Liquid Alternatives Challenges and Opportunities

12/1/2003 4/1/2004 8/1/2004 12/1/2004 4/1/2005 8/1/2005 12/1/2005 4/1/2006 8/1/2006 12/1/2006 4/1/2007 8/1/2007 12/1/2007 4/1/2008 8/1/2008 12/1/2008 4/1/2009 8/1/2009 12/1/2009 4/1/2010 8/1/2010 12/1/2010 4/1/2011 8/1/2011 12/1/2011 4/1/2012 8/1/2012 12/1/2012 4/1/2013 8/1/2013 12/1/2013 4/1/2014 8/1/2014 12/1/2014 4/1/2015 8/1/2015 12/1/2015 4/1/2016 8/1/2016 12/1/2016 4/1/2017 8/1/2017 Rates Matter for Alternatives Hedge Fund Index Returns vs. U.S. 10-Year Yield (15-Year Window) 14.0% 6.0% 12.0% 5.0% 10.0% 4.0% 8.0% 3.0% 6.0% 2.0% 4.0% 2.0% 1.0% 0.0% 0.0% 2 Source: Morningstar HF Return - Left Axis 10-Year Yield - Right Axis

12/2003 4/2004 8/2004 12/2004 4/2005 8/2005 12/2005 4/2006 8/2006 12/2006 4/2007 8/2007 12/2007 4/2008 8/2008 12/2008 4/2009 8/2009 12/2009 4/2010 8/2010 12/2010 4/2011 8/2011 12/2011 4/2012 8/2012 12/2012 4/2013 8/2013 12/2013 4/2014 8/2014 12/2014 4/2015 8/2015 12/2015 4/2016 8/2016 12/2016 4/2017 8/2017 Long-Term Returns Have Eroded 60/40 Portfolio vs. Credit Suisse Hedge Fund Index 14% 12% 10% 8% 6% 4% 2% 0% 3 HF 10 YR Roll 60/40 10 YR Rolling Return

Liquid Alternative Mutual Funds Continue to Grow Despite the weakness in long-term returns, liquid alts have experienced reasonable growth. 250,000,000,000 200,000,000,000 $ Billions 150,000,000,000 100,000,000,000 Total Net Assets 50,000,000,000 0 4

Some Alternatives Have Grown Faster Than Others Asset Growth by Morningstar Category 60,000,000,000 50,000,000,000 40,000,000,000 $ Billions 30,000,000,000 20,000,000,000 Long Short Credit Long Short Equity Managed Futures Market Neutral Multialternative Multicurrency Options-Based 10,000,000,000 0 5

Some Alternatives Categories Are Seeing Outflows Estimated net flows, organic growth, and total assets as of January 2018. Organic Growth Rate % (TTM) Total Assets ($Bil) Morningstar Category 1-Mo QTD YTD 1-Yr US Fund Multialternative 1,083 1,083 1,083 2,889 5.77 56 US Fund Long-Short Equity 992 992 992 2,942 8.84 41 US Fund Managed Futures (116) (116) (116) (2,162) (8.52) 25 US Fund Market Neutral 331 331 331 414 2.01 22 US Fund Options-Based 276 276 276 1,330 8.70 17 US Fund Long-Short Credit (8) (8) (8) (480) (6.26) 7 US Fund Multicurrency (14) (14) (14) 325 5.53 7 Copyright 2018 Morningstar, Inc. 6

Performance Improves for Alts Categories in 2017, With Some Unexpected Results in 2018 Name 2017 Perf. 3 Year Ann. 5 year Ann. 5-Year Beta to 60/40 5 Year Beta to SPX Recent Sell-Off Jan 26th to Feb 8 5-year Sharpe 25-Year Sharpe 60% AGG- 40% VTI 10.4% 6.2% 7.3% 1.00 0.40-4.8% 1.63 US Fund Long-Short Equity 11.2% 5.8% 6.2% 1.02 0.51-6.3% 1.04 0.53 US Fund Options-Based 9.1% 5.4% 5.2% 0.88 0.42-8.1% 1.21 0.50 US Fund Multialternative 5.1% 2.0% 2.6% 0.66 0.27-4.0% 0.50 US Fund Managed Futures 3.0% 0.1% 3.8% 0.34 0.05-8.6% 0.25 US Fund Long-Short Credit 2.4% 1.7% 1.5% 0.38 0.14-0.9% 0.44 US Fund Market Neutral 2.4% 1.1% 1.2% 0.18 0.09-1.4% 0.99 0.27 US Fund Multicurrency 0.8% 0.5% -0.5% 0.32 0.11-0.4% -0.09-0.10 SPDR S&P 500 ETF 21.7% 14.5% 15.8% 2.03 1.00-10.1% 1.56 0.55 Average Beta 0.54 0.23 7

Alternatives Provided Some Downside Protection From Peak to Trough Alts category returns versus major asset-class performance Name Recent Market Turbulence from Jan 26 to Feb 8 CBOE Market Volatility (VIX) 201.44 US Dollar 1.3% US Fund Multicurrency -0.4% ishares 3-7 Year Treasury Bond ETF -0.4% US Fund Long-Short Credit -0.9% BBgBarc US Agg Bond TR USD -1.0% US Fund Market Neutral -1.4% BBgBarc High Yield Corporate TR USD -1.4% SPDR Gold Shares -2.8% US Fund Multialternative -4.0% US Fund Long-Short Equity -6.3% United States Oil -7.5% US Fund Options-based -8.1% US Fund Managed Futures -8.6% ishares MSCI Emerging Markets ETF -8.6% ishares Edge MSCI Min Vol USA ETF -9.1% S&P 500 TR USD -10.1% NASDAQ 100 TR USD -10.2% ishares Edge MSCI USA Value Fac tor ETF -10.2% ishares Edge MSCI USA Momentum Fc tr -10.3% SG Trend Index -11.9% Average Alts Category Performance -4.2% 8

Multialternative: Category Considerations and Medalist Performance (3-Year period ending January 2018) Category Considerations Roughly 0.3 average beta Most heterogeneous Global-macro return drivers Style-premium return drivers Other alternative betas Asset-allocation models Traditional fundamental long-short Hedge fund replication products Macro investing struggles Illiquidity and credit concerns Name Morningstar 3-Year Ann. Analyst Rating Return AQR Style Premia Alternative I Silver 7.6% Goldman Sachs Absolute Ret Trckr Instl Bronze 4.6% AQR Style Premia Alternative LV R6 Silver 4.4% Litman Gregory Masters Alt Strats Instl Bronze 3.6% AQR Multi-Strategy Alternative I Bronze 3.4% Principal Global Multi-Strategy Instl Bronze 3.2% WCM Alternatives Event-Driven Instl Bronze 2.5% GMO SGM Major Markets III Bronze 2.1% Dreyfus Global Real Return I Silver 1.7% JHancock Global Absolute Ret Strats NAV Bronze 0.9% William Blair Macro Allocation I Bronze 0.5% Multialternative Category Average 2.0% Morningstar Medalist Average 3.1% 9

Long-Short Equity: Category Considerations and Medalist Performance (3-Year period ending January 2018) Category Considerations Average beta 0.5 Pure company-specific risk Factor-based risk premia Risks other than single stock specific Often downside protection in mind Seek market dislocation Name Morningstar Analyst Rating 3-Year Ann. Return AQR Long-Short Equity I Bronze 15.72 Boston Partners Long/Short Equity Instl Bronze 9.82 Schwab Hedged Equity Bronze 8.34 Diamond Hill Long-Short I Bronze 7.47 Boston Partners Long/Short Rsrch Instl Silver 7.24 Boston Partners Global Long/Short Instl Bronze 6.38 Long-Short Equity Category Average 5.8% Morningstar Medalist Average 9.2% 10

Market Neutral: Category Considerations and Medalist Performance (3-Year period ending January 2018) Category Considerations Zero beta Factor long-short Merger spreads and deal volume Multiple dimensions in neutrality Low short rates are not good Subject to factor crash risk Leverage Name Morningstar Analyst Rating 3-year Ann. Return AQR Equity Market Neutral I Bronze 9.4% AQR Diversified Arbitrage I Bronze 2.9% Touchstone Merger Arbitrage Instl Bronze 2.7% AC Alternatives Market Neutral Val I Bronze 2.5% Arbitrage I Bronze 2.5% Merger Institutional Bronze 2.3% BlackRock Global Long/Short Equity Instl Bronze 1.3% Vanguard Market Neutral I Silver 1.2% Market-Neutral Category Average 1.1% Morningstar Medalist Average 3.1% 11

Managed Futures: Category Considerations and Medalist Performance (3-Year period ending January 2018) Category Considerations Zero beta with some spikes Systematic trend-followers dominate Time series momentum Volatile periods and max drawdown Margined derivative accounts, but not short vega Not a 100% hedge Must understand margin/equity ratio Name Morningstar Analyst Rating 3-Year Ann. Return American Beacon AHL Mgd Futs Strat Instl Bronze 2.2% Credit Suisse Managed Futs Strat I Bronze 1.2% Natixis ASG Managed Futures Strategy Y Bronze -0.5% Abbey Capital Futures Strategy I Bronze -0.5% AQR Managed Futures Strategy I Bronze -2.8% AQR Managed Futures Strategy HV I Bronze -4.9% Managed-Futures Category Average 0.1% Morningstar Medalist Average -0.9% 12

Options-Based: Category Considerations and Medalist Performance (3-Year period ending January 2018) Category Considerations Market beta ranges from -0.5 to 1.0 Systematic outcome-based strategies make up the core Consistent options-based strategies for qualification Very large dispersion year to date Watch for naked option sellers/tail risks!!! Look at daily returns! Similar to credit-sensitive bonds If you must, keep it small Name Morningstar Analyst Rating 3-year Ann. Return JPMorgan Hedged Equity I Silver 7.7% Gateway Y Silver 6.7% Swan Defined Risk I Bronze 4.7% AllianzGI Structured Return P Bronze 4.5% Options-Based Category Average 5.4% Morningstar Medalist Average 5.9% 13

Credit Long-Short and Multicurrency: Category Considerations Credit Long-Short Strategy No Morningstar Medalists here Duration-neutral portfolios, spread assets, and static hedges Compressed credit spreads, no external leverage Beware of derivatives and structured products internal leverage After a major credit dislocation, these funds may provide better value Small doses to add cash plus yield, but tail risks may be hidden Multicurrency Highly heterogeneous The core is the carry trade, a globalmacro risk factor Invest in higher-yielding currencies against the U.S. dollar High correlation to equities Other players may be net long or short the U.S. dollar 14

Alternatives Charge More Than Double for Institutional Share Classes 15 Calculated Average Net Expense Ratio Distribution Category Median Calculated Average Net Expense Ratio Distribution Category Median Distribution Group - Alternatives Distribution Group - Traditional Equity Alternative Defer Load 2.31 2.20 Small Cap Deferred Load 2.03 2.02 Equity Alternative Front Load 1.79 1.73 Small Cap Front Load 1.31 1.35 Equity Alternative Institutional 1.46 1.40 Small Cap Institutional 0.99 0.99 Equity Alternative Level Load 2.47 2.45 Small Cap Level Load 2.05 2.01 Equity Alternative No Load 1.61 1.50 Small Cap No Load 1.17 1.12 Equity Alternative Retirement, Large 1.18 1.25 Small Cap Retirement, Large 0.90 0.87 Equity Alternative Retirement, Medium 1.79 1.74 Small Cap Retirement, Medium 1.53 1.47 Equity Alternative Retirement, Small 2.20 2.20 Small Cap Retirement, Small 1.63 1.67 Managed Futures Defer Load 2.35 2.35 Intermediate-Term Bond Deferred Load 1.52 1.49 Managed Futures Front Load 2.04 1.94 Intermediate-Term Bond Front Load 0.83 0.85 Managed Futures Institutional 1.62 1.57 Intermediate-Term Bond Institutional 0.50 0.51 Managed Futures Level Load 2.66 2.69 Intermediate-Term Bond Level Load 1.53 1.49 Managed Futures No Load 1.86 1.91 Intermediate-Term Bond No Load 0.65 0.63 Managed Futures Retirement, Large 1.22 1.20 Intermediate-Term Bond Retirement, Large 0.48 0.49 Managed Futures Retirement, Medium 1.90 1.90 Intermediate-Term Bond Retirement, Medium 1.10 1.01 Multialternative Defer Load 2.07 2.08 Intermediate-Term Bond Retirement, Small 1.08 1.17 Multialternative Front Load 1.84 1.75 Large Cap Deferred Load 1.83 1.91 Multialternative Institutional 1.55 1.49 Large Cap Front Load 1.11 1.15 Multialternative Level Load 2.54 2.49 Large Cap Institutional 0.75 0.72 Multialternative No Load 1.73 1.60 Large Cap Level Load 1.89 1.78 Multialternative Retirement, Large 1.31 1.25 Large Cap No Load 0.90 0.87 Multialternative Retirement, Medium 1.87 1.72 Large Cap Retirement, Large 0.65 0.63 Multialternative Retirement, Small 2.24 2.24 Large Cap Retirement, Medium 1.32 1.22 Large Cap Retirement, Small 1.42 1.40 Institutional Average 1.55 0.75 Front Load (Class A) 1.89 1.08 Level Load (Class C) 2.56 1.82

Morningstar Fee Study Results Alternatives Fund Fees Have Gone Up 16

Share-Class-Related Flows (All Mutual Funds) Morningstar Direct Flows Data 17 All Share Class Types Name 1-Yr (Mil) Mkt Sh% Jan 2018 Mkt Sh% Jan 2017 Inst 328,669 33.14 31.49 Other 231,225 20.33 18.97 A (225,580) 13.35 15.41 No Load (133,216) 13.33 14.40 Retirement 170,098 7.12 5.90 Inv (28,249) 6.57 6.93 C (70,992) 2.55 3.28 Adv 3,133 1.29 1.33 S (7,154) 0.68 0.73 D (1,116) 0.43 0.36 N (1,362) 0.41 0.45 B 20,686 0.40 0.25 M (4,308) 0.35 0.42 Unclassified (312) 0.05 0.05 T (2,530) 0.00 0.02 Copyright 2018 Morningstar, Inc.

Concluding Remarks Rates matter for alternatives. Lower yields on cash holdings (managed futures, merger-arbitrage, credit long-short). Compressed credit spreads, option premiums, and overall risk premiums. More dislocations and more opportunities for alternative funds? Capacity-related considerations. Consolidation is not good for alternatives. The battle of bots versus humans. Increasing quantitative equity investing, alternative data, natural language processing. Overcrowding effects, Quant Quake of August 2007. A mix of traditional versus quantitative? Options-based strategies are complex, perhaps some are too complex!!! Be wary of naked option sellers. Time to be mindful of stock and bond correlations as rising rates can destabilize certain markets. Some alternative strategies may help. And finally, most alternatives are still too expensive for what they deliver. 18

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