existing capital structure.
HFRX Event Driven Index (HFRXED) - Event Driven Managers maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress,
tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from most senior in the capital structure to most junior or subordinated, and frequently involve additional
derivative securities. Event Driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments. Investment theses are typically predicated on fundamental characteristics (as
opposed to quantitative), with the realization of the thesis predicated on a specific development exogenous to the existing capital structure.
HFRX Relative Value Arbitrage Index (HFRXRVA) - Relative Value investment managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities.
Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically
quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment
manager.
HFRX Macro Index (HFRXM) - Macro strategy managers which trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income,
hard currency and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top down and bottom up theses, quantitative and fundamental approaches and long and short term
holding periods. Although some strategies employ RV techniques, Macro strategies are distinct from RV strategies in that the primary investment thesis is predicated on predicted or future movements in the underlying instruments, rather than
realization of a valuation discrepancy between securities. In a similar way, while both Macro and equity hedge managers may hold equity securities, the overriding investment thesis is predicated on the impact movements in underlying
macroeconomic variables may have on security prices, as opposes to EH, in which the fundamental characteristics on the company are the most significant and integral to investment thesis
HFRX Equity Hedge Index (HFRXEH) - Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment
decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period,
concentrations of market capitalizations and valuation ranges of typical portfolios.
HFRX Equity Hedge EUR Index (HFRXEHE) - The HFRX Equity Hedge EUR Index is denominated in EUR. Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of
investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of
levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. Equity Hedge managers would typically maintain at least 50%, and may in some cases be substantially
entirely invested in equities, both long and short.
HFRX ED: Distressed/Restructuring Index (HFRXDS) - Distressed Restructuring Strategies employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at
significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings. Managers are typically actively involved with the
management of these companies, frequently involved on creditors' committees in negotiating the exchange of securities for alternative obligations, either swaps of debt, equity or hybrid securities.
16
A Franklin Templeton Investments company
Quarterly Hedge Fund Strategy Outlook - Q2 2016
Important Disclosures and Disclaimers
BENCHMARK DEFINITIONS (continued)
HFRX EH: Equity Market Neutral Index (HFRXEMN) - Equity Market Neutral strategies employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between
securities, select securities for purchase and sale. These can include both Factor-based and Statistical Arbitrage/Trading strategies. Factor-based investment strategies include strategies in which the investment thesis is predicated on the
systematic analysis of common relationships between securities. In many but not all cases, portfolios are constructed to be neutral to one or multiple variables, such as broader equity markets in dollar or beta terms, and leverage is frequently
employed to enhance the return profile of the positions identified. Statistical Arbitrage/Trading strategies consist of strategies in which the investment thesis is predicated on exploiting pricing anomalies which may occur as a function of expected
mean reversion inherent in security prices; high frequency techniques may be employed and trading strategies may also be employed on the basis on technical analysis or opportunistically to exploit new information the investment manager believes
has not been fully, completely or accurately discounted into current security prices.
HFRX Activist Index (HFRXACT) - Activist strategies may obtain or attempt to obtain representation of the company's board of directors in an effort to impact the firm's policies or strategic direction and in some cases may advocate activities such
as division or asset sales, partial or complete corporate divestiture, dividend or share buybacks, and changes in management. Strategies employ an investment process primarily focused on opportunities in equity and equity related instruments of
companies which are currently or prospectively engaged in a corporate transaction, security issuance/repurchase, asset sales, division spin-off or other catalyst oriented situation.
HFRX Commodity Index (HFRXCOM) - Commodity strategies include both discretionary and systematic commodity strategies. Systematic commodity have investment processes typically as function of mathematical, algorithmic and technical
models, with little or no influence of individuals over the portfolio positioning. Strategies employ an investment process designed to identify opportunities in markets exhibiting trending or momentum characteristics across commodity assets classes,
frequently with related ancillary exposure in commodity sensitive equities or other derivative instruments. Strategies typically employ quantitative process which focus on statistically robust or technical patterns in the return series of the asset, and
typically focus on highly liquid instruments and maintain shorter holding periods than either discretionary or mean reverting strategies.
HFRX Asia Composite Hedge Fund Index (HFRXASC) - HFRX Asia Composite Index is designed to reflect the performance of the complete Asian hedge fund universe by an asset weighted allocation to the following: HFRX Asia Ex Japan Index,
HFRX Asia w/ Japan index, and HFRX Japan Index.
HFRX EH: Sector - Technology/Healthcare Index (HFRXTH) - Technology/Healthcare strategies employ investment processes designed to identify opportunities in securities in specific niche areas of the market in which the Manager maintain a
level of expertise which exceeds that of a market generalist in identifying opportunities in companies engaged in all development, production and application of technology, biotechnology and as related to production of pharmaceuticals and
healthcare industry. Though some diversity exists as a across sub-strategy, strategies implicitly exhibit some characteristic sensitivity to broader growth trends, or in the case of the later, developments specific to the Healthcare industry.
HFRX RV: FI– Sovereign Index: Fixed Income (HFRXFSV) - Sovereign includes strategies in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components of the spread is a
sovereign fixed income instrument. Strategies employ an investment process designed to isolate attractive opportunities between a variety of fixed income instruments, typically realizing an attractive spread between multiple sovereign bonds or
between a corporate and risk free government bond. Fixed Income Sovereign typically employ multiple investment processes including both quantitative and fundamental discretionary approaches and relative to other Relative Value Arbitrage substrategies, these have the most significant top-down macro influences, relative to the more idiosyncratic fundamental approaches employed. RV: Fixed Income: Sovereign funds would typically have a minimum of 50% exposure to global sovereign
fixed income markets, but characteristically maintain lower net exposure than similar strategies in Macro: Multi-Strategy sub-strategy.
HFRX RV: Fixed Income-Convertible Arbitrage Index (HFRXCA) - Convertible Arbitrage includes strategies in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components
of the spread is a convertible fixed income instrument. Strategies employ an investment process designed to isolate attractive opportunities between the price of a convertible security and the price of a non-convertible security, typically of the same
issuer. Convertible arbitrage positions maintain characteristic sensitivities to credit quality the issuer, implied and realized volatility of the underlying instruments, levels of interest rates and the valuation of the issuer’s equity, among other more
general market and idiosyncratic sensitivities.
HFRX RV: Volatility Index (HFRXVOL) - Volatility strategies trade volatility as an asset class, employing arbitrage, directional, market neutral or a mix of types of strategies, and include exposures which can be long, short, neutral or variable to the
direction of implied volatility, and can include both listed and unlisted instruments. Directional volatility strategies maintain exposure to the direction of implied volatility of a particular asset or, more generally, to the trend of implied volatility in broader
asset classes. Arbitrage strategies employ an investment process designed to isolate opportunities between the price of multiple options or instruments containing implicit optionality. Volatility arbitrage positions typically maintain characteristic
sensitivities to levels of implied and realized volatility, levels of interest rates and the valuation of the issuer's equity, among other more general market and idiosyncratic sensitivities.
HFRX ED: Merger Arbitrage Index (HFRXMA) - Merger Arbitrage strategies which employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate
transaction. Merger Arbitrage involves primarily announced transactions, typically with limited or no exposure to situations which pre-, post-date or situations in which no formal announcement is expected to occur. Opportunities are frequently
presented in cross border, collared and international transactions which incorporate multiple geographic regulatory institutions, with typically involve minimal exposure to corporate credits.
HFRX Special Situations Index (HFRXSS) - Special Situations: Strategies employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate
transaction, security issuance/repurchase, asset sales, division spin-off or other catalyst oriented situation. These involve both announced transactions as well as situations which pre-, post-date or situations in which no formal announcement is
expected to occur. Strategies employ an investment process focusing broadly on a wide spectrum of corporate life cycle investing, including but not limited to distressed, bankruptcy and post bankruptcy security issuance, announced acquisitions
and corporate division spin-offs, asset sales and other security issuance impacting an individual capital structure focusing primarily on situations identified via fundamental research which are likely to result in a corporate transactions or other
realization of shareholder value through the occurrence of some identifiable catalyst. Strategies effectively employ primarily equity (greater than 60%) but also corporate debt exposure, and in general focus more broadly on post-bankruptcy equity
exposure and exit of restructuring proceedings.
17
A Franklin Templeton Investments company
Quarterly Hedge Fund Strategy Outlook - Q2 2016
Important Disclosures and Disclaimers
BENCHMARK DEFINITIONS (continued)
HFRX RV: FI – Asset Backed Index (HFRXFAB) - Fixed Income - Asset Backed includes strategies in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components of the
spread is a fixed income instrument backed physical collateral or other financial obligations (loans, credit cards) other than those of a specific corporation. Strategies employ an investment process designed to isolate attractive opportunities between
a variety of fixed income instruments specifically securitized by collateral commitments which frequently include loans, pools and portfolios of loans, receivables, real estate, machinery or other tangible financial commitments. Investment thesis may
be predicated on an attractive spread given the nature and quality of the collateral, the liquidity characteristics of the underlying instruments and on issuance and trends in collateralized fixed income instruments, broadly speaking. In many cases,
investment managers hedge, limit or offset interest rate exposure in the interest of isolating the risk of the position to strictly the yield disparity of the instrument relative to the lower risk instruments.
HFRX RV: Fixed Income-Corporate Index (HFRXFCO) - Fixed Income - Corporate includes strategies in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components of the
spread is a corporate fixed income instrument. Strategies employ an investment process designed to isolate attractive opportunities between a variety of fixed income instruments, typically realizing an attractive spread between multiple corporate
bonds or between a corporate and risk free government bond. Fixed Income - Corporate strategies differ from Event Driven: Credit Arbitrage in that the former more typically involve more general market hedges which may vary in the degree to
which they limit fixed income market exposure, while the later typically involve arbitrage positions with little or no net credit market exposure, but are predicated on specific, anticipated idiosyncratic developments.
HFRX Discretionary Thematic Index (HFRXDT) - Discretionary Thematic strategies are primarily reliant on the evaluation of market data, relationships and influences, as interpreted by an individual or group of individuals who make decisions on
portfolio positions; strategies employ an investment process most heavily influenced by top down analysis of macroeconomic variables. Investment Managers may trade actively in developed and emerging markets, focusing on both absolute and
relative levels on equity markets, interest rates/fixed income markets, currency and commodity markets; frequently employing spread trades to isolate a differential between instrument identified by the Investment Manager to be inconsistent with
expected value. Portfolio positions typically are predicated on the evolution of investment themes the Manager expect to materialize over a relevant time frame, which in many cases contain contrarian or volatility focused components.
HFRX Macro: Systematic Diversified Index (HFRXSDV) - Systematic Diversified strategies have investment processes typically as function of mathematical, algorithmic and technical models, with little or no influence of individuals over the
portfolio positioning. Strategies which employ an investment process designed to identify opportunities in markets exhibiting trending or momentum characteristics across individual instruments or asset classes. Strategies typically employ
quantitative process which focus on statistically robust or technical patterns in the return series of the asset, and typically focus on highly liquid instruments and maintain shorter holding periods than either discretionary or mean reverting strategies.
Although some strategies seek to employ counter trend models, strategies benefit most from an environment characterized by persistent, discernible trending behavior. Systematic Diversified strategies typically would expect to have no greater than
35% of portfolio in either dedicated currency or commodity exposures over a given market cycle.
HFRX Emerging Markets Index (HFRXTEM) - HFRX Total Emerging Market Index covers all 5 emerging markets: Asia Ex Japan, Russia/East Europe, Latin America, MENA, and Multi-Emerging market. 15 constituent funds are composed of
3 most representative funds are chosen in each region and equally weighing every region.
HFRX Commodity: Energy Index (HFRXENEG) - Macro: Commodity: Energy strategies are reliant on the evaluation of market data, relationships and influences as they pertain primarily to Energy commodity markets focusing primarily on
positions in Crude Oil, Natural Gas and other Petroleum products. Portfolio investment process can be predicated on fundamental, systematic or technical analysis, and strategies typically invest in both Emerging and Developed Markets.
HFRX Commodity: Metals Index (HFRXMETL) - Macro: Commodity: Metals strategies are reliant on the evaluation of market data, relationships and influences as they pertain primarily to Hard Commodity markets focusing primarily on positions in
Metals (Gold, Silver, Platinum, etc). Portfolio investment process can be predicated on fundamental, systematic or technical analysis, and strategies typically invest in both Emerging and Developed Markets
HFRX Commodity: Agriculture Index (HFRXAGRI) - Macro: Commodity: Agricultural strategies are reliant on the evaluation of market data, relationships and influences as they pertain primarily to Soft Commodity markets focusing primarily on
positions in grains (wheat, soybeans, corn, etc.) or livestock markets. Portfolio the investment process can be predicated on fundamental, systematic or technical analysis, and Agricultural strategies typically invest in both Emerging and Developed
Markets.
Eurekahedge ILS Advisers Index (EHFI300) - The Eurekahedge ILS Advisers Index is an equally weighted index of hedge funds that explicitly allocate to insurance linked investments and have at least 70% of their portfolio invested in non-life risk
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A Franklin Templeton Investments company
Quarterly Hedge Fund Strategy Outlook - Q2 2016
Important Disclosures and Disclaimers
RISK CONSIDERATIONS
Investments in alternative investment strategies and hedge funds (collectively, “Alternative Investments”) are speculative investments, entail significant risk and should not be considered a complete investment program. 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.
Alternative Investments are generally not 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. Investors in Alternative Investments will incur direct asset-based fees and expenses and, for certain Alternative Investments such as funds of hedge funds, additional
indirect fees, expenses and asset-based compensation of investment funds in which these Alternative Investments invest.
DISCLAIMERS
This presentation shall not constitute an offer to sell or a solicitation of an offer to buy an interest in any of the funds advised by K2. Such offer may only be made at the time a qualified offeree (as determined by K2 and the applicable K2 Fund in
their sole discretion) receives from K2 a Confidential Private Offering Memorandum describing an offering. This material does not constitute investment advice with respect to an investment in any security or other interest in any K2 Fund. Any
information herein regarding K2 Funds should not be regarded as providing any assurance that any such K2 Fund will continue to have the features, attributes and qualities described herein as of any subsequent date and is not a guarantee of future
results.
THIS MATERIAL DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS MATERIAL TO A PROSPECTIVE INVESTOR IN ANY K2 FUND. AN INVESTOR CONSIDERING INVESTING IN A K2 FUND SHOULD CAREFULLY CONSIDER
ALL OF THE TERMS GOVERNING AN INVESTMENT THEREIN INCLUDING INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES, WHICH ARE CONTAINED IN ITS CONFIDENTIAL PRIVATE OFFERING MEMORANDUM.
THE CONFIDENTIAL PRIVATE OFFERING MEMORANDUM OF SUCH FUND SHOULD BE CAREFULLY READ AND UNDERSTOOD BEFORE INVESTING.
THIS PRESENTATION DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR TO ANY PERSON WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
19
A Franklin Templeton Investments company