K2 ADVISORS, L.L.C.

Kelsey Biggers

Hedge Fund Investing: Then and Now

September 2009 Confidential Presentation

This Presentation is provided to you on a confidential basis for informational purposes only and 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 Advisors, L.L.C. Such offer may only be made at the time a qualified offeree receives from K2 Advisors, L.L.C. a Confidential Private Offering Memorandum describing the offer. This Presentation may not be copied, loaned or distributed to any other person without the consent of K2 Advisors, L.L.C.

The source and reactions to a credit crisis

Disparate factors combine to create the circumstances for the crisis
Qualifications for mortgages relaxed as home values soar Interest rates at historically low levels since 2001 Rating agencies underpin mortgage-back securities Mortgages bundled, securitized and sold globally Leverage increased throughout the financial system

Governments, banks and companies act aggressively to unfreeze credit, increase liquidity and de-leverage US Treasury
Tax rebates Bailout package Fannie May Freddie Mac conservatorship

Billions
$250 $700 $200

Federal Reserve
Loan to JP Morgan to acquire Bear Stearns Loan to AIG for 85 percent stake Discount window lending Commercial paper lending Underwriting money market funds $30 $96 $200 pending 3,000 $1,800

European and Asia Central banks infuse capital

1

Partial sum of commitments

$6.276 Trillion

2008
January

Timeline of the Global Credit Crisis

2007
March

Global stock market falls hardest since Sept 2001 Fed cuts rates 75 bps - largest in 25 years MBIA loses $2.3B on sub-prime World Bank predicts slow growth Market recovers from early loses Fed makes $200B available to banks to improve liquidity Bear Stearns in fire-sale to JP Morgan Fed makes weekend % rate cut. $250 billion US tax rebates begin mailing IMF warns of $1 trillion in credit-related losses FBI arrests 406 people for mortgage-related fraud 2 Bear Stearns workers face criminal charges Qatar buys 7.7 % of Barclays Initial U.S. support for Fannie Mae and Freddie Mac holders of $ 5 trillion in mortgage credit IndyMac declares Chapter 11in 2nd largest bank failure in U.S. history U.S. home prices decline 15 % Unemployment hits 6.1 % Fannie and Freddie taken over by U.S Lehman Brother Collapses Buffet buys Goldman Sachs, GE stakes Merrill Lynch in fire sale to Bank of America Fed lends $ 85 Billion to AIG, takes 80% ownership Congress fails to pass $700 billion bailout of banks $700 billion approved for bailout to Treasury Major developed countries cut rates in unprecedented coordinated action Markets crash worldwide, partial recovery U.K. government invests 50B in UK banks Fed funds commercial paper market U.S. government invest $250 billion in US banks Treasury abandons plan to buy troubled assets, instead invests to recapitalize banks  Group of 20 meet in Washington to coordinate response Treasury gives Citigroup $20 Billion bringing total to $45 Billion As its stock falls 60% in one week  Fed pledges $800 Billion to shore up financial system of which $600 billion goes to back up Fannie and Freddie mortgages S&P falls 7.43 % for the month Belgium government resigns after Fortis Nationalization Madoff arrested in $50 billion ponzi scheme Automakers testify in Congress asking $34 billion in loans S&P ends year down over 38 % HFRI Down 18+%

The Before Years

April April July New Century Financial Sub-prime lender files Chapter 11 2 Bear Stearns hedge funds fold July June

The After Time

August BNP ParibusFreezes 2 funds citing complete evaporation of liquidity ECB pumps 85B Euro into System German bank Sachsen facing collapse is sold September

September

Fed cuts 50 bps to 4.75 Depositors run on UK Bank Northern Rock Libor spikes to 6.8% as banks fear lending to other banks German lender IK Bloses 1B in US sub-prime Major losses emerge

October

October

UBS $3.4 B Merrill Lynch$ 7.9 B Citigroup initial $3.1 B goes to $40 B CEOs at Merrill and Citibank resign

November

December

Global Institutions Coordinate help White House plans help for 1 million homeowners facing foreclosure Bank of England cuts rates Fed and 5 central banks offer Billions in loans to banks December Rating agencies downgrade credit Insurers.

S&P 500 Index: 1042.73

1,800 1,600 1,400 1,200

1091.82 1,000 800 600 400 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

VIX Index - S$P 500 Implied Volatility: 24.15

90.0 80.0 70.0 60.0 50.0 40.0 30.0

21.21

20.0 10.0

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09

Goldman Sachs Commodity Index: 4094.70

11,500 10,500 9,500 8,500 7,500 6,500 5,500

4285.76

4,500 3,500 2,500 1,500

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09

Single B Credit Spreads: 692.27

1,400 1,200 1,000 800 600

458.24

400 200

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09

The Before Years and the After Time

2006
S&P Annual Return S&P Volatility +13.52% 5.70%

2008
S&P Annual Return S&P Volatility -38.49% 20.99%

HFR Annual Return HFR Volatility

+12.89% 4.70%

HFR Annual Return HFR Volatility

-19.03% 9.70%

95 % of the return with 82 % of the volatility

46 % of the return with 44 % of the volatility

 Hedge Fund Investors Focused on

 Hedge Fund Investors Focused on

Market risk Leverage Capacity

Co-investors risk Liquidity Counter-party Regulations Operational Due Diligence Fat tail events (Black Swan)

Future of Hedge Fund Investing

 Fewer, but stronger players  Hedge fund industry may be cleansed of weaker players

Small funds under $25 million European funds

 Tighter credit will negatively impact highly leveraged strategies

(LIBOR +1000) Negative impact on higher leveraged strategies

Fixed Income Arbitrage Global Macro Convertible Arbitrage Relative Value Quantitative Long/Short  Some strategies will have enhanced opportunities coming out of crisis

A great environment for active management Long/short equity as a equity allocation Distressed debt Specialist credit
 More accommodation of investor needs

Transparency Capacity Fees

 Potentially beneficial regulatory reform (also potentially harmful)

Clearance for complex instruments SEC registration

Hedge Funds, while vulnerable to crisis, still deliver superior risk-adjusted return
 Hedge fund strategies in the aggregate, as represented below by the HFRI Fund Weighted Composite Index,

have delivered significant outperformance compared to Equities and High Yield bonds with lower drawdowns
1000% 900% 800% Cu mulative Return 700% 600% ` 500% 400% 300% 200% 100% 0% 1990 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

865%

427% 349%

-10% Historical Drawdowns

-20% ` -30%

-40%

HFRI Fund Weighted Composite Index Annualized 8% Return S&P 500 DRI Merrill Lynch High Yield Master II
Source: HFR, S&P, Merrill Lynch Data through July 2008.

-50%

Past performance is not indicative or a guarantee of future results. Please see important disclosures and disclaimers at the end of the presentation.