Franklin K2 Alternative Strategies Fund NCSR Certified annual shareholder report (management investment company)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number_811-22641

__Franklin Alternative Strategies Funds

(Exact name of registrant as specified in charter)

One Franklin Parkway, San Mateo, CA 94403-1906

(Address of principal executive offices) (Zip code)

Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906

(Name and address of agent for service)

Registrant's telephone number, including area code: _650 312-2000

Date of fiscal year end: 5/31

Date of reporting period: _5/31/16

Item 1. Reports to Stockholders.

Annual Report
and Shareholder Letter
May 31, 2016

Franklin K2 Alternative Strategies Fund

A SERIES OF FRANKLIN ALTERNATIVE STRATEGIES FUNDS

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Contents
Annual Report
Franklin K2 Alternative Strategies Fund	3
Performance Summary	7
Your Fund’s Expenses	12
Consolidated Financial Highlights and Consolidated
Statement of Investments	14
Consolidated Financial Statements	75
Notes to Consolidated Financial Statements	79
Report of Independent Registered
Public Accounting Firm	95
Tax Information	96
Board Members and Officers	97
Shareholder Information	102

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Annual Report

Franklin K2 Alternative Strategies Fund

This annual report for Franklin K2 Alternative Strategies Fund covers the fiscal year ended May 31, 2016.

Your Fund’s Goal and Main Investments

The Fund seeks capital appreciation with lower volatility relative to the broad equity markets. The Fund seeks to achieve its investment goal by allocating its assets across multiple non-traditional or “alternative” strategies, including but not limited to relative value, long short equity, global macro and event driven. The Fund is structured as a multi-manager fund, meaning the Fund’s assets are managed by multiple investment managers (subadvisors), while the Fund’s investment manager retains overall responsibility for the Fund’s investments. The Fund may invest in a wide range of securities and other investments including, but not limited to: equity securities including common stocks, preferred stocks, convertible securities, rights and warrants, private and registered investment vehicles and exchange-traded funds (ETFs); and debt securities including bonds, notes, debentures, banker’s acceptances and commercial paper; loans and loan participations; and mortgage-backed or other asset-backed securities, including collateralized debt obligations; as well as derivatives, commodities and currencies.

Performance Overview

The Fund’s Class A shares had a -3.89% cumulative total return for the 12 months under review. For comparison, the Fund’s primary benchmark, the BofA Merrill Lynch 3-Month U.S. Treasury Bill (T-Bill) Index, which tracks the performance of short-term U.S. government securities with a remaining term to final maturity of less than three months, posted a +0.15% total return.¹Also for comparison, the Fund’s secondary benchmark, the HFRX Global Hedge Fund Index, which is designed to be representative of the overall composition of the hedge fund universe, had a -7.08% total return.²You can find more of the Fund’s performance data in the Performance Summary beginning on page 7.

*Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.

Economic and Market Overview

The global economy expanded moderately during the 12 months under review. Concerns about global economic growth, China’s slowing economy and tumbling stock market, declining commodity prices, geopolitical tensions in several regions, fear of the U.K.’s potential exit from the European Union (commonly referred to as Brexit) and uncertainty about the U.S. Federal Reserve’s (Fed’s) timing for raising interest rates contributed to stock market volatility. However, toward period-end, equity markets strengthened after the Fed’s decision to leave its federal funds target rate unchanged after raising it for the first time in nine years in December. Further helping global stocks were the Bank of Japan’s (BOJ’s) decision to cut interest rates, hopes of additional stimulus measures by global central banks, and finalization of a new debt deal for Greece.

1. Source: Morningstar.
2. Source: FactSet. Hedge Fund Research, Inc. – www.hedgefundresearch.com. The HFRX Global Hedge Fund Index is being used under license from Hedge Fund
Research, Inc., which does not endorse or approve of any of the contents of this report.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Consolidated Statement of Investments (SOI).
The Consolidated SOI begins on page 19.

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An improvement in metal prices and signs of stabilization in crude oil prices also improved investor sentiment. For the reporting period, oil prices declined sharply, largely due to strong global supply, and other commodity prices also witnessed a fall for most of the period but partially recovered toward period-end. In this environment, global developed market stocks, as measured by the MSCI World Index, declined during the period.

U.S. economic growth was mixed during the 12 months under review. After strengthening in 2015’s second quarter, the economy moderated in the third and fourth quarters. Growth slowed further in 2016’s first quarter as non-residential investments, private inventory investments and federal government spending declined, although the impact was partially offset by healthy consumer spending. After maintaining a near-zero interest rate for seven years to support the U.S. economy’s recovery, the Fed raised its target range for the federal funds rate to 0.25%–0.50% at its December meeting but kept interest rates unchanged through period-end. At its April meeting, the Fed indicated that its monetary policy remained accommodative, thus supporting further labor market improvement and progress toward its 2.0% inflation objective.

In Europe, U.K. economic growth moderated in 2016’s first quarter as production, construction and agriculture slowed, while services continued to grow. In the eurozone, stocks declined mainly due to China’s moderating economy, geopolitical tensions between Russia and Turkey, weak trade data and Brexit fears toward period-end. However, the region generally benefited during the period from lower oil prices, a weaker euro that supported exports, the European Central Bank’s (ECB’s) ongoing accommodative policy and Greece’s debt deal settlement. Also boosting investor sentiments were comments by the ECB in May about its work on new proposals for dealing with non-performing loans. The eurozone’s annual inflation rate rose for most of the period but declined toward period-end.

Japan’s economy contracted in 2015’s fourth quarter as private consumption and housing investment declined. However, the economy grew in 2016’s first quarter as government and private consumption rebounded. The BOJ took several actions during the period, including lowering its inflation forecasts and reorganizing its stimulus program to increase exposure to long-term government bonds and exchange-traded funds. In January, the BOJ introduced a negative interest rate on excess reserves kept by financial institutions with the central bank in an effort to boost lending and support inflation. However, toward the period-end, it decided against further stimulus measures and kept interest rates unchanged. In April, the BOJ further reduced its gross domestic product and inflation forecasts for fiscal year 2016.

In emerging markets, economic growth generally moderated while retreating in some countries. China’s economy grew in the fourth quarter of 2015 and the first quarter of 2016 at an annual rate that was largely in line with the government’s target. Russia’s 2015 economic growth contracted because of declining oil prices and a weakening Russian ruble. Brazil’s economy shrank during the reporting period amid lower oil prices, weakness in the mining and services sectors, and the country’s ongoing political turmoil, including the temporary suspension of its president in May pending an impeachment trial. The People’s Bank of China cut its benchmark interest rate and the cash reserve requirement ratio for the country’s banks several times and lowered its currency valuation in May to the lowest level since March 2011. Elsewhere, the Reserve Bank of India slashed interest rates to the lowest in five years and took steps to increase monetary liquidity. In the recent global environment, emerging market stocks overall, as measured by the MSCI Emerging Markets Index, fell significantly during the 12-month period.

Investment Strategy

We manage the Fund using a multi-manager approach. While we are responsible for the Fund’s overall investments, we allocate assets to multiple subadvisors, each of whom independently manages a separate portion of the Fund’s portfolio in accordance with some or all of the following strategies: long short equity, relative value, event driven and global macro. We allocate the Fund’s assets among these strategies utilizing a top-down approach, generating the Fund’s strategy weightings by taking into account market conditions, risk factors, diversification, liquidity, transparency, and availability of various subadvisors and other investment options, among other things. The allocations to specific subadvisors may change from time to time based upon our assessment of their correlations to various markets and to each other, their risk profiles and return expectations. Long short equity strategies generally seek to produce returns from investments in the equity markets by taking long and short positions in stocks and common stock indexes (through the use of derivatives or ETFs). Relative value strategies encompass a wide range of investment techniques that are intended to profit from pricing inefficiencies. Event driven strategies generally invest in securities of companies undergoing significant corporate events. Global macro strategies generally focus on macroeconomic opportunities across numerous markets and investments.

The Fund may take long and/or short positions in a wide range of asset classes, including equities, fixed income, commodities and currencies, among others. Long positions benefit from an increase in the price of the underlying instrument or asset class, while short positions benefit from a decrease in that price. The Fund may use derivatives for hedging and nonhedging (investment) purposes. Such derivative investments may

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F R A N K L I N K 2 A L T E R N A T I V E S T R A T E G I E S F U N D

include futures contracts, swaps, options and currency forward contracts. The Fund may engage in active and frequent trading as part of its investment strategies.

What is a futures contract?

A futures contract is an agreement between the Fund and a
counterparty made through a U.S. or foreign futures exchange to
buy or sell an underlying instrument or asset at a specific price
on a future date.

What is a swap agreement?

A swap agreement, such as an equity total return swap, is a
contract between the Fund and a counterparty to exchange on a
future date the returns, or differentials in return, that would have
been earned or realized if a notional amount were invested in
specific instruments.

A credit default swap, or CDS, is an agreement between two
parties whereby the buyer receives credit protection from the
seller. The buyer makes periodic payments over the term of the
agreement in return for a payment by the seller in the event of a
default or other credit event.

An interest rate swap is an agreement between two parties to
exchange interest rate payment obligations, generally one
based on an interest rate fixed to maturity and the other based
on an interest rate that changes in accordance with changes in a
designated benchmark (for example, LIBOR, prime, commercial
paper or other benchmarks).

What is an option?

An option is a contract to buy or sell a specific financial product
known as the option s underlying instrument at a specific price.
The buyer of an option has the right, but not the obligation, to
buy or sell the underlying instrument at or until a specified
expiration date. Conversely, the seller (writer) of an option who
opens a transaction is obligated to buy or sell the underlying
instrument should the option holder exercise that right.

What is a currency forward contract?

A currency forward contract is an agreement between the Fund
and a counterparty to buy or sell a foreign currency in exchange
for another currency at a specific exchange rate on a
future date.

Manager s Discussion

During a challenging period for hedge fund managers, three of the four strategies in which the Fund s assets were allocated, long short equity, event driven and global macro, detracted from results for the period. In contrast, the relative value strategy helped returns. The Fund s overall performance was negative. In mid-May 2016, we implemented a conditional risk overlay strategy to seek to reduce downside equity exposure.

Subadvisors

5/31/16

Long Short Equity

Chilton Investment Company, LLC

Impala Asset Management, LLC

Jennison Associates, LLC

Portland Hill Capital LLP

Wellington Management Company, LLP

Relative Value

Basso Capital Management, L. P.

Chatham Asset Management, LLC

Lazard Asset Management, LLC

Loomis Sayles & Company, L. P.

Event Driven

P. Schoenfeld Asset Management, L. P.

York Registered Holdings, L. P.

Global Macro

Emso Asset Management Limited

Graham Capital Management, L. P.

What is a conditional risk overlay (CRO) strategy?
From time to time, the Fund s Investment Manager may imple-
ment its CRO Strategy, which seeks to neutralize certain market
sensitivities that may exist in the Fund. The CRO Strategy
involves investing in derivatives or other instruments in an effort
to provide a hedge against negative market events. When
implemented, the strategy will reduce the Fund s ability to bene-
fit from positive market movements.

The Fund s long short equity strategy subadvisors were Chilton Investment Company, Impala Asset Management, Jennison Associates, Portland Hill Capital and Wellington Management Company. Portland Hill was added to the Fund in April. Performance among subadvisors was spread out, as Wellington and Chilton generated gains, Jennison and Impala posted declines and Portland Hill had relatively flat performance.

Strengthening performance for technology-focused subadvisor Wellington was a long position in a developer of payment technology services, which reported above-expectation quarterly results. After previously completing an acquisition of an Australian-based payments company, the payment services provider started to record significant earnings growth within the Asia-Pacific region. For Chilton, a long position in an online-based furniture retailer helped performance, as the retailer disclosed a significant year-over-year improvement in direct retail gross sales during the post-Thanksgiving holiday period. Health-care focused subadvisor Jennison s performance was challenged by positions in several pharmaceutical and biotechnology companies, including a long position in a company whose application for a new muscular dystrophy

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FRANKLIN K2 ALTERNATIVE STRATEGIES FUND

treatment was rejected by the U.S. Food and Drug Administration. Industrials and basic materials positions tended to weigh on Impala. In industrials, one example was a long position in a European manufacturer of passenger cars and light commercial vehicles, which sold off along with industry peers on concerns relating to the outlook for global growth. The release of soft manufacturing data in China sparked fears relating to the extent of the slowdown in China, as the country remains a key market for European automotive companies. For Portland Hill, contributions from financial positions tended to be offset by negative results for communications holdings.

Our relative value strategy subadvisors were Basso Capital Management, Chatham Asset Management, Lazard Asset Management and Loomis Sayles & Company. The strategy’s positive performance reflected contributions from Basso, Chatham and Loomis, while Lazard had negative returns in the review period. In general, communications and health care positions tended to contribute to returns, while energy holdings weighed on results. One contributor for Basso was a copper producer, where the subadvisor holds a long convertible bond/ short stock position. This position benefited from the short stock side as the company downplayed a potential takeover, while the credit price was relatively unmoved. For Chatham, an American publishing company announced strong performance from some of its subsidiaries. Many short sellers in the issuer also were forced to cover their positions. Communications companies were a source of positive performance for Loomis. A position in direct-broadcast satellite services provider added value as the company reached an agreement in late 2015 with several major television affiliates. In contrast, a computer data storage manufacturer weighed on returns for Lazard. The stock was repriced with lower quality credit markets, and had an issue in early 2016 with its New York Stock Exchange listing.

The Fund’s event driven strategy subadvisors were P. Schoenfeld Asset Management (PSAM) and York Registered Holdings. York posted a decline in the review period, while PSAM provided a slight gain. Performance drivers for both subadvisors were diverse, with special situations equity positions suffering from increased equity market volatility over the period. Energy sector concerns weighed on several York positions. For example, a U.S. finance and leasing firm’s stock declined in January amid investor worries about the company’s exposure to oil and gas markets. However, both subadvisors benefited from successful completion of several merger situations. For PSAM, a position in a health care company focused on renal and hospital products benefited from news that the company had named a new chief executive officer. In February, the company announced fourth-quarter 2015 income that exceeded the company’s previous guidance.

Graham Capital Management and Emso Asset Management represented our global macro exposure. Although Emso provided positive results, Graham declined in the period, and the strategy overall had negative performance. Graham’s returns were challenged by long U.S. dollar positioning against European currencies. For Emso, credit securities rallied in emerging markets for much of year-to-date 2016. Argentinian sovereign government debt benefited returns as the country reached a resolution in February with holdout bondholders from the country’s 2001 bond default. Following the agreement, Argentina issued new government bonds across maturities, and investor appetite led to an over-subscribed bond auction.

Thank you for your participation in Franklin K2 Alternative Strategies Fund. We look forward to continuing to serve your investment needs.

Portfolio Management Team

The foregoing information reflects our analysis, opinions and portfolio holdings as of May 31, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

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FRANKLIN K2 ALTERNATIVE STRATEGIES FUND

Performance Summary as of May 31, 2016

Your dividend income will vary depending on dividends or interest paid by securities in the Fund’s portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graphs do not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.


Net Asset Value

Share Class (Symbol)		5/31/16		5/31/15		Change
A (FAAAX)	$	10.55	$	11.16	-$	0.61
C (FASCX)	$	10.45	$	11.09	-$	0.64
R (FSKKX)	$	10.61	$	11.15	-$	0.54
R6 (FASRX)	$	10.59	$	11.18	-$	0.59
Advisor (FABZX)	$	10.58	$	11.18	-$	0.60


Distributions¹(6/1/15–5/31/16)

		Dividend		Long-Term
Share Class		Income		Capital Gain		Total
A	$	0.1396	$	0.0375	$	0.1771
C	$	0.0921	$	0.0375	$	0.1296
R		—	$	0.0375	$	0.0375
R6	$	0.1684	$	0.0375	$	0.2059
Advisor	$	0.1637	$	0.0375	$	0.2012

See page 11 for Performance Summary footnotes.

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FRANKLIN K2 ALTERNATIVE STRATEGIES FUND
PERFORMANCE SUMMARY

Performance as of 5/31/16²

Cumulative total return excludes sales charges. Average annual total returns and value of $10,000 investment include maximum
sales charges. Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only;
Class R/R6/Advisor Class: no sales charges.


							Average Annual
	Cumulative		Average Annual			Value of $10,000	Total Return		Total Annual Operating Expenses⁷
Share Class	Total Return³		Total Return⁴			Investment⁵	(6/30/16	)⁶	(with waiver)		(without waiver)
A									2.85	%	3.49	%
1-Year	-3.89	%	-9.41	%	$	9,059	-7.65	%
Since Inception (10/11/13)	+8.34	%	+0.80	%	$	10,211	+2.69	%
C									3.60	%	4.24	%
1-Year	-4.62	%	-5.56	%	$	9,444	-3.72	%
Since Inception (10/11/13)	+6.45	%	+2.40	%	$	10,645	+6.96	%
R									3.10	%	3.74	%
1-Year	-4.51	%	-4.51	%	$	9,549	-2.31	%
Since Inception (10/11/13)	+7.29	%	+2.71	%	$	10,729	+7.80	%
R6									2.51	%	3.15	%
1-Year	-3.45	%	-3.45	%	$	9,655	-1.76	%
Since Inception (10/11/13)	+9.32	%	+3.44	%	$	10,932	+9.84	%
Advisor									2.60	%	3.24	%
1-Year	-3.58	%	-3.58	%	$	9,642	-1.90	%
Since Inception (10/11/13)	+9.15	%	+3.38	%	$	10,915	+9.66	%

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will
fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For
most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.

See page 11 for Performance Summary footnotes.

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FRANKLIN K2 ALTERNATIVE STRATEGIES FUND
PERFORMANCE SUMMARY

Total Return Index Comparison for a Hypothetical $10,000 Investment²

Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or distributions. These differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in an index.

See page 11 for Performance Summary footnotes.

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FRANKLIN K2 ALTERNATIVE STRATEGIES FUND
PERFORMANCE SUMMARY

Total Return Index Comparison for a Hypothetical $10,000 Investment²(continued)

See page 11 for Performance Summary footnotes.

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FRANKLIN K2 ALTERNATIVE STRATEGIES FUND
PERFORMANCE SUMMARY

Total Return Index Comparison for a Hypothetical $10,000 Investment²(continued)

All investments involve risks, including possible loss of principal. The market values of securities owned by the Fund will go up or down, sometimes rapidly or
unpredictably. The Fund’s performance depends on the manager’s skill in selecting, overseeing, and allocating Fund assets to the subadvisors. The Fund is
actively managed and could experience losses if the investment manager’s and subadvisors’ judgment about particular investments made for the Fund’s
portfolio prove to be incorrect. Some subadvisors may have little or no experience managing the assets of a registered investment company. Foreign invest-
ments are subject to greater investment risk such as political, economic, credit and information risks as well as risk of currency fluctuations. Investments in
derivatives involve costs and create economic leverage, which may result in significant volatility and cause the Fund to participate in losses (as well as gains)
that significantly exceed the Fund’s initial investment. Lower rated or high yield debt securities involve greater credit risk, including the possibility of default or
bankruptcy. Currency management strategies could result in losses to the Fund if currencies do not perform as the investment manager or subadvisor expects.
The Fund may make short sales of securities, which involves the risk that losses may exceed the original amount invested. Merger arbitrage investments risk
loss if a proposed reorganization in which the Fund invests is renegotiated or terminated. Liquidity risk exists when securities have become more difficult to sell,
or are unable to be sold, at the price at which they have been valued. The Fund’s prospectus also includes a description of the main investment risks.


Class C:	These shares have higher annual fees and expenses than Class A shares.
Class R:	Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares.
Class R6:	Shares are available to certain eligible investors as described in the prospectus.
Advisor Class:	Shares are available to certain eligible investors as described in the prospectus.

1. The distribution amount is the sum of the dividend payments to shareholders for the period shown and includes only estimated tax-basis net investment income and
capital gain.
2. The Fund has an expense reduction contractually guaranteed through at least 9/30/16 and a fee waiver related to the management fee paid by a subsidiary. The transfer
agent has contractually agreed to waive or limit its transfer agency fees for Class R6 shares of the Fund so that transfer agency fees for that class do not exceed 0.01% until
9/30/16. Fund investment results reflect the expense reduction, fee waiver and fee cap, to the extent applicable; without these reductions, the results would have been lower.
3. Cumulative total return represents the change in value of an investment over the periods indicated.
4. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not
been annualized.
5. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
6. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
7. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Consolidated Financial Highlights in this report. In periods of
market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
8. Source: Morningstar. The BofA Merrill Lynch 3-Month U.S. T-Bill Index is an index of short-term U.S. government securities with a remaining term to final maturity of less
than three months.
9. Source: Factset. Hedge Fund Research, Inc. – www.hedgefundresearch.com. The HFRX Global Hedge Fund Index is being used under license from Hedge Fund
Research, Inc., which does not endorse or approve of any of the contents of this report. The HFRX Global Hedge Fund Index is designed to be representative of the overall
composition of the hedge fund universe. It is composed of all eligible hedge fund strategies, including but not limited to convertible arbitrage, distressed securities, equity
hedge, equity market neutral, event driven, macro, merger arbitrage and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the
hedge fund industry.
See www.franklintempletondatasources.com for additional data provider information.

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FRANKLIN K2 ALTERNATIVE STRATEGIES FUND

Your Fund’s Expenses

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.

Actual Fund Expenses

The first line (Actual) for each share class listed in the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of Fund expenses.

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1. Divide your account value by $1,000.

If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

2. Multiply the result by the number under the heading “Expenses Paid During Period.”

If Expenses Paid During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical “Ending Account Value” is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Expenses Paid During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds.

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.

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FRANKLIN K2 ALTERNATIVE STRATEGIES FUND
YOUR FUND’S EXPENSES


		Beginning Account		Ending Account		Expenses Paid During
Share Class		Value 12/1/15		Value 5/31/16		*Period 12/1/15–5/31/16**
A
Actual	$	1,000	$	983.10	$	14.28
Hypothetical (5% return before expenses)	$	1,000	$	1,010.60	$	14.48
C
Actual	$	1,000	$	979.50	$	17.91
Hypothetical (5% return before expenses)	$	1,000	$	1,006.90	$	18.16
R
Actual	$	1,000	$	982.20	$	15.46
Hypothetical (5% return before expenses)	$	1,000	$	1,009.40	$	15.67
R6
Actual	$	1,000	$	985.80	$	12.56
Hypothetical (5% return before expenses)	$	1,000	$	1,012.35	$	12.73
Advisor
Actual	$	1,000	$	984.40	$	13.00
Hypothetical (5% return before expenses)	$	1,000	$	1,011.90	$	13.18

*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 2.88%;
C: 3.62%; R: 3.12%; R6: 2.53% and Advisor: 2.62%), multiplied by the average account value over the period, multiplied by 183/366 to reflect
the one-half year period.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS


Consolidated Financial Highlights
Franklin K2 Alternative Strategies Fund
		Year Ended May 31,
		2016			2015			2014	^a
Class A
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	11.16		$	10.64		$	10.00
Income from investment operations^b:
Net investment income (loss)^c		(0.05	)		(0.11	)		(0.02	)
Net realized and unrealized gains (losses)		(0.38	)		0.70			0.70
Total from investment operations		(0.43	)		0.59			0.68
Less distributions from:
Net investment income		(0.14	)		(0.07	)		(0.04	)
Net realized gains		(0.04	)		—			—
Total distributions		(0.18	)		(0.07	)		(0.04	)
Net asset value, end of year	$	10.55		$	11.16		$	10.64

Total return^d		(3.89	)%		5.53	%		6.82	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f		3.22	%		3.40	%		3.33	%
Expenses net of waiver, payments by affiliates and expense reduction^f		2.88	%^g		2.99	%^g		2.83	%
Expenses incurred in connection with securities sold short		0.67	%		0.65	%		0.56	%
Net investment income (loss)		(0.44	)%		(0.95	)%		(0.35	)%

Supplemental data
Net assets, end of year (000’s)	$	177,412		$	148,991		$	96,889
Portfolio turnover rate		229.90	%		295.81	%		181.06	%

^aFor the period October 11, 2013 (commencement of operations) to May 31, 2014.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales
and repurchases of Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
^gBenefit of expense reduction rounds to less than 0.01%.

14 Annual Report | The accompanying notes are an integral part of these financial statements.

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL HIGHLIGHTS


Franklin K2 Alternative Strategies Fund (continued)
		Year Ended May 31,
		2016			2015			2014	^a
Class C
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	11.09		$	10.60		$	10.00
Income from investment operations^b:
Net investment income (loss)^c		(0.12	)		(0.17	)		(0.08	)
Net realized and unrealized gains (losses)		(0.39	)		0.69			0.72
Total from investment operations		(0.51	)		0.52			0.64
Less distributions from:
Net investment income		(0.09	)		(0.03	)		(0.04	)
Net realized gains		(0.04	)		—			—
Total distributions		(0.13	)		(0.03	)		(0.04	)
Net asset value, end of year	$	10.45		$	11.09		$	10.60

Total return^d		(4.62	)%		4.87	%		6.42	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f		3.96	%		4.04	%		4.03	%
Expenses net of waiver, payments by affiliates and expense reduction^f		3.62	%^g		3.63	%^g		3.53	%
Expenses incurred in connection with securities sold short		0.67	%		0.65	%		0.56	%
Net investment income (loss)		(1.18	)%		(1.59	)%		(1.05	)%

Supplemental data
Net assets, end of year (000’s)	$	71,154		$	37,937		$	16,618
Portfolio turnover rate		229.90	%		295.81	%		181.06	%

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The accompanying notes are an integral part of these financial statements. | Annual Report 15


Franklin K2 Alternative Strategies Fund (continued)
��		Year Ended May 31,
		2016			2015			2014	^a
Class R
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	11.15		$	10.62		$	10.00
Income from investment operations^b:
Net investment income (loss)^c		(0.10	)		(0.16	)		(0.05	)
Net realized and unrealized gains (losses)		(0.40	)		0.73			0.71
Total from investment operations		(0.50	)		0.57			0.66
Less distributions from:
Net investment income		—			(0.04	)		(0.04	)
Net realized gains		(0.04	)		—			—
Total distributions		(0.04	)		(0.04	)		(0.04	)
Net asset value, end of year	$	10.61		$	11.15		$	10.62

Total return^d		(4.51	)%		5.39	%		6.62	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f		3.46	%		3.57	%		3.63	%
Expenses net of waiver, payments by affiliates and expense reduction^f		3.12	%^g		3.16	%^g		3.13	%
Expenses incurred in connection with securities sold short		0.67	%		0.65	%		0.56	%
Net investment income (loss)		(0.68	)%		(1.12	)%		(0.65	)%

Supplemental data
Net assets, end of year (000’s)	$	341		$	9,173		$	11,660
Portfolio turnover rate		229.90	%		295.81	%		181.06	%

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL HIGHLIGHTS

^aFor the period October 11, 2013 (commencement of operations) to May 31, 2014.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales
and repurchases of Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
^gBenefit of expense reduction rounds to less than 0.01%.

16 Annual Report | The accompanying notes are an integral part of these financial statements.

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL HIGHLIGHTS


Franklin K2 Alternative Strategies Fund (continued)
		Year Ended May 31,
		2016			2015			2014	^a
Class R6
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	11.18		$	10.66		$	10.00
Income from investment operations^b:
Net investment income (loss)^c		(0.01	)		(0.08	)		(0.01	)
Net realized and unrealized gains (losses)		(0.37	)		0.70			0.71
Total from investment operations		(0.38	)		0.62			0.70
Less distributions from:
Net investment income		(0.17	)		(0.10	)		(0.04	)
Net realized gains		(0.04	)		—			—
Total distributions		(0.21	)		(0.10	)		(0.04	)
Net asset value, end of year	$	10.59		$	11.18		$	10.66

Total return^d		(3.45	)%		5.80	%		7.02	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f		2.87	%		2.98	%		3.19	%
Expenses net of waiver, payments by affiliates and expense reduction^f		2.53	%^g		2.60	%^g		2.69	%
Expenses incurred in connection with securities sold short		0.67	%		0.65	%		0.56	%
Net investment income (loss)		(0.09	)%		(0.56	)%		(0.21	)%

Supplemental data
Net assets, end of year (000’s)	$	265,517		$	239,754		$	215,526
Portfolio turnover rate		229.90	%		295.81	%		181.06	%

^aFor the period October 11, 2013 (commencement of operations) to May 31, 2014.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales
and repurchases of Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
^gBenefit of expense reduction rounds to less than 0.01%.

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The accompanying notes are an integral part of these financial statements. | Annual Report 17

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL HIGHLIGHTS


Franklin K2 Alternative Strategies Fund (continued)
		Year Ended May 31,
		2016			2015			2014	^a
Advisor Class
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	11.18		$	10.65		$	10.00
Income from investment operations^b:
Net investment income (loss)^c		(0.02	)		(0.02	)		(0.02	)
Net realized and unrealized gains (losses)		(0.38	)		0.64			0.71
Total from investment operations		(0.40	)		0.62			0.69
Less distributions from:
Net investment income		(0.16	)		(0.09	)		(0.04	)
Net realized gains		(0.04	)		—			—
Total distributions		(0.20	)		(0.09	)		(0.04	)
Net asset value, end of year	$	10.58		$	11.18		$	10.65

Total return^d		(3.58	)%		5.88	%		6.92	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f		2.96	%		3.07	%		3.21	%
Expenses net of waiver, payments by affiliates and expense reduction^f		2.62	%^g		2.66	%^g		2.71	%
Expenses incurred in connection with securities sold short		0.67	%		0.65	%		0.56	%
Net investment income (loss)		(0.18	)%		(0.62	)%		(0.23	)%

Supplemental data
Net assets, end of year (000’s)	$	722,216		$	329,139		$	54,593
Portfolio turnover rate		229.90	%		295.81	%		181.06	%

^aFor the period October 11, 2013 (commencement of operations) to May 31, 2014.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales
and repurchases of Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(f).
^gBenefit of expense reduction rounds to less than 0.01%.

18 Annual Report | The accompanying notes are an integral part of these financial statements.

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS


Consolidated Statement of Investments, May 31, 2016

Franklin K2 Alternative Strategies Fund
	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests 33.4%
Aerospace & Defense 0.0%^†
United Technologies Corp	United States	807	$	81,168
Air Freight & Logistics 0.4%
^aFedEx Corp	United States	27,085		4,468,212
Airlines 0.3%
^aDelta Air Lines Inc	United States	62,015		2,695,172
^bSpirit Airlines Inc	United States	6,700		291,249
^b,cWizz Air Holdings PLC, 144A	Switzerland	4,266		119,557
				3,105,978
Auto Components 0.3%
^b,cEuropcar Groupe SA, 144A	France	36,544		376,394
Johnson Controls Inc	United States	47,440		2,094,476
Tung Thih Electronic Co. Ltd	Taiwan	20,000		279,647
^aVisteon Corp	United States	17,923		1,343,867
				4,094,384
Automobiles 0.1%
General Motors Co	United States	1,544		48,296
^bPeugeot SA	France	66,092		1,040,179
				1,088,475
Banks 0.1%
BB&T Corp	United States	1,665		60,556
ING Groep NV, IDR	Netherlands	10,296		128,248
^dJPMorgan Chase & Co	United States	2,656		173,357
PacWest Bancorp	United States	744		31,010
The PNC Financial Services Group Inc	United States	794		71,254
US Bancorp	United States	1,400		59,948
^dWells Fargo & Co	United States	3,534		179,244
				703,617
Beverages 1.2%
^aAnheuser-Busch InBev SA/NV, ADR	Belgium	12,825		1,618,771
^aBrown-Forman Corp., B	United States	31,494		3,088,616
^dThe Coca-Cola Co	United States	72,766		3,245,364
Constellation Brands Inc., A	United States	319		48,855
Heineken NV	Netherlands	47,903		4,448,867
^a,bMonster Beverage Corp	United States	15,038		2,255,700
PepsiCo Inc	United States	1,266		128,081
				14,834,254
Biotechnology 3.2%
AbbVie Inc	United States	1,286		80,928
^bAcorda Therapeutics Inc	United States	5,251		149,391
^bAdaptimmune Therapeutics PLC, ADR	United States	8,201		84,388
^bAduro Biotech Inc	United States	6,038		74,207
^bAeglea BioTherapeutics Inc	United States	13,407		100,553
^a,bAgios Pharmaceuticals Inc	United States	7,518		420,632
^bAlexion Pharmaceuticals Inc	United States	12,524		1,889,872
^a,bAlnylam Pharmaceuticals Inc	United States	16,783		1,203,677
^bAmicus Therapeutics Inc	United States	38,111		269,826
^bApplied Genetic Technologies Corp	United States	14,201		244,257
^bAvexis Inc	United States	3,226		138,653

franklintempleton.com

Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests (continued)
Biotechnology (continued)
^a,dBaxalta Inc	United States	226,783	$	10,257,395
^bBioCryst Pharmaceuticals Inc	United States	18,918		64,132
^bBiogen Idec Inc	United States	9,979		2,891,216
^a,bBioMarin Pharmaceutical Inc	United States	38,830		3,481,109
^bBluebird Bio Inc	United States	15,568		704,452
^bCelgene Corp	United States	30,591		3,227,962
^bChimerix Inc	United States	21,745		106,550
^bCorvus Pharmaceuticals Inc	United States	4,423		62,143
^a,bDBV Technologies SA, ADR	France	7,806		261,735
^bDimension Therapeutics Inc	United States	7,067		56,536
^bEPIRUS Biopharmaceuticals Inc	United States	28,159		17,222
^bEpizyme Inc	United States	28,240		312,334
^bExelixis Inc	United States	110,468		716,937
^bFibrocell Science Inc	United States	39,509		91,266
^bGlobal Blood Therapeutics Inc	United States	5,039		120,533
^bImmune Design Corp	United States	3,386		42,494
^bIncyte Corp. Ltd	United States	19,736		1,665,916
^bInotek Pharmaceuticals Corp	United States	24,483		225,244
^bInsmed Inc	United States	18,257		215,433
^bIntellia Therapeutics Inc	United States	901		26,643
^bMacroGenics Inc	United States	4,014		102,598
^bMedgenics Inc	Israel	27,311		155,673
^a,bMedivation Inc	United States	61,163		3,697,915
^bMirati Therapeutics Inc	United States	1,129		20,469
^bNatera Inc	United States	10,748		148,215
^bNeurocrine Biosciences Inc	United States	6,345		315,029
^bNivalis Therapeutics Inc	United States	3,452		17,225
^bOtonomy Inc	United States	19,497		286,411
^a,bOvaScience Inc	United States	32,834		242,643
^bProQR Therapeutics NV	Netherlands	36,423		177,016
^bProteostasis Therapeutics Inc	United States	15,055		248,709
^bProthena Corp. PLC	Ireland	8,418		408,610
^bPTC Therapeutics Inc	United States	4,139		33,774
^bRadius Health Inc	United States	4,144		150,261
^bRegeneron Pharmaceuticals Inc	United States	3,337		1,331,229
^bREGENXBIO Inc	United States	2,633		32,544
^bRetrophin Inc	United States	12,056		214,356
^bSage Therapeutics Inc	United States	6,594		217,009
^bSarepta Therapeutics Inc	United States	9,059		189,605
^bSeres Therapeutics Inc	United States	5,605		170,560
^bSyndax Pharmaceuticals Inc	United States	3,233		44,421
^bTesaro Inc	United States	13,774		637,736
^bTrevena Inc	United States	10,390		76,055
^bUltragenyx Pharmaceutical Inc	United States	10,799		789,407
^bVertex Pharmaceuticals Inc	United States	5,391		502,172
				39,413,278
Capital Markets 0.3%
SEI Investments Co	United States	80,544		4,143,183
Chemicals 1.8%
^aAir Products & Chemicals Inc	United States	20,176		2,877,905
Akzo Nobel NV	Netherlands	13,057		886,195

20 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests (continued)
Chemicals (continued)
Axalta Coating Systems Ltd	United States	36,714	$	1,033,499
^aAxiall Corp	United States	89,588		2,086,504
The Dow Chemical Co	United States	948		48,689
Eastman Chemical Co	United States	16,796		1,232,155
^bIngevity Corp	United States	6,681		194,684
^dMonsanto Co	United States	22,736		2,557,118
PPG Industries Inc	United States	473		50,933
^aThe Sherwin-Williams Co	United States	21,716		6,321,310
Syngenta AG	Switzerland	5,924		2,327,286
^aWR Grace & Co	United States	30,081		2,335,489
				21,951,767
Commercial Services & Supplies 0.2%
^bAtento SA	Spain	79,355		708,640
Edenred	France	14,315		265,193
^bSpotless Group Holdings Ltd	Australia	76,960		64,523
Tyco International PLC	United States	30,081		1,282,052
West Corp	United States	21,310		449,641
				2,770,049
Communications Equipment 0.1%
^a,bArista Networks Inc	United States	9,811		719,048
^bLumentum Holdings Inc	United States	27,050		685,447
^bOclaro Inc	United States	89,641		449,102
				1,853,597
Construction Materials 0.5%
Buzzi Unicem SpA	Italy	22,417		445,467
HeidelbergCement AG	Germany	7,995		683,982
^bItalcementi SpA	Italy	164,252		1,915,262
^bLafargeHolcim Ltd., B	Switzerland	30,283		1,361,821
^aMartin Marietta Materials Inc	United States	12,101		2,287,573
				6,694,105
Consumer Finance 0.0%^†
^bEncore Capital Group Inc	United States	539		14,494
^a,bSynchrony Financial	United States	11,000		343,200
				357,694
Containers & Packaging 0.0%^†
International Paper Co	United States	533		22,471
Diversified Financial Services 0.3%
^aMoody’s Corp	United States	39,834		3,929,226
Diversified Telecommunication Services 0.1%
CenturyLink Inc	United States	909		24,652
Swisscom AG	Switzerland	1,271		605,579
Verizon Communications Inc	United States	5,034		256,231
				886,462
Electric Utilities 0.3%
Exelon Corp	United States	939		32,180
^aITC Holdings Corp	United States	73,009		3,250,361

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests (continued)
Electric Utilities (continued)
^dNextEra Energy Inc	United States	1,423	$	170,931
PG&E Corp	United States	1,944		116,795
				3,570,267
Electrical Equipment 0.1%
Eaton Corp. PLC	United States	1,110		68,409
Emerson Electric Co	United States	13,792		717,460
Rockwell Automation Inc	United States	2,697		312,987
^bSolarCity Corp	United States	5,992		134,161
				1,233,017
Electronic Equipment, Instruments & Components 0.4%
^bCoherent Inc	United States	2,100		198,702
^aIngram Micro Inc., A	United States	65,022		2,251,712
^a,bVeriFone Systems Inc	United States	81,650		2,155,560
				4,605,974
Energy Equipment & Services 0.0%^†
Halliburton Co	United States	991		41,800
Food & Staples Retailing 0.7%
Casey’s General Stores Inc	United States	17,956		2,158,491
^aCostco Wholesale Corp	United States	36,449		5,422,517
CVS Health Corp	United States	15,193		1,465,365
The Kroger Co	United States	1,675		59,898
				9,106,271
Food Products 0.7%
Greencore Group PLC	Ireland	52,664		262,924
^aThe Kraft Heinz Co	United States	27,838		2,315,843
Lindt & Spruengli AG	Switzerland	73		5,397,887
Mead Johnson Nutrition Co	United States	618		50,849
Mondelez International Inc	United States	672		29,897
^bThe WhiteWave Foods Co	United States	24,692		1,102,498
				9,159,898
Health Care Equipment & Supplies 0.8%
^aBecton Dickinson and Co	United States	20,927		3,483,299
^a,bDerma Sciences Inc	United States	15,328		62,078
^bDexCom Inc	United States	10,142		654,058
^bGenMark Diagnostics Inc	United States	29,621		223,046
^a,bIDEXX Laboratories Inc	United States	35,937		3,147,003
Innocoll Holdings PLC	Ireland	4,533		43,517
Medtronic PLC	United States	13,158		1,058,956
^bNovadaq Technologies Inc	Canada	18,095		174,798
St. Jude Medical Inc	United States	10,443		818,313
^a,bTearLab Corp	United States	61,823		47,604
				9,712,672
Health Care Providers & Services 1.0%
^bAcadia Healthcare Co. Inc	United States	12,192		717,743
Aetna Inc	United States	16,596		1,879,165
Celesio AG	Germany	61,856		1,745,713
^bCentene Corp	United States	21,974		1,370,079

22 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests (continued)
Health Care Providers & Services (continued)
^aCigna Corp	United States	11,789	$	1,510,289
Humana Inc	United States	8,261		1,425,105
^bLaboratory Corp. of America Holdings	United States	1,240		158,658
^aUnitedHealth Group Inc	United States	16,247		2,171,737
^aUniversal Health Services Inc., B	United States	7,370		993,918
				11,972,407
Health Care Technology 0.0%^†
^bathenahealth Inc	United States	1,288		163,409
Hotels, Restaurants & Leisure 1.1%
^a,bBuffalo Wild Wings Inc	United States	2,873		417,705
^aDomino’s Pizza Inc	United States	25,041		3,026,956
^aHilton Worldwide Holdings Inc	United States	138,534		2,878,737
Marriott International Inc., A	United States	5,400		356,616
McDonald’s Corp	United States	631		77,020
^aSonic Corp	United States	158,342		4,717,008
Starwood Hotels & Resorts Worldwide Inc	United States	20,479		1,503,773
Wyndham Worldwide Corp	United States	6,625		446,459
				13,424,274
Household Durables 0.3%
CalAtlantic Group Inc	United States	59,461		2,199,462
^a,bMohawk Industries Inc	United States	6,881		1,353,424
Whirlpool Corp	United States	213		37,194
				3,590,080
Industrial Conglomerates 0.0%^†
Danaher Corp	United States	578		56,852
General Electric Co	United States	9,678		292,566
				349,418
Insurance 0.2%
AmTrust Financial Services Inc	United States	382		10,131
MetLife Inc	United States	933		42,498
Prudential Financial Inc	United States	415		32,889
W.R. Berkley Corp	United States	24,075		1,372,997
^aWillis Towers Watson PLC	United States	6,500		832,130
				2,290,645
Internet & Catalog Retail 0.7%
^a,bAmazon.com Inc	United States	3,820		2,761,058
Expedia Inc	United States	11,315		1,258,681
^bThe Priceline Group Inc	United States	97		122,640
^a,bTripAdvisor Inc	United States	16,565		1,122,113
^a,bWayfair Inc., A	United States	73,402		3,022,694
				8,287,186
Internet Software & Services 1.7%
^a,bAkamai Technologies Inc	United States	27,105		1,479,391
^a,bAlibaba Group Holding Ltd., ADR	China	18,675		1,531,350
^a,bAlphabet Inc., A	United States	3,824		2,863,602
^a,bAlphabet Inc., C	United States	1,251		920,386
^a,bBenefitfocus Inc	United States	17,610		646,463

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests (continued)
Internet Software & Services (continued)
^a,bCoStar Group Inc	United States	2,495	$	515,442
^bDemandware Inc	United States	3,700		177,563
^a,beBay Inc	United States	29,343		717,730
^a,bFacebook Inc	United States	31,755		3,772,812
Naver Corp	South Korea	299		180,634
Tencent Holdings Ltd	China	19,300		430,421
^a,bVeriSign Inc	United States	12,055		1,030,220
^a,bYahoo! Inc	United States	166,995		6,335,790
^bZillow Group Inc., A	United States	4,740		138,598
^bZillow Group Inc., C	United States	14,280		409,550
				21,149,952
IT Services 3.1%
Accenture PLC, A	United States	12,060		1,434,778
^a,bAlliance Data Systems Corp	United States	12,145		2,698,498
Automatic Data Processing Inc	United States	30,010		2,636,078
^a,bCardtronics Inc	United States	30,810		1,210,525
^a,bCognizant Technology Solutions Corp., A	United States	25,550		1,569,792
^a,bEPAM Systems Inc	United States	14,300		1,094,093
EVERTEC Inc	Puerto Rico	43,675		668,664
^a,bExlService Holdings Inc	United States	71,460		3,701,628
^bGartner Inc	United States	2,700		274,374
^bGenpact Ltd	United States	136,675		3,852,868
^aGlobal Payments Inc	United States	59,037		4,586,584
^aMasterCard Inc., A	United States	33,542		3,216,678
^bPayPal Holdings Inc	United States	59,463		2,247,107
^bSyntel Inc	United States	12,735		586,829
^a,bVantiv Inc., A	United States	25,775		1,385,922
Visa Inc., A	United States	46,802		3,694,550
^a,bWEX Inc	United States	30,297		2,795,201
^b,cWorldpay Group PLC, 144A	United Kingdom	106,785		428,569
				38,082,738
Leisure Products 0.0%^†
^bJAKKS Pacific Inc	United States	965		7,199
Life Sciences Tools & Services 0.5%
Gerresheimer AG	Germany	23,576		1,876,616
^a,bIllumina Inc	United States	7,343		1,063,487
^bSequenom Inc	United States	65,989		67,309
^aThermo Fisher Scientific Inc	United States	20,841		3,163,038
				6,170,450
Machinery 0.0%^†
Caterpillar Inc	United States	650		47,131
Trinity Industries Inc	United States	2,694		48,654
				95,785
Marine 0.4%
Irish Continental Group PLC	Ireland	389,101		2,337,827
^a,bKirby Corp	United States	19,033		1,333,833
^bNeptune Orient Lines Ltd	Singapore	1,905,361		1,791,767
				5,463,427

24 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests (continued)
Media 1.0%
CBS Corp., B	United States	38,558	$	2,128,402
^bCharter Communications Inc	United States	2,409		527,426
^aComcast Corp., A	United States	27,075		1,713,847
^a,bDish Network Corp., A	United States	36,758		1,834,224
^bLiberty Global PLC LiLAC, A	United Kingdom	6,908		283,781
^a,bLiberty Global PLC, A	United Kingdom	6,533		244,008
^bLiberty Global PLC, C	United Kingdom	17,615		636,430
^bLiberty SiriusXM Group	United States	34,847		1,095,938
SES SA, IDR	Luxembourg	24,396		546,410
^aThe Walt Disney Co	United States	37,766		3,747,143
				12,757,609
Metals & Mining 0.6%
Alcoa Inc	United States	9,284		86,063
Boliden AB	Sweden	27,287		482,843
Freeport-McMoRan Inc	United States	53,595		593,833
^bImpala Platinum Holdings Ltd	South Africa	106,154		303,948
Newmont Mining Corp	United States	43,194		1,399,917
Nucor Corp	United States	460		22,315
^aRio Tinto PLC, ADR	United Kingdom	32,319		906,225
Teck Resources Ltd	Canada	214,414		2,064,807
ThyssenKrupp AG	Germany	51,931		1,143,191
United States Steel Corp	United States	59,302		858,100
				7,861,242
Multi-Utilities 0.0%^†
Sempra Energy	United States	1,004		107,548
Multiline Retail 0.1%
Macy’s Inc	United States	21,702		720,723
Oil, Gas & Consumable Fuels 1.2%
^dChevron Corp	United States	1,030		104,030
Columbia Pipeline Group Inc	United States	34,753		887,592
^a,bContinental Resources Inc	United States	62,258		2,618,571
Delek U.S. Holdings Inc	United States	2,355		32,452
Devon Energy Corp	United States	5,525		199,397
^dExxon Mobil Corp	United States	2,434		216,675
Golar LNG Ltd	Bermuda	1,384		24,082
Hess Corp	United States	1,033		61,908
^bKinder Morgan Inc., wts., 5/25/17	United States	52,317		1,344
Marathon Oil Corp	United States	3,028		39,576
^bNewfield Exploration Co	United States	34,666		1,413,333
^aOccidental Petroleum Corp	United States	28,890		2,179,462
Scorpio Tankers Inc	Monaco	8,167		48,022
TransCanada Corp	Canada	115,379		4,750,305
Valero Energy Corp	United States	322		17,613
^aThe Williams Cos Inc	United States	102,378		2,268,696
				14,863,058
Paper & Forest Products 0.2%
^bCanfor Corp	Canada	141,570		1,694,932
West Fraser Timber Co. Ltd	Canada	25,980		887,562
				2,582,494

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests (continued)
Pharmaceuticals 1.9%
^bAerie Pharmaceuticals Inc	United States	40,618	$	725,844
^b,dAllergan PLC	United States	37,283		8,789,467
^a,bAratana Therapeutics Inc	United States	19,668		140,233
^bAssembly Biosciences Inc	United States	28,503		162,752
AstraZeneca PLC, ADR	United Kingdom	18,409		546,747
^a,dBristol-Myers Squibb Co	United States	41,166		2,951,602
^b,cCassiopea SpA, 144A	Italy	4,138		147,786
^bDermira Inc	United States	13,175		418,174
Eli Lilly & Co	United States	21,526		1,615,096
^bFlex Pharma Inc	United States	4,363		54,581
Innoviva Inc	United States	18,430		207,890
^bIntra-Cellular Therapies Inc	United States	21,789		843,234
^bJazz Pharmaceuticals PLC	United States	3,769		571,230
^dJohnson & Johnson	United States	1,756		197,884
^bThe Medicines Co	United States	16,856		633,954
Novo Nordisk AS, ADR	Denmark	5,066		283,899
^bOcular Therapeutix Inc	United States	9,512		114,144
^bPacira Pharmaceuticals Inc	United States	15,973		742,904
Pfizer Inc	United States	4,507		156,393
^bSCYNEXIS Inc	United States	6,453		25,489
Shire PLC, ADR	United States	21,131		3,933,747
^bSteadymed Ltd	Israel	7,372		25,655
				23,288,705
Professional Services 1.0%
Equifax Inc	United States	11,585		1,456,582
Experian PLC	Ireland	73,606		1,392,292
^bFTI Consulting Inc	United States	16,550		692,618
^a,bHuron Consulting Group Inc	United States	42,430		2,483,852
^aManpowerGroup Inc	United States	13,070		1,042,332
Robert Half International Inc	United States	17,525		728,865
SThree PLC	United Kingdom	43,159		204,718
^bTransUnion	United States	35,400		1,171,740
^bTriNet Group Inc	United States	50,810		1,023,822
^a,bWageWorks Inc	United States	29,435		1,649,832
				11,846,653
Real Estate Investment Trusts (REITs) 0.0%^†
Redwood Trust Inc	United States	4,391		62,572
Road & Rail 0.8%
CSX Corp	United States	40,127		1,060,557
Kansas City Southern	United States	26,148		2,434,379
^bOld Dominion Freight Line Inc	United States	12,718		818,403
Ryder System Inc	United States	14,018		975,933
^a,bSwift Transportation Co	United States	85,518		1,332,370
^aUnion Pacific Corp	United States	42,958		3,616,634
				10,238,276
Semiconductors & Semiconductor Equipment 1.0%
^bAcacia Communications Inc	United States	6,400		251,392
Advanced Semiconductor Engineering Inc	Taiwan	187,000		211,585
^aApplied Materials Inc	United States	65,569		1,601,195

26 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests (continued)
Semiconductors & Semiconductor Equipment (continued)
Broadcom Ltd	Singapore	9,701	$	1,497,446
^bCavium Inc	United States	5,180		257,705
^bCirrus Logic Inc	United States	7,211		259,596
Cypress Semiconductor Corp	United States	5,949		63,238
^a,bFirst Solar Inc	United States	14,096		699,866
^a,bInphi Corp	United States	10,836		337,975
Intel Corp	United States	1,247		39,393
Intersil Corp	United States	5,900		79,768
^aLam Research Corp	United States	8,758		725,250
^a,bM/A-COM Technology Solutions Holdings Inc	United States	6,681		240,516
Mellanox Technologies Ltd	Israel	10,600		502,440
^aMicrochip Technology Inc	United States	20,565		1,062,799
^a,bNeoPhotonics Corp	United States	33,166		298,826
NVIDIA Corp	United States	5,452		254,717
^bNXP Semiconductors NV	Netherlands	15,893		1,501,730
^a,bON Semiconductor Corp	United States	26,783		261,670
QUALCOMM Inc	United States	2,320		127,414
Silicon Motion Technology Corp., ADR	Taiwan	20,292		901,979
^bSiltronic AG	Germany	1,871		32,132
^aSkyworks Solutions Inc	United States	8,048		537,284
^bSunEdison Semiconductor Ltd	United States	29,935		170,630
^aTaiwan Semiconductor Manufacturing Co. Ltd., ADR	Taiwan	27,700		684,744
Texas Instruments Inc	United States	1,373		83,204
Win Semiconductors Corp	Taiwan	135,000		265,757
				12,950,251
Software 0.9%
^aActivision Blizzard Inc	United States	40,192		1,577,938
^a,bAdobe Systems Inc	United States	6,270		623,677
^a,bGuidewire Software Inc	United States	15,075		884,902
^bHubSpot Inc	United States	5,085		242,860
Intuit Inc	United States	7,345		783,418
^dMicrosoft Corp	United States	24,347		1,290,391
Mobileye NV	United States	10,819		410,797
Oracle Corp	United States	1,479		59,456
^bPaylocity Holding Corp	United States	14,000		513,940
^bRed Hat Inc	United States	9,057		701,555
^a,bSalesforce.com Inc	United States	11,605		971,455
^bServiceNow Inc	United States	3,100		222,053
SS&C Technologies Holdings Inc	United States	4,085		251,595
^bTake-Two Interactive Software Inc	United States	45,088		1,754,374
^bVerint Systems Inc	United States	25,555		843,059
				11,131,470
Specialty Retail 1.7%
^a,bAutoNation Inc	United States	110,827		5,590,114
^a,bAutozone Inc	United States	6,882		5,245,460
^aThe Home Depot Inc	United States	61,069		8,068,436
Inditex SA	Spain	36,884		1,245,937
^a,bMarineMax Inc	United States	23,513		399,251
				20,549,198

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants		Value
Common Stocks and Other Equity Interests (continued)
Technology Hardware, Storage & Peripherals 1.5%
Apple Inc	United States	472	$	47,134
Catcher Technology Co. Ltd	Taiwan	27,000		205,320
^a,dEMC Corp	United States	366,279		10,237,498
Hewlett Packard Enterprise Co	United States	124,615		2,301,639
Lexmark International Inc	United States	12,774		483,624
^a,b,dNCR Corp	United States	94,236		2,910,008
^bPure Storage Inc., A	United States	59,555		701,558
Samsung Electronics Co. Ltd	South Korea	960		1,040,711
^bViolin Memory Inc	United States	19,835		11,262
				17,938,754
Textiles, Apparel & Luxury Goods 0.5%
Coach Inc	United States	21,063		830,304
Michael Kors Holdings Ltd	United States	17,688		755,631
Moncler SpA	Italy	37,696		628,714
^aNIKE Inc., B	United States	64,213		3,545,842
				5,760,491
Tobacco 0.0%^†
Altria Group Inc	United States	787		50,085
Philip Morris International Inc	United States	692		68,287
Reynolds American Inc	United States	1,525		75,792
				194,164
Wireless Telecommunication Services 0.1%
NTT DoCoMo Inc	Japan	36,700		921,021
^bT-Mobile U.S. Inc	United States	20,189		863,282
				1,784,303
Total Common Stocks and Other Equity Interests
(Cost $382,297,916)				413,512,300
Exchange Traded Funds 0.1%
Health Care Select Sector SPDR ETF	United States	5,966		425,614
iShares iBoxx USD High Yield Corporate Bond ETF	United States	11,200		936,432
Technology Select Sector SPDR Fund	United States	5,275		233,208
Total Exchange Traded Funds (Cost $1,566,743)				1,595,254
Convertible Preferred Stocks 0.2%
Food Products 0.2%
Bunge Ltd., cvt. pfd., 4.875%	United States	4,462		429,467
^aPost Holdings Inc., cvt. pfd., 2.50%	United States	12,573		1,827,800
				2,257,267
Health Care Providers & Services 0.0%^†
Amsurg Corp., cvt. pfd., Series A-1, 5.25%	United States	615		87,330
Real Estate Investment Trusts (REITs) 0.0%^†
^eWelltower Inc., cvt. pfd., Series I, 6.50%	United States	2,088		130,792
Tobacco 0.0%^†
^aUniversal Corp., cvt. pfd., 6.75%	United States	330		406,189
Total Convertible Preferred Stocks (Cost $2,132,961)				2,881,578

28 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares/Warrants			Value
Preferred Stocks 0.2%
Chemicals 0.0%^†
Henkel AG & Co. KGaA, pfd	Germany	1,295		$	150,931
Diversified Telecommunication Services 0.0%^†
Iridium Communications Inc., pfd., 7.00%	United States	1,979			206,558
Machinery 0.0%^†
^bMAN SE, pfd	Germany	3,186			332,510
Pharmaceuticals 0.2%
Allergan PLC, pfd., 5.50%	United States	2,357			1,990,864
Total Preferred Stocks (Cost $3,078,653)					2,680,863

		Principal
		Amount*
Convertible Bonds 14.0%
Banks 0.6%
^fThe Oita Bank Ltd., senior note, Reg S, zero cpn., 12/18/19	Japan	1,300,000			1,205,750
The Yamagata Bank Ltd., senior note, zero cpn., 4/22/19	Japan	2,000,000			1,930,000
^fYamaguchi Financial Group Inc., senior note, Reg S,
zero cpn., 12/20/18	Japan	4,000,000			4,230,000
					7,365,750
Biotechnology 0.6%
^fAblynx NV, senior note, Reg S, Series ABLX, 3.25%, 5/27/20	Belgium	200,000	EUR		283,891
Acorda Therapeutics Inc., senior note, 1.75%, 6/15/21	United States	679,000			626,378
^aAMAG Pharmaceuticals Inc., senior note, 2.50%, 2/15/19	United States	1,175,000			1,233,016
^cAnacor Pharmaceuticals Inc., senior note, 144A, 2.00%, 4/15/23	United States	517,000			781,639
BioMarin Pharmaceutical Inc., senior sub. note, 1.50%, 10/15/20	United States	70,000			87,150
^aExelixis Inc., senior sub. note, 4.25%, 8/15/19	United States	1,312,000			1,716,260
Ligand Pharmaceuticals Inc., senior note, 0.75%, 8/15/19	United States	1,368,000			2,298,240
PDL BioPharma Inc., senior note, 4.00%, 2/01/18	United States	670,000			629,800
^cPTC Therapeutics Inc., senior note, 144A, 3.00%, 8/15/22	United States	328,000			156,210
					7,812,584
Building Products 0.1%
^cGriffon Corp., sub. note, 144A, 4.00%, 1/15/17	United States	801,000			983,728
Capital Markets 0.3%
Ares Capital Corp., senior note, 5.125%, 6/01/16	United States	968,000			968,000
^fCahaya Capital Ltd., senior note, Reg S, zero cpn., 9/18/21	Malaysia	2,400,000			2,355,000
^aCowen Group Inc., senior note, 3.00%, 3/15/19	United States	615,000			564,262
^aFXCM Inc., senior note, 2.25%, 6/15/18	United States	592,000			254,560
					4,141,822
Chemicals 0.1%
^aSolazyme Inc., senior sub. note, 5.00%, 10/01/19	United States	1,390,000			667,200
Commercial Services & Supplies 0.0%^†
RWT Holdings Inc., senior note, 5.625%, 11/15/19	United States	204,000			199,410
Communications Equipment 0.4%
Brocade Communications Systems Inc., senior note, 1.375%, 1/01/20	United States	245,000			238,109
Ciena Corp.,
senior bond, 0.875%, 6/15/17	United States	565,000			558,291
^csenior note, 144A, 3.75%, 10/15/18	United States	55,000			63,181

franklintempleton.com

Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*			Value
Convertible Bonds (continued)
Communications Equipment (continued)
^aPalo Alto Networks Inc., senior note, zero cpn., 7/01/19	United States	2,889,000	$		3,858,621
					4,718,202
Construction & Engineering 0.2%
^cDycom Industries Inc., senior note, 144A, 0.75%, 9/15/21	United States	977,000			1,100,957
^fLarsen & Toubro Ltd., senior note, Reg S, 0.675%, 10/22/19	India	1,600,000			1,536,000
					2,636,957
Construction Materials 0.2%
^aCemex SAB de CV, sub. note,
3.75%, 3/15/18	Mexico	1,324,000			1,373,650
3.72%, 3/15/20	Mexico	1,258,000			1,183,306
					2,556,956
Consumer Finance 0.4%
Encore Capital Group Inc., senior note,
3.00%, 11/27/17	United States	780,000			812,662
^a2.875%, 3/15/21	United States	700,000			531,125
^aPRA Group Inc., senior note, 3.00%, 8/01/20	United States	789,000			629,721
^fSiemens Financieringsmaatschappij NV, senior note, Reg S, Series SIE,
1.05%, 8/16/17	Germany	3,000,000			3,193,500
					5,167,008
Diversified Consumer Services 0.3%
Ascent Capital Group Inc., senior note, 4.00%, 7/15/20	United States	725,000			466,266
^aCarriage Services Inc., sub. note, 2.75%, 3/15/21	United States	1,064,000			1,252,195
TAL Education Group, senior note, 2.50%, 5/15/19	China	696,000			1,441,590
					3,160,051
Diversified Financial Services 0.1%
^cElement Financial Corp., sub. note, 144A,
5.125%, 6/30/19	Canada	536,000		CAD	455,744
4.25%, 6/30/20	Canada	1,205,000		CAD	946,467
					1,402,211
Electric Utilities 0.1%
Emera Inc., sub. bond, 4.00%, 9/29/25	Canada	1,595,000		CAD	526,051
Electrical Equipment 0.1%
General Cable Corp., sub. bond, 4.50%, 11/15/29	United States	1,110,000			670,162
^aSolarCity Corp., senior note, 2.75%, 11/01/18	United States	285,000			187,922
					858,084
Electronic Equipment, Instruments & Components 0.3%
^cKnowles Corp., senior note, 144A, 3.25%, 11/01/21	United States	604,000			633,067
^fTPK Holding Co. Ltd., senior note, Reg S, zero cpn., 4/08/20	Taiwan	1,500,000			1,321,875
^aVishay Intertechnology Inc., senior bond, 2.25%, 11/15/40	United States	1,930,000			2,010,819
					3,965,761
Energy Equipment & Services 0.1%
^aHornbeck Offshore Services Inc., senior note, 1.50%, 9/01/19	United States	1,126,000			658,006
Health Care Equipment & Supplies 0.5%
^aHologic Inc., senior bond, zero cpn., 12/15/43	United States	929,000			1,142,670

30 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*			Value
Convertible Bonds (continued)
Health Care Equipment & Supplies (continued)
^aIntegra LifeSciences Holdings Corp., senior note, 1.625%, 12/15/16	United States	1,027,000		$	1,468,610
^cInvacare Corp., senior note, 144A, 5.00%, 2/15/21	United States	367,000			342,228
^fNipro Corp., senior note, Reg S, zero cpn., 1/29/21	Japan	30,000,000	JPY		295,300
^cNuVasive Inc., senior note, 144A, 2.25%, 3/15/21	United States	992,000			1,126,540
Quidel Corp., senior note, 3.25%, 12/15/20	United States	480,000			435,600
^aWright Medical Group Inc., senior note, 2.00%, 2/15/20	United States	1,358,000			1,301,982
^cWright Medical Group NV, senior note, 144A, 2.25%, 11/15/21	United States	382,000			423,781
					6,536,711
Health Care Providers & Services 0.5%
^cAceto Corp., senior note, 144A, 2.00%, 11/01/20	United States	810,000			760,387
Brookdale Senior Living Inc., senior note, 2.75%, 6/15/18	United States	55,000			54,519
^aHealthSouth Corp., senior sub. bond, 2.00%, 12/01/43	United States	2,320,000			2,762,250
Molina Healthcare Inc.,
^asenior bond, 1.625%, 8/15/44	United States	1,287,000			1,402,830
senior note, 1.125%, 1/15/20	United States	1,054,000			1,399,185
					6,379,171
Health Care Technology 0.1%
^aAllscripts Healthcare Solutions Inc., senior note, 1.25%, 7/01/20	United States	954,000			989,775
Household Durables 0.4%
CalAtlantic Group Inc.,
^asenior bond, 1.25%, 8/01/32	United States	987,000			1,075,830
senior note, 0.25%, 6/01/19	United States	1,056,000			975,480
KB Home, senior note, 1.375%, 2/01/19	United States	45,000			42,441
^aLGI Homes Inc., sub. note, 4.25%, 11/15/19	United States	610,000			836,463
M/I Homes Inc., senior sub. note, 3.25%, 9/15/17	United States	600,000			609,750
Meritage Homes Corp., senior bond, 1.875%, 9/15/32	United States	1,123,000			1,120,192
^aToll Brothers Finance Corp., senior bond, 0.50%, 9/15/32	United States	649,000			640,076
					5,300,232
Household Products 0.0%^†
^fUnicharm Corp., senior note, Reg S, zero cpn., 9/25/20	Japan	40,000,000	JPY		409,988
Independent Power & Renewable Electricity Producers 0.1%
^a,cPattern Energy Group Inc., senior note, 144A, 4.00%, 7/15/20	United States	1,788,000			1,747,770
Industrial Conglomerates 0.0%^†
^fKeihan Holdings Co. Ltd., senior note, Reg S, zero cpn., 3/30/21	Japan	30,000,000	JPY		279,383
Insurance 0.1%
^aAmTrust Financial Services Inc., senior bond, 2.75%, 12/15/44	United States	1,234,000			974,860
Internet & Catalog Retail 0.7%
^aCtrip.com International Ltd., senior note, 1.25%, 10/15/18	China	1,508,000			1,971,710
^aPriceline Group Inc., senior note, 1.00%, 3/15/18	United States	2,847,000			4,012,491
^aShutterfly Inc., senior note, 0.25%, 5/15/18	United States	2,357,000			2,392,355
					8,376,556
Internet Software & Services 2.2%
Akamai Technologies Inc., senior note, zero cpn., 2/15/19	United States	795,000			780,595
^aBlucora Inc., senior note, 4.25%, 4/01/19	United States	142,000			125,670
^aj2 Global Inc., senior bond, 3.25%, 6/15/29	United States	874,000			1,016,025
^aLinkedIn Corp., senior note, 0.50%, 11/01/19	United States	1,351,000			1,269,096

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*		Value
Convertible Bonds (continued)
Internet Software & Services (continued)
^aMercadoLibre Inc., senior note, 2.25%, 7/01/19	Argentina	2,288,000	$	2,845,700
Monster Worldwide Inc., senior note, 3.50%, 10/15/19	United States	468,000		415,935
SINA Corp., senior note, 1.00%, 12/01/18	China	1,882,000		1,864,356
Twitter Inc., senior note,
0.25%, 9/15/19	United States	2,194,000		1,943,061
^a1.00%, 9/15/21	United States	1,410,000		1,189,688
VeriSign Inc., junior sub. bond, 4.345%, 8/15/37	United States	3,902,000		9,750,123
Web.com Group Inc., senior note, 1.00%, 8/15/18	United States	1,045,000		967,931
WebMD Health Corp., senior note,
2.50%,1/31/18	United States	523,000		616,159
^a1.50%, 12/01/20	United States	904,000		1,262,210
^c144A, 2.625%, 6/15/23	United States	593,000		619,314
Yahoo! Inc., senior note, zero cpn., 12/01/18	United States	2,986,000		3,017,726
				27,683,589
IT Services 0.2%
^a,cCSG Systems International Inc., 144A,
senior bond, 4.25%, 3/15/36	United States	988,000		1,049,132
senior sub. note, 3.00%, 3/01/17	United States	476,000		895,475
^cUnisys Corp., senior note, 144A, 5.50%, 3/01/21	United States	444,000		482,573
				2,427,180
Leisure Products 0.0%^†
^cJAKKS Pacific Inc., senior note, 144A, 4.25%, 8/01/18	United States	494,000		504,806
Life Sciences Tools & Services 0.1%
Albany Molecular Research Inc., senior note, 2.25%, 11/15/18	United States	597,000		641,775
Illumina Inc., senior note, 0.50%, 6/15/21	United States	671,000		696,163
Sequenom Inc., senior note, 5.00%, 1/01/18	United States	500,000		305,000
				1,642,938
Machinery 0.5%
^aAltra Industrial Motion Corp., senior bond, 2.75%, 3/01/31	United States	810,000		935,044
^aThe Greenbrier Cos Inc., senior note, 3.50%, 4/01/18	United States	1,113,000		1,201,344
^fHyundai Heavy Industries Co. Ltd., senior note, Reg S, zero cpn., 6/29/20	South Korea	1,400,000		1,328,250
^aNavistar International Corp., senior sub. note, 4.75%, 4/15/19	United States	498,000		278,258
^aTrinity Industries Inc., senior sub. bond, 3.875%, 6/01/36	United States	1,873,000		2,005,281
^aWabash National Corp., senior note, 3.375%, 5/01/18	United States	661,000		880,782
				6,628,959
Media 0.1%
^cLiberty Interactive LLC, senior bond, 144A, 1.00%, 9/30/43	United States	847,000		740,066
^aLiberty Media Corp., senior bond, 1.375%, 10/15/23	United States	895,000		893,322
				1,633,388
Metals & Mining 0.2%
AK Steel Corp., senior note, 5.00%, 11/15/19	United States	397,000		422,805
^aNewmont Mining Corp., senior note, Series B, 1.625%, 7/15/17	United States	906,000		971,119
RTI International Metals Inc., senior note, 1.625%, 10/15/19	United States	341,000		366,362
				1,760,286
Oil, Gas & Consumable Fuels 0.4%
Aegean Marine Petroleum Network Inc., senior note, 4.00%, 11/01/18	Greece	1,129,000		926,486
Chesapeake Energy Corp., senior bond, 2.50%, 5/15/37	United States	435,000		406,725

32 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*		Value
Convertible Bonds (continued)
Oil, Gas & Consumable Fuels (continued)
Cobalt International Energy Inc., senior note, 2.625%, 12/01/19	United States	587,000	$	248,007
^fGolar LNG Ltd., secured note, Reg S, 3.75%, 3/07/17	Bermuda	1,200,000		1,155,960
^aGreen Plains Inc., senior note, 3.25%, 10/01/18	United States	753,000		824,064
^fPaladin Energy Ltd., senior note, Reg S, 6.00%, 4/30/17	Australia	400,000		376,000
^cRenewable Energy Group Inc., senior bond, 144A, 4.00%, 6/15/36	United States	355,000		365,430
^cScorpio Tankers Inc., senior note, 144A, 2.375%, 7/01/19	Monaco	239,000		201,059
^a,cWhiting Petroleum Corp., senior note, 144A, 1.25%, 4/01/20	United States	1,261,000		964,665
				5,468,396
Pharmaceuticals 0.3%
^aMedicines Co., senior note,
1.375%, 6/01/17	United States	351,000		506,756
2.50%, 1/15/22	United States	2,181,000		2,783,501
^aTheravance Inc., senior note, 2.125%, 1/15/23	United States	1,055,000		854,550
				4,144,807
Professional Services 0.0%^†
^a51job Inc., senior note, 3.25%, 4/15/19	China	253,000		261,381
Real Estate Investment Trusts (REITs) 1.2%
^a,cAmerican Residential Properties Inc., senior note, 144A, 3.25%, 11/15/18	United States	1,160,000		1,295,575
Colony Capital Inc., senior note, 3.875%, 1/15/21	United States	1,271,000		1,220,160
Colony Starwood Homes, senior note, 4.50%, 10/15/17	United States	628,000		666,073
^aForest City Enterprises Inc., senior note, 3.625%, 8/15/20	United States	1,447,000		1,596,222
Forest City Realty Trust Inc., senior note, 4.25%, 8/15/18	United States	290,000		337,850
^a,cGPT Property Trust LP, senior note, 144A, 3.75%, 3/15/19	United States	2,575,000		3,160,812
^aNational Health Investors Inc., senior note, 3.25%, 4/01/21	United States	1,097,000		1,173,104
Redwood Trust Inc., senior note, 4.625%, 4/15/18	United States	570,000		559,313
Spirit Realty Capital Inc., senior note, 2.875%, 5/15/19	United States	387,000		403,933
^aStarwood Property Trust Inc., senior note,
3.75%, 10/15/17	United States	2,353,000		2,370,648
4.55%, 3/01/18	United States	646,000		675,070
^aStarwood Waypoint Residential Trust, senior note, 3.00%, 7/01/19	United States	982,000		1,023,121
				14,481,881
Real Estate Management & Development 0.1%
^fAYC Finance Ltd., senior note, Reg S, 0.50%, 5/02/19	Philippines	200,000		211,000
^fCosmos Boom Investment Ltd., senior note, Reg S, 0.50%, 6/23/20	China	400,000		378,500
				589,500
Semiconductors & Semiconductor Equipment 0.8%
^fAdvanced Semiconductor Engineering Inc., senior note, Reg S,
zero cpn., 3/27/18	Taiwan	1,200,000		1,135,500
^aIntel Corp., junior sub. bond, 3.25%, 8/01/39	United States	1,274,000		2,015,315
^aMicrochip Technology Inc., junior sub. bond, 2.125%, 12/15/37	United States	749,000		1,609,882
Micron Technology Inc., senior bond, 3.00%, 11/15/43	United States	682,000		499,565
NVIDIA Corp., senior note, 1.00%, 12/01/18	United States	1,562,000		3,638,484
Trina Solar Ltd., senior note, 3.50%, 6/15/19	China	341,000		281,112
				9,179,858
Software 1.1%
^aBottomline Technologies de Inc., senior note, 1.50%, 12/01/17	United States	988,000		1,034,312
^a,cBroadSoft Inc., senior note, 144A, 1.00%, 9/01/22	United States	881,000		1,129,332

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*		Value
Convertible Bonds (continued)
Software (continued)
^cFireEye Inc., senior bond, 144A, 1.625%, 6/01/35	United States	466,000	$	385,324
^aNetSuite Inc., senior note, 0.25%, 6/01/18	United States	1,861,000		1,852,858
Nuance Communications Inc., senior bond,
2.75%, 11/01/31	United States	557,000		563,614
^c144A, 1.00%, 12/15/35	United States	1,203,000		1,081,948
^aRed Hat Inc., senior note, 0.25%, 10/01/19	United States	837,000		1,061,944
^aSalesforce.com Inc., senior note, 0.25%, 4/01/18	United States	1,021,000		1,382,179
^aTake-Two Interactive Software Inc., senior note, 1.00%, 7/01/18	United States	2,385,000		4,389,891
^aWorkday Inc., senior note, 0.75%, 7/15/18	United States	992,000		1,125,300
				14,006,702
Specialty Retail 0.1%
^a,cRestoration Hardware Holdings Inc., senior note, 144A,
zero cpn., 7/15/20	United States	955,000		684,019
^cVitamin Shoppe Inc., senior note, 144A, 2.25%, 12/01/20	United States	344,000		339,915
				1,023,934
Technology Hardware, Storage & Peripherals 0.0%^†
Violin Memory Inc., senior note, 4.25%, 10/01/19	United States	99,000		27,968
Textiles, Apparel & Luxury Goods 0.1%
^aIconix Brand Group Inc., senior sub. note, 1.50%, 3/15/18	United States	1,483,000		1,079,809
Trading Companies & Distributors 0.1%
^cKaman Corp., senior note, 144A, 3.25%, 11/15/17	United States	397,000		524,288
Transportation Infrastructure 0.2%
^fDP World Ltd., senior bond, Reg S, 1.75%, 6/19/24	United Arab Emirates	1,800,000		1,788,750
Total Convertible Bonds (Cost $167,131,678)				172,672,647
Convertible Bonds in Reorganization 0.0%^†
Semiconductors & Semiconductor Equipment 0.0%^†
^gSunEdison Inc., senior note,
^a,c144A, 0.25%, 1/15/20	United States	126,000		8,190
2.375%, 4/15/22	United States	247,000		16,055
Total Convertible Bonds in Reorganization
(Cost $341,877)				24,245
Corporate Bonds and Notes 17.9%
Aerospace & Defense 0.1%
Embraer Netherlands Finance BV, senior bond, 5.05%, 6/15/25	Brazil	95,000		94,406
^cEmbraer Overseas Ltd., senior bond, 144A, 5.696%, 9/16/23	Brazil	90,000		93,038
^cMeccanica Holdings USA Inc., senior bond, 144A, 6.25%, 1/15/40	Italy	555,000		541,125
^hRockwell Collins Inc., senior note, FRN, 0.984%, 12/15/16	United States	40,000		40,026
				768,595
Auto Components 0.0%^†
^c,hDaimler Finance North America LLC, senior note, 144A, FRN,
0.985%, 3/10/17	Germany	150,000		149,938
^cMidas Intermediate Holdco II LLC / Midas Intermediate Holdco II Finance
Inc., senior note, 144A, 7.875%, 10/01/22	United States	170,000		163,642
				313,580

34 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*		Value
Corporate Bonds and Notes (continued)
Banks 0.3%
Bank of America Corp.,
^hsenior note, FRN, 1.668%, 1/15/19	United States	20,000	$	20,091
sub. bond, 4.20%, 8/26/24	United States	135,000		138,093
sub. bond, Series L, 3.95%, 4/21/25	United States	335,000		335,122
^c,h,iCredit Agricole SA, junior sub., 144A, FRN, 7.875%, Perpetual	France	400,000		393,530
HSBC Holdings PLC, senior bond, 4.30%, 3/08/26	United Kingdom	350,000		366,687
^cIntesa Sanpaolo SpA, sub. bond, 144A,
5.017%, 6/26/24	Italy	955,000		906,455
5.71%, 1/15/26	Italy	460,000		453,053
ⁱRoyal Bank of Scotland Group PLC, 8.00% to 8/10/25, FRN
thereafter, Perpetual	United Kingdom	410,000		404,363
^cSantander UK Group Holdings PLC, sub. bond, 144A, 4.75%, 9/15/25	United Kingdom	270,000		266,828
^c,h,iSociete Generale SA, junior sub., 144A, FRN, 7.875%, Perpetual	France	750,000		725,274
^hToyota Motor Credit Corp., senior note, FRN, 1.023%, 1/17/19	United States	40,000		40,033
				4,049,529
Beverages 0.0%^†
^hAnheuser-Busch InBev Finance Inc., senior note, FRN, 0.824%, 1/27/17	Belgium	45,000		44,998
^hThe Coca-Cola Co., senior note, FRN, 0.737%, 11/01/16	United States	80,000		80,039
				125,037
Biotechnology 0.0%^†
AbbVie Inc., senior note, 3.60%, 5/14/25	United States	315,000		323,373
^hAmgen Inc., senior note, FRN, 1.034%, 5/22/17	United States	125,000		125,047
				448,420
Building Products 0.0%^†
Owens Corning, senior bond, 4.20%, 12/01/24	United States	165,000		169,354
Capital Markets 0.0%^†
Brixmor Operating Partnership LP, senior bond, 3.85%, 2/01/25	United States	265,000		257,645
Morgan Stanley, sub. bond, 4.35%, 9/08/26	United States	150,000		154,928
				412,573
Chemicals 0.0%^†
Albemarle Corp., senior bond, 4.15%, 12/01/24	United States	141,000		143,782
^cSolvay Finance America LLC, senior bond, 144A, 4.45%, 12/03/25	Belgium	200,000		205,385
				349,167
Commercial Services & Supplies 0.4%
RR Donnelley & Sons Co.,
senior bond, 6.00%, 4/01/24	United States	3,814,000		3,413,530
senior note, 7.00%, 2/15/22	United States	1,565,000		1,521,962
				4,935,492
Communications Equipment 0.1%
Alcatel-Lucent USA Inc., senior bond,
6.50%, 1/15/28	France	150,000		156,750
6.45%, 3/15/29	France	495,000		527,175
^hCisco Systems Inc., senior note, FRN, 0.966%, 3/03/17	United States	100,000		100,188
				784,113
Construction Materials 0.1%
^cCemex SAB de CV, senior secured bond, 144A,
7.75%, 4/16/26	Mexico	300,000		316,125
first lien, 6.125%, 5/05/25	Mexico	365,000		355,875
				672,000

franklintempleton.com

Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*			Value
Corporate Bonds and Notes (continued)
Consumer Finance 0.0%^†
^hCaterpillar Financial Services Corp., senior note, FRN,
0.916%, 3/03/17	United States	110,000		$	110,103
0.806%, 6/09/17	United States	300,000			300,079
^c,hNissan Motor Acceptance Corp., senior note, 144A, FRN, 1.236%, 3/03/17	Japan	105,000			105,064
					515,246
Diversified Financial Services 3.4%
Ally Financial Inc.,
senior note, 4.25%, 4/15/21	United States	245,000			246,225
sub. bond, 5.75%, 11/20/25	United States	245,000			248,981
^hAmerican Honda Finance Corp., senior note, FRN, 1.073%, 9/20/17	United States	180,000			180,544
^c,hThe Bank of Tokyo-Mitsubishi UFJ Ltd., senior note, 144A, FRN,
1.652%, 9/14/18	Japan	335,000			335,564
Everi Payments Inc., senior note, 10.00%, 1/15/22	United States	8,667,000			7,193,610
^cFinanciera de Desarrollo Territorial SA Findeter, senior bond, 144A,
7.875%, 8/12/24	Colombia	795,000,000	COP		226,978
^hFord Motor Credit Co. LLC, senior note, FRN, 1.413%, 1/17/17	United States	40,000			40,065
General Motors Financial Co. Inc., senior note, 3.70%, 5/09/23	United States	220,000			217,925
^c,hHyundai Capital Services Inc., senior note, 144A, FRN, 1.439%, 3/18/17	South Korea	200,000			199,922
^ciPayment Inc., senior note, 144A, 9.50%, 12/15/19	United States	10,199,166			10,301,158
^cLadder Capital Finance Holdings LLP, senior note, 144A, 5.875%, 8/01/21	United States	225,000			198,844
^c,jMarfrig Holdings Europe BV, senior note, 144A, 8.00%, 6/08/23	Brazil	245,000			246,642
^aNewStar Financial Inc., senior note, 7.25%, 5/01/20	United States	3,820,000			3,566,925
^cOpal Acquisition Inc., senior note, 144A, 8.875%, 12/15/21	United States	5,541,000			4,363,537
^cQuicken Loans Inc., senior note, 144A, 5.75%, 5/01/25	United States	580,000			552,450
^a,cROC Finance LLC / ROC Finance 1 Corp., secured note, second lien, 144A,
12.125%, 9/01/18	United States	12,840,000			13,482,000
^hShell International Finance BV, senior note, FRN,
0.836%, 11/15/16	Netherlands	80,000			80,047
0.95%, 5/10/17	Netherlands	390,000			390,470
					42,071,887
Diversified Telecommunication Services 0.1%
^a,cFrontier Communications Corp., senior note, 144A, 11.00%, 9/15/25	United States	640,000			653,600
^cOi SA, senior note, 144A, 9.75%, 9/15/16	Brazil	300,000	BRL		21,170
^aSprint Capital Corp., senior bond, 8.75%, 3/15/32	United States	1,106,000			898,625
^hVerizon Communications Inc., senior note, FRN, 1.036%, 6/09/17	United States	125,000			125,094
					1,698,489
Electric Utilities 0.5%
^hDuke Energy Corp., senior note, FRN, 1.009%, 4/03/17	United States	100,000			99,887
^hDuke Energy Progress Inc., secured note, FRN, 0.836%, 3/06/17	United States	50,000			49,906
^cEnel SpA, sub. bond, 144A, 8.75% to 9/24/23, FRN thereafter, 9/24/73	Italy	745,000			860,475
GenOn Americas Generation LLC, senior bond, 9.125%, 5/01/31	United States	840,000			596,400
^cReal Alloy Holding Inc., senior note, 144A, 10.00%, 1/15/19	United States	4,448,000			4,448,000
					6,054,668
Electronic Equipment, Instruments & Components 0.1%
Avnet Inc., senior bond, 4.625%, 4/15/26	United States	100,000			101,443
Flextronics International Ltd., senior note, 4.75%, 6/15/25	United States	235,000			237,056
Keysight Technologies Inc., senior note, 4.55%, 10/30/24	United States	400,000			399,431
					737,930

36 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*			Value
Corporate Bonds and Notes (continued)
Energy Equipment & Services 0.3%
Diamond Offshore Drilling Inc., senior bond, 4.875%, 11/01/43	United States	60,000		$	42,939
Noble Holding International Ltd., senior bond,
5.25%, 3/15/42	United Kingdom	190,000			100,225
7.95%, 4/01/45	United Kingdom	270,000			178,568
Petroleos Mexicanos,
^fsenior bond, Reg S, 6.875%, 8/04/26	Mexico	1,007,000			1,096,724
^fsenior note, Reg S, 3.75%, 3/15/19	Mexico	217,000	EUR		249,180
senior note, 4.25%, 1/15/25	Mexico	581,000			544,745
Targa Resources Partners LP / Targa Resources Partners Finance Corp.,
senior bond, 6.375%, 8/01/22	United States	25,000			24,937
senior bond, 5.25%, 5/01/23	United States	15,000			14,175
senior bond, 4.25%, 11/15/23	United States	350,000			315,000
^csenior note, 144A, 6.75%, 3/15/24	United States	590,000			585,575
Western Refining Logistics LP / WNRL Finance Corp., senior note,
7.50%, 2/15/23	United States	80,000			78,200
					3,230,268
Food & Staples Retailing 0.2%
New Albertsons Inc., senior bond, 7.45%, 8/01/29	United States	669,000			648,930
Tesco PLC, senior bond, 5.125%, 4/10/47	United Kingdom	1,400,000	EUR		1,487,533
					2,136,463
Food Products 0.0%^†
^cJBS USA LLC / JBS USA Finance Inc., senior bond, 144A,
7.25%, 6/01/21	United States	10,000			10,350
5.75%, 6/15/25	United States	65,000			62,400
					72,750
Gas Utilities 0.0%^†
NGL Energy Partners LP / NGL Energy Finance Corp., senior note,
5.125%, 7/15/19	United States	230,000			208,150
6.875%, 10/15/21	United States	30,000			25,950
					234,100
Health Care Equipment & Supplies 0.6%
Universal Hospital Services Inc., senior note, 7.625%, 8/15/20	United States	7,661,000			7,191,764
Health Care Providers & Services 0.7%
CHS / Community Health Systems Inc., senior note, 6.875%, 2/01/22	United States	3,759,000			3,249,242
Express Scripts Holding Co., senior bond, 4.50%, 2/25/26	United States	370,000			396,834
IASIS Healthcare LLC / IASIS Capital Corp., senior note, 8.375%, 5/15/19	United States	1,702,000			1,642,430
^aKindred Healthcare Inc., senior note, 8.75%, 1/15/23	United States	3,399,000			3,339,517
^c,jMPH Acquisition Holdings LLC, senior note, 144A, 7.125%, 6/01/24	United States	270,000			278,100
					8,906,123
Hotels, Restaurants & Leisure 1.3%
^aCaesars Entertainment Resort Properties LLC / Caesars Entertainment Resort
Properties, secured note, second lien, 11.00%, 10/01/21	United States	1,892,000			1,821,050
Choice Hotels International Inc., senior bond, 5.70%, 8/28/20	United States	125,000			135,000
^cDownstream Development Authority of the Quapaw Tribe of Oklahoma, secured
note, 144A, 10.50%, 7/01/19	United States	7,196,000			6,764,240
^cGolden Nugget Escrow Inc., senior note, 144A, 8.50%, 12/01/21	United States	4,224,000			4,403,520
Mohegan Tribal Gaming Authority, senior note, 9.75%, 9/01/21	United States	1,853,000			1,961,864

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*			Value
Corporate Bonds and Notes (continued)
Hotels, Restaurants & Leisure (continued)
Wyndham Worldwide Corp., senior bond, 5.10%, 10/01/25	United States	400,000		$	425,707
					15,511,381
Household Durables 0.1%
Sharp Corp., senior note, 1.604%, 9/13/19	Japan	100,000,000	JPY		813,945
Household Products 0.0%^†
^hThe Procter & Gamble Co., senior note, FRN, 0.717%, 11/04/16	United States	80,000			80,027
Independent Power & Renewable Electricity Producers 0.1%
AES Corp., senior note, 6.00%, 5/15/26	United States	285,000			289,275
GenOn Energy Inc., senior note,
9.50%, 10/15/18	United States	187,000			148,198
9.875%, 10/15/20	United States	210,000			151,725
					589,198
Insurance 0.1%
American International Group Inc., senior bond, 3.90%, 4/01/26	United States	475,000			481,841
^f,hAssicurazioni Generali SpA, senior sub. bond, FRN, Reg S, 7.75%, 12/12/42	Italy	100,000	EUR		134,421
Old Republic International Corp., senior bond, 4.875%, 10/01/24	United States	415,000			443,997
					1,060,259
Life Sciences Tools & Services 1.1%
inVentiv Health Inc., senior note,
10.00%, 8/15/18	United States	8,456,000			8,434,860
10.00%, 8/15/18	United States	995,000			980,075
^c,k144A, PIK, 10.00%, 8/15/18	United States	3,747,626			3,831,948
					13,246,883
Marine 0.0%^†
^fPB Issuer No. 3 Ltd., Reg S, 1.875%, 10/22/18	Hong Kong	400,000			389,500
Media 3.7%
American Media Inc.,
^csecured note, second lien, 144A, 7.00%, 7/15/20	United States	16,025,058			17,908,002
senior secured note, first lien, 11.50%, 12/15/17	United States	395,000			404,875
^cCCO Holdings LLC / CCO Holdings Capital Corp., senior note, 144A,
5.125%, 5/01/23	United States	35,000			35,525
Clear Channel Worldwide Holdings Inc., senior sub. note, Series B,
7.625%, 3/15/20	United States	1,095,000			1,056,675
^cCox Communications Inc., senior bond, 144A,
4.70%, 12/15/42	United States	120,000			103,636
4.50%, 6/30/43	United States	220,000			185,336
CSC Holdings LLC, senior bond, 7.625%, 7/15/18	United States	245,000			266,438
DISH DBS Corp., senior note, 5.875%, 11/15/24	United States	510,000			474,619
^cLee Enterprises Inc., senior secured note, first lien, 144A, 9.50%, 3/15/22	United States	6,710,000			6,710,000
The McClatchy Co., senior secured note, first lien, 9.00%, 12/15/22	United States	7,751,000			7,402,205
Postmedia Network Inc., secured note, second lien, 12.50%, 7/15/18	Canada	5,922,000			2,383,605
^cTime Inc., senior note, 144A, 5.75%, 4/15/22	United States	8,822,000			8,447,065
Time Warner Cable Inc., senior bond, 4.50%, 9/15/42	United States	240,000			214,631
					45,592,612

38 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*		Value
Corporate Bonds and Notes (continued)
Metals & Mining 0.8%
AK Steel Corp.,
senior bond, 7.625%, 5/15/20	United States	3,722,000	$	3,005,515
senior bond, 8.375%, 4/01/22	United States	3,817,000		2,953,404
senior note, 7.625%, 10/01/21	United States	4,977,000		3,838,511
United States Steel Corp.,
senior bond, 7.375%, 4/01/20	United States	233,000		203,292
senior bond, 7.50%, 3/15/22	United States	150,000		117,750
senior note, 6.875%, 4/01/21	United States	293,000		228,540
				10,347,012
Oil, Gas & Consumable Fuels 2.6%
Anadarko Petroleum Corp., senior bond, 4.50%, 7/15/44	United States	370,000		315,721
Antero Resources Corp., senior note,
5.375%, 11/01/21	United States	85,000		83,300
5.125%, 12/01/22	United States	345,000		332,063
^cBaytex Energy Corp., senior note, 144A,
5.125%, 6/01/21	Canada	10,000		8,150
5.625%, 6/01/24	Canada	495,000		386,100
^cBellatrix Exploration Ltd., senior note, 144A, 8.50%, 5/15/20	Canada	150,000		87,000
Bonanza Creek Energy Inc., senior note,
6.75%, 4/15/21	United States	115,000		44,275
5.75%, 2/01/23	United States	415,000		155,625
^hBP Capital Markets PLC, senior note, FRN, 1.052%, 11/07/16	United Kingdom	80,000		80,055
California Resources Corp., senior note,
5.50%, 9/15/21	United States	85,000		46,325
6.00%, 11/15/24	United States	1,055,000		573,656
^c144A, 8.00%, 12/15/22	United States	135,000		98,381
Chesapeake Energy Corp.,
senior bond, 6.625%, 8/15/20	United States	5,000		3,300
senior bond, 6.125%, 2/15/21	United States	20,000		12,700
senior note, 5.375%, 6/15/21	United States	5,000		3,138
senior note, 4.875%, 4/15/22	United States	170,000		102,850
^hChevron Corp., senior note, FRN, 0.796%, 11/15/17	United States	145,000		144,650
Concho Resources Inc., senior bond,
5.50%, 10/01/22	United States	75,000		75,375
5.50%, 4/01/23	United States	565,000		567,825
ConocoPhillips, senior bond, 6.50%, 2/01/39	United States	325,000		401,343
ConocoPhillips Co., senior bond, 4.95%, 3/15/26	United States	310,000		339,939
Continental Resources Inc.,
senior bond, 5.00%, 9/15/22	United States	1,535,000		1,458,250
senior bond, 4.90%, 6/01/44	United States	335,000		277,213
senior note, 4.50%, 4/15/23	United States	35,000		32,047
senior note, 3.80%, 6/01/24	United States	405,000		355,388
Devon Energy Corp., senior bond, 5.00%, 6/15/45	United States	427,000		361,614
^cEclipse Resources Corp., senior note, 144A, 8.875%, 7/15/23	United States	335,000		266,325
Enable Midstream Partners LP, senior bond, 5.00%, 5/15/44	United States	400,000		299,744
Energy Transfer Equity LP, secured bond, first lien, 7.50%, 10/15/20	United States	200,000		205,000
Energy Transfer Partners LP, senior bond,
5.15%, 3/15/45	United States	230,000		195,981
6.125%, 12/15/45	United States	540,000		509,008

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*			Value
Corporate Bonds and Notes (continued)
Oil, Gas & Consumable Fuels (continued)
EnLink Midstream Partners LP, senior bond,
5.60%, 4/01/44	United States	145,000		$	111,047
5.05%, 4/01/45	United States	245,000			181,331
Enterprise Products Operating LLC, senior bond, 3.70%, 2/15/26	United States	35,000			35,500
^f,hEP PetroEcuador via Noble Sovereign Funding I Ltd., secured note, FRN, Reg S,
6.258%, 9/24/19	Ecuador	594,632			566,387
^hExxon Mobil Corp., senior note, FRN, 0.674%, 3/15/17	United States	110,000			109,966
Halcon Resources Corp.,
^csecured note, second lien, 144A, 8.625%, 2/01/20	United States	410,000			389,500
senior note, 9.75%, 7/15/20	United States	370,000			74,925
Kinder Morgan Energy Partners LP, senior bond,
3.45%, 2/15/23	United States	70,000			65,805
3.50%, 9/01/23	United States	100,000			93,492
5.625%, 9/01/41	United States	130,000			116,091
5.00%, 8/15/42	United States	300,000			253,922
4.70%, 11/01/42	United States	150,000			123,050
5.00%, 3/01/43	United States	30,000			25,772
^aKinder Morgan Inc., senior bond, 8.05%, 10/15/30	United States	3,439,000			3,757,902
Marathon Oil Corp., senior bond, 5.20%, 6/01/45	United States	345,000			290,358
Matador Resources Co., senior note, 6.875%, 4/15/23	United States	497,000			501,970
^cMEG Energy Corp., 144A,
senior bond, 6.375%, 1/30/23	Canada	180,000			138,600
senior bond, 7.00%, 3/31/24	Canada	425,000			329,375
senior note, 6.50%, 3/15/21	Canada	230,000			182,275
MPLX LP,
senior bond, 4.00%, 2/15/25	United States	30,000			26,970
^csenior note, 144A, 4.50%, 7/15/23	United States	55,000			52,163
^csenior note, 144A, 4.875%, 12/01/24	United States	960,000			908,611
Noble Energy Inc.,
senior bond, 5.25%, 11/15/43	United States	255,000			243,443
senior bond, 5.05%, 11/15/44	United States	295,000			281,240
senior note, 5.625%, 5/01/21	United States	50,000			52,033
Oasis Petroleum Inc.,
senior bond, 6.875%, 1/15/23	United States	70,000			63,525
senior note, 7.25%, 2/01/19	United States	10,000			9,650
senior note, 6.875%, 3/15/22	United States	510,000			471,750
^cPacific Exploration and Production Corp., 144A,
senior bond, 5.125%, 3/28/23	Colombia	200,000			31,500
senior bond, 5.625%, 1/19/25	Colombia	515,000			81,113
senior note, 5.375%, 1/26/19	Colombia	175,000			27,563
^cParsley Energy LLC / Parsley Finance Corp., senior note, 144A, 6.25%, 6/01/24	United States	195,000			199,388
Petrobras Global Finance BV,
senior bond, 5.75%, 1/20/20	Brazil	240,000			225,780
senior bond, 5.375%, 1/27/21	Brazil	745,000			660,256
senior bond, 8.75%, 5/23/26	Brazil	766,000			728,849
senior bond, 6.85%, 6/05/15	Brazil	3,042,000			2,068,560
senior note, 4.875%, 3/07/18	Brazil	963,000	EUR		1,065,581
senior note, 4.875%, 3/17/20	Brazil	3,069,000			2,779,593
senior note, 8.375%, 5/23/21	Brazil	385,000			381,997
^fPetroleos de Venezuela SA, senior bond, Reg S,
6.00%, 5/16/24	Venezuela	995,000			328,947
6.00%, 11/15/26	Venezuela	4,735,000			1,538,401

40 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*			Value
Corporate Bonds and Notes (continued)
Oil, Gas & Consumable Fuels (continued)
Plains All American Pipeline LP / PAA Finance Corp., senior bond,
4.70%, 6/15/44	United States	464,000		$	366,119
4.90%, 2/15/45	United States	315,000			257,834
Regency Energy Partners LP / Regency Energy Finance Corp., senior note,
5.75%, 9/01/20	United States	75,000			77,067
Rice Energy Inc., senior note, 6.25%, 5/01/22	United States	300,000			297,000
RSP Permian Inc., senior note, 6.625%, 10/01/22	United States	1,250,000			1,296,875
Sabine Pass Liquefaction LLC, senior secured note, first lien, 5.625%, 3/01/25	United States	455,000			456,706
SM Energy Co.,
senior bond, 6.50%, 1/01/23	United States	60,000			54,913
senior bond, 5.625%, 6/01/25	United States	10,000			8,650
senior note, 6.50%, 11/15/21	United States	10,000			9,400
senior note, 6.125%, 11/15/22	United States	220,000			202,400
senior note, 5.00%, 1/15/24	United States	230,000			197,825
Whiting Petroleum Corp., senior note,
6.50%, 10/01/18	United States	145,000			134,850
5.00%, 3/15/19	United States	25,000			22,625
5.75%, 3/15/21	United States	570,000			485,925
The Williams Cos Inc., senior bond, 5.75%, 6/24/44	United States	605,000			496,100
Williams Partners LP, senior bond,
4.00%, 9/15/25	United States	125,000			108,075
5.10%, 9/15/45	United States	615,000			498,118
					32,367,004
Paper & Forest Products 0.3%
Resolute Forest Products Inc., senior note, 5.875%, 5/15/23	United States	4,346,000			3,243,202
Pharmaceuticals 0.3%
^cGreatbatch Ltd., senior note, 144A, 9.125%, 11/01/23	United States	320,000			323,200
^hJohnson & Johnson, senior note, FRN, 0.744%, 11/28/16	United States	20,000			20,006
^hMerck & Co. Inc., senior note, FRN, 0.755%, 2/10/17	United States	165,000			165,056
^cValeant Pharmaceuticals International Inc., senior note, 144A,
6.75%, 8/15/18	United States	260,000			255,450
5.625%, 12/01/21	United States	115,000			97,750
5.50%, 3/01/23	United States	385,000			321,475
4.50%, 5/15/23	United States	640,000	EUR		551,871
5.875%, 5/15/23	United States	2,150,000			1,818,094
					3,552,902
Professional Services 0.2%
^a,cAltegrity Inc., senior note, first lien, 144A, 9.50%, 7/01/19	United States	3,047,000			2,635,655
Verisk Analytics Inc., senior bond, 5.50%, 6/15/45	United States	390,000			381,225
					3,016,880
Real Estate Investment Trusts (REITs) 0.0%^†
Healthcare Realty Trust Inc., senior bond, 3.875%, 5/01/25	United States	75,000			73,378
Host Hotels & Resorts LP, senior bond, 4.00%, 6/15/25	United States	175,000			174,137
					247,515

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*		Value
Corporate Bonds and Notes (continued)
Real Estate Management & Development 0.0%^†
^cInterval Acquisition Corp., senior note, 144A, 5.625%, 4/15/23	United States	205,000	$	210,125
^cRialto Holdings LLC / Rialto Corp., senior note, 144A, 7.00%, 12/01/18	United States	178,000		176,665
				386,790
Semiconductors & Semiconductor Equipment 0.1%
Micron Technology Inc.,
senior bond, 5.50%, 2/01/25	United States	235,000		197,988
^csenior bond, 144A, 5.625%, 1/15/26	United States	455,000		373,100
^csenior note, 144A, 5.25%, 8/01/23	United States	270,000		230,175
^csenior note, 144A, 5.25%, 1/15/24	United States	375,000		316,875
				1,118,138
Software 0.1%
^cOpen Text Corp., senior bond, 144A, 5.875%, 6/01/26	Canada	1,110,000		1,115,550
^hOracle Corp., senior note, FRN, 0.827%, 7/07/17	United States	135,000		135,259
				1,250,809
Specialty Retail 0.0%^†
^hLowe’s Cos. Inc., senior note, FRN, 1.232%, 9/14/18	United States	255,000		257,429
Technology Hardware, Storage & Peripherals 0.2%
^c,jDiamond 1 Finance Corp. / Diamond 2 Finance Corp., senior secured bond,
first lien, 144A, 6.02%, 6/15/26	United States	1,105,000		1,117,036
^cWestern Digital Corp., senior note, 144A, 10.50%, 4/01/24	United States	725,000		752,187
				1,869,223
Thrifts & Mortgage Finance 0.0%^†
Santander Holdings USA Inc., senior bond, 4.50%, 7/17/25	United States	475,000		489,912
Trading Companies & Distributors 0.0%^†
Air Lease Corp.,
senior bond, 4.25%, 9/15/24	United States	170,000		172,030
senior note, 3.75%, 2/01/22	United States	90,000		91,423
				263,453
Total Corporate Bonds and Notes (Cost $212,463,093)				221,571,622
Corporate Bonds and Notes in Reorganization 0.3%
Electric Utilities 0.2%
^c,gEnergy Future Intermediate Holding Co. LLC / EFIH Finance Inc., senior
note, 144A, 11.25%, 12/01/18	United States	3,097,000		2,949,892
Energy Equipment & Services 0.1%
^c,gParagon Offshore PLC, 144A,
senior bond, 7.25%, 8/15/24	United States	1,423,000		394,883
senior note, 6.75%, 7/15/22	United States	1,841,000		510,877
				905,760
Oil, Gas & Consumable Fuels 0.0%^†
^gLinn Energy LLC / Linn Energy Finance Corp., senior bond, 7.75%, 2/01/21	United States	895,000		145,438
^c,gUltra Petroleum Corp., 144A,
senior bond, 6.125%, 10/01/24	United States	50,000		27,000
senior note, 5.75%, 12/15/18	United States	20,000		10,800
				183,238
Total Corporate Bonds and Notes in Reorganization
(Cost $3,913,093)				4,038,890

42 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*			Value
^h,lSenior Floating Rate Interests 0.1%
Auto Components 0.0%^†
Gates Global Inc., Term Loan B, 4.25%, 7/06/21	United States	179,361	$		173,532
Building Products 0.0%^†
Continental Building Products Inc., Term Loan, first lien, 4.00%, 8/28/20	United States	45,477			45,288
Ply Gem Holdings Inc., Term Loan, 4.00%, 2/01/21	United States	41,459			41,520
					86,808
Chemicals 0.0%^†
Emerald Performance Materials LLC, Term Loan, first lien, 4.50%, 7/30/21	United States	30,938			30,861
Communications Equipment 0.0%^†
Presidio Holdings, Term Loan B, 5.25%, 2/02/22	United States	188,100			187,600
Diversified Telecommunication Services 0.0%^†
Integra Telecom, Term Loan, 5.25%, 8/14/20	United States	223,247			216,132
Electric Utilities 0.0%^†
Power Buyer LLC, Delayed Draw, Term Loan, 4.25%, 5/06/20	United States	66,599			66,599
Health Care Providers & Services 0.0%^†
Universal Services, Delayed Draw, Term Loan, 4.75%, 7/28/22	United States	119,700			117,705
Insurance 0.0%^†
Hyperion Insurance Group Ltd., Term Loan B, 5.50%, 4/29/22	United States	44,550			43,436
IT Services 0.0%^†
Aptean Inc., Term Loan, first lien, 5.25%, 2/26/20	United States	49,000			48,755
Leisure Products 0.0%^†
SRAM LLC, Term Loan, first lien guaranteed, senior secured, 5.50%, 4/10/20	United States	34,762			30,851
Machinery 0.0%^†
North American Lifting Holdings Inc., Initial Term Loan, 5.50%, 11/27/20	United States	15,657			11,703
Onsite Rental Group Ltd., Term Loan B, 5.50%, 7/30/21	United States	117,202			88,488
					100,191
Oil, Gas & Consumable Fuels 0.0%^†
Energy Transfer Equity LP, Term Loan 2013, 3.25%, 12/02/19	United States	33,128			32,093
Energy Transfer Partners LP, Term Loan C, 4.00%, 12/02/19	United States	39,998			39,048
OSG Bulk Ships, Term Loan B, 5.25%, 8/05/19	United States	9,462			9,450
Southcross Energy Partners LP, senior secured, Term Loan B, first lien
guaranteed, 5.25%, 8/04/21	United States	29,623			24,272
					104,863
Retailing 0.0%^†
Talbots Inc., Initial Term Loan, first lien, 5.50%, 3/19/20	United States	66,882			65,084
Technology Hardware, Storage & Peripherals 0.1%
Western Digital Corp., Term Loan, 6.25%, 4/29/23	United States	420,000			419,935
Total Senior Floating Rate Interests (Cost $1,732,915)					1,692,352
Foreign Government and Agency Securities 2.3%
Government of Argentina,
^fsenior bond, Reg S, 6.875%, 4/22/21	Argentina	230,000			241,500
^csenior bond, 144A, 6.875%, 4/22/21	Argentina	250,000			262,625
^fsenior bond, Reg S, 7.50%, 4/22/26	Argentina	273,000			287,196
senior bond, 7.82%, 12/31/33	Argentina	3,700,343		EUR	4,179,117
^fsenior bond, Reg S, 7.625%, 4/22/46	Argentina	213,000			218,325

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*			Value
Foreign Government and Agency Securities (continued)
Government of Argentina, (continued)
senior note, 8.75%, 6/02/17	Argentina	2,083,173		$	2,197,747
^fGovernment of Bahrain, senior note, Reg S, 7.00%, 1/26/26	Bahrain	543,000			543,067
Government of Brazil, senior bond, 6.00%, 4/07/26	Brazil	1,521,000			1,543,815
^fGovernment of Cyprus, senior note, Reg S, 3.875%, 5/06/22	Cyprus	942,000	EUR		1,078,087
Government of Hellenic Republic,
^fsenior bond, Reg S, 3.00% to 2/24/20, 3.65% to 2/24/21, 4.30% thereafter,
2/24/42	Greece	4,602,800	EUR		3,501,104
^csenior note, 144A, 3.375%, 7/17/17	Greece	4,306,000	EUR		4,606,399
^csenior note, 144A, 4.75%, 4/17/19	Greece	2,779,000	EUR		2,891,773
Government of Hungary, senior bond, 5.375%, 2/21/23	Hungary	972,000			1,071,091
^fGovernment of Iraq, senior bond, Reg S, 5.80%, 1/15/28	Iraq	1,064,000			778,050
Government of Mexico, senior bond, 4.00%, 10/02/23	Mexico	1,140,000			1,191,300
^fGovernment of Pakistan, senior note, Reg S, 6.75%, 12/03/19	Pakistan	1,392,000			1,460,401
^fGovernment of Paraguay, senior note, Reg S, 4.625%, 1/25/23	Paraguay	945,000			970,987
^fGovernment of Sri Lanka, senior note, Reg S, 6.85%, 11/03/25	Sri Lanka	1,072,000			1,032,077
Total Foreign Government and Agency Securities
(Cost $25,213,272)					28,054,661
Asset-Backed Securities and Commercial
Mortgage-Backed Securities 1.9%
Airlines 0.1%
^cAir Canada 2015-2 Class B Pass Through Trust, third lien note, 144A,
5.00%, 6/15/25	Canada	505,000			493,006
^cLatam Airlines, 2015-1 Pass Through Trust B, 144A, 4.50%, 11/15/23	Chile	953,254			843,630
					1,336,636
Banks 0.1%
Capital One Multi-Asset Execution Trust,
2013-A3, 0.96%, 9/16/19	United States	100,000			100,073
2014-A2, 1.26%, 1/15/20	United States	40,000			40,080
2014-A5, 1.48%, 7/15/20	United States	90,000			90,462
2015-A7, 1.45%, 8/16/21	United States	400,000			401,714
^hWells Fargo Mortgage Backed Securities 2003-M Trust, A1, FRN,
2.787%, 12/25/33	United States	35,285			35,362
^hWells Fargo Mortgage Backed Securities 2004-0 Trust, A1, FRN,
2.743%, 8/25/34	United States	14,437			14,345
Wells Fargo Mortgage Backed Securities 2005-16 Trust, A18, 6.00%, 1/25/36	United States	7,253			7,182
^hWells Fargo Mortgage Backed Securities 2005-AR10 Trust, 2A4, FRN,
2.849%, 6/25/35	United States	21,720			21,757
					710,975
Commercial Services & Supplies 0.0%^†
^cShenton Aircraft Investment I Ltd., Series 2015-A, 144A, 4.75%, 10/15/42	Cayman Islands	333,514			326,844
Consumer Finance 0.1%
American Express Credit Account Master Trust,
^hSeries 2012-A, FRN, 0.704%, 1/15/20	United States	100,000			100,146
Series 2013-A, 0.98%, 5/15/19	United States	100,000			100,065
Series 2014-A, 1.26%, 1/15/20	United States	100,000			100,269
Series 2014-A, 1.49%, 4/15/20	United States	100,000			100,527
^hSeries 2014-A, FRN, 0.724%, 5/15/20	United States	100,000			100,211

44 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin K2 Alternative Strategies Fund (continued)


		Principal
	Country	Amount*		Value
Asset-Backed Securities and Commercial
Mortgage-Backed Securities (continued)
Consumer Finance (continued)
^hBank of America Credit Card Trust, FRN,
A, 0.704%, 9/16/19	United States	120,000	$	120,179
A, 0.814%, 6/15/21	United States	100,000		100,240
A3, 0.724%, 1/15/20	United States	100,000		100,192
				821,829
Diversified Financial Services 1.4%
^cAIM Aviation Finance Ltd., Series 2015-B1, 144A, 5.072%, 2/15/40	Cayman Islands	341,518		322,094
^hAlliance Bancorp 2007-OA1 Trust, A1, FRN, 0.686%, 7/25/37	United States	360,686		256,385
Ally Auto Receivables 2016-3 Trust, A3, 1.44%, 8/17/20	United States	180,000		180,072
^hAmerican Home Mortgage Investment 2006-1 Trust, 11A1, FRN,
0.726%, 3/25/46	United States	351,776		283,321
Banc of America Alternative Loan 2003-10 Trust, 3A1, 5.50%, 12/25/33	United States	193,834		196,152
Banc of America Alternative Loan 2003-8 Trust, 1CB1, 5.50%, 10/25/33	United States	11,943		12,085
Banc of America Alternative Loan 2004-9 Trust, 2CB1, 6.00%, 10/25/34	United States	12,683		12,764
Banc of America Alternative Loan 2005-6 Trust, CB7, 5.25%, 7/25/35	United States	23,570		21,465
^hBanc of America Funding 2004-B Trust, 1A2, FRN, 2.907%, 12/20/34	United States	84,821		78,404
Banc of America Funding 2005-5 Trust, 1A1, 5.50%, 9/25/35	United States	21,929		22,817
Banc of America Funding 2007-4 Trust, 5A1, 5.50%, 11/25/34	United States	210,528		209,162
^hBanc of America Mortgage 2005-A Trust, 2A1, FRN, 2.949%, 2/25/35	United States	13,114		12,674
^hBear Stearns ARM 2004-6 Trust, 2A1, FRN, 3.027%, 9/25/34	United States	86,826		80,128
^hBear Stearns ARM 2005-12 Trust, 11A1, FRN, 2.816%, 2/25/36	United States	26,867		20,808
^c,hBLCP Hotel Trust 2014-CLRN, E, 144A, FRN, 4.104%, 8/15/29	United States	100,000		96,451
BMW Vehicle Owner Trust,
2013-A3, 0.67%, 11/27/17	United States	13,428		13,419
2014-A3, 0.97%, 11/26/18	United States	65,618		65,619
BXHT 2015-DRMZ Mortgage Trust, 8.634%, 7/15/29	United States	239,031		235,370
^cCAM Mortgage 2016-1 Trust, 144A,
A, 4.00%, 1/15/56	United States	97,612		97,543
^hM, FRN, 5.00%, 1/15/56	United States	150,000		145,862
^cCAM Mortgage LLC, 144A,
^h2015-1, M, FRN, 4.75%, 7/15/64	United States	100,000		97,255
2015-A, 3.50%, 7/15/64	United States	94,813		95,127
^cCCRESG Commercial Mortgage 2016-HEAT Trust, D, 144A, 5.488%, 4/10/29	United States	100,000		100,262
Chase Issuance Trust,
^hA5, FRN, 0.804%, 4/15/21	United States	120,000		120,077
A8, 1.01%, 10/15/18	United States	100,000		100,076
Series 2014-A6, 1.26%, 7/15/19	United States	100,000		100,243
^hSeries 2014-A8, FRN, 0.684%, 11/15/18	United States	85,000		85,064
^hSeries 2015-A1, FRN, 0.754%, 2/18/20	United States	110,000		110,249
Series 2015-A2, 1.59%, 2/18/20	United States	135,000		135,946
Series 2015-A7, 1.62%, 7/15/20	United States	300,000		302,504
^cCLI Funding LLC, 2014-2A, 144A, 3.38%, 10/18/29	United States	84,111		80,256
^cColony American Homes, 144A,
^h2014-1, FRN, 2.584%, 5/17/31	United States	110,000		107,687
^h2014-2, FRN, 2.793%, 7/17/31	United States	300,000		296,029
^h2014-2, FRN, 3.64%, 7/17/31	United States	100,000		95,535
2015-1, D, 5.649%, 10/15/47	Cayman Islands	115,000		112,263
^h2015-D, FRN, 2.584%, 7/17/32	United States	200,000		193,316
^c,hCOMM 2014-SAVA Mortgage Trust, 2014-C, 144A, FRN, 2.835%, 6/15/34	United States	100,000		98,221

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Annual Report

F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*		Value

Asset-Backed Securities and Commercial
Mortgage-Backed Securities (continued)
Diversified Financial Services (continued)
Countrywide Alternative Loan Trust,
2003-2A1, 5.75%, 10/25/33	United States	24,957	$	25,838
2003-A7, 5.50%, 7/25/33	United States	25,310		25,146
2004-1A1, 5.50%, 4/25/34	United States	58,058		59,168
2004-5A1, 5.75%, 1/25/35	United States	10,834		10,958
2005-2A1, 5.50%, 2/25/25	United States	11,279		11,525
h 2005-2A1, FRN, 0.656%, 5/25/35	United States	64,576		52,254
h Countrywide Home Loans Mortgage Pass-Through 2004-12 Trust, 8A1, FRN,
2.969%, 8/25/34	United States	18,967		16,775
h Countrywide Home Loans Mortgage Pass-Through 2004-HYB4 Trust, 2A1, FRN,
2.712%, 9/20/34	United States	148,360		142,987
Countrywide Home Loans Mortgage Pass-Through 2005-21 Trust, A17,
5.50%, 10/25/35	United States	18,387		17,150
c CPS Auto Receivables 2014-B Trust, D, 144A, 4.62%, 5/15/20, B	United States	110,000		104,325
c CPS Auto Receivables 2016-B Trust, E, 144A, 8.14%, 5/15/23, B	United States	500,000		499,763
c,h Credit Suisse Mortgage Capital Certificates, 2015-A, 144A, FRN,
1.684%, 3/15/17	United States	110,000		109,523
Deutsche Alt-A Securities Inc. Mortgage Loan 2005-3 Trust, 4A4,
5.25%, 6/25/35	United States	883		883
h Deutsche Alt-A Securities Inc. Mortgage Loan 2005-5 Trust, 1A4, FRN,
5.50%, 11/25/35	United States	13,028		12,421
h Discover Card Execution Note Trust, A1, FRN, 0.784%, 8/17/20	United States	210,000		210,583
h DSLA Mortgage Loan 2005-AR5 Trust, 2A1A, FRN, 0.769%, 9/19/45	United States	71,247		51,759
c DT Auto Owner 2014-3 Trust, D, 144A, 4.47%, 11/15/21	United States	50,000		50,518
c DT Auto Owner 2016-1 Trust, D, 144A, 4.66%, 12/15/22	United States	180,000		175,958
c DT Auto Owner 2016-2 Trust, D, 144A, 5.43%, 11/15/22	United States	240,000		238,993
c,h Extended Stay America 2013-ESH Trust, D7, 144A, FRN, 4.036%, 12/05/31	United States	220,000		221,583
c First Investors Auto Owner 2016-1 Trust, D, 144A, 4.70%, 4/18/22	United States	110,000		107,410
Ford Credit Auto Owner Trust,
c 2014-A, 144A, 2.31%, 4/15/26	United States	100,000		101,548
2014-A3, 0.90%, 10/15/18	United States	83,179		83,162
2014-A3, 1.06%, 5/15/19	United States	55,000		55,014
2015-A3, 1.28%, 9/15/19	United States	85,000		85,199
2015-A3, 1.41%, 2/15/20	United States	396,000		397,261
h Freddie Mac Structured Agency Credit Risk Debt Notes, FRN,
2013-M2, 4.696%, 11/25/23	United States	250,000		253,386
2015-M2, 2.296%, 10/25/27	United States	250,000		249,629
2015-M3, 3.746%, 10/25/27	United States	250,000		244,820
h GMACM Mortgage Loan 2005-AR4 Trust, 3A1, FRN, 3.223%, 7/19/35	United States	241,164		219,514
c,h GP Portfolio 2014-GGP Trust, A, 144A, FRN, 1.384%, 2/15/27	United States	75,976		75,438
GSR Mortgage Loan 2005-4F Trust, 6A1, 6.50%, 2/25/35	United States	35,789		35,992
h GSR Mortgage Loan 2005-AR6 Trust, 4A5, FRN, 2.806%, 9/25/35	United States	210,072		209,704
h Harborview Mortgage Loan 2004-2 Trust, 1A1, FRN, 0.959%, 6/19/34	United States	190,013		162,659
h Harborview Mortgage Loan Trust, 1A, FRN, 0.809%, 10/19/33	United States	139,535		130,807
c Hilton USA 2013-HLT Trust, CFX, 144A, 3.714%, 11/05/30	United States	100,000		100,486
Honda Auto Receivables 2013-4 Owner Trust, A3, 0.69%, 9/18/17	United States	10,803		10,798
Honda Auto Receivables 2014-2 Owner Trust, A3, 0.77%, 3/19/18	United States	58,259		58,213
Honda Auto Receivables 2014-3 Owner Trust,
A3, 0.88%, 6/15/18	United States	37,262		37,252
A4, 1.31%, 10/15/20	United States	30,000		30,054
Honda Auto Receivables 2014-4 Owner Trust, A3, 0.99%, 9/17/18	United States	52,446		52,448

46 Annual Report

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*		Value

Asset-Backed Securities and Commercial
Mortgage-Backed Securities (continued)
Diversified Financial Services (continued)
Honda Auto Receivables 2015-1 Owner Trust, A3, 1.05%, 10/15/18	United States	60,000	$	60,011
Honda Auto Receivables 2015-2 Owner Trust, A3, 1.04%, 2/21/19	United States	400,000		399,939
Honda Auto Receivables 2015-3 Owner Trust, A3, 1.27%, 4/18/19	United States	135,000		135,210
Honda Auto Receivables 2015-4 Owner Trust, A3, 1.23%, 9/23/19	United States	390,000		389,973
Honda Auto Receivables 2016-2 Owner Trust, A3, 1.39%, 4/15/20	United States	180,000		179,997
Hyundai Auto Receivables 2014-4 Owner Trust, A3, 0.79%, 7/16/18	United States	57,108		57,076
Hyundai Auto Receivables 2015-A Owner Trust, A3, 1.05%, 4/15/19	United States	55,000		55,008
Hyundai Auto Receivables 2015-B Owner Trust, A3, 1.12%, 11/15/19	United States	230,000		229,863
h IndyMac Mortgage Loan 2005-AR11 Trust, A3, FRN, 2.718%, 8/25/35	United States	99,215		82,102
c,h Invitation Homes 2014-SFR1 Trust, D, 144A, FRN, 3.034%, 6/17/31	United States	160,000		158,419
c,h Invitation Homes Trust, B, 144A, FRN, 1.934%, 6/17/31	United States	100,000		98,609
h JP Morgan Alternative Loan 2006-A1 Trust, 3A1, FRN, 2.747%, 3/25/36	United States	85,888		71,598
c,h JP Morgan Chase Commercial Mortgage Securities 2015-SGP Trust, D, 144A,
FRN, 4.934%, 7/15/36	United States	180,000		176,848
h JP Morgan Mortgage 2003-A2 Trust, 3A1, FRN, 2.468%, 11/25/33	United States	17,955		17,095
JP Morgan Mortgage 2004-S1 Trust, 2A1, 6.00%, 9/25/34	United States	195,148		197,587
h JP Morgan Mortgage 2005-A1 Trust, 6T1, FRN, 2.873%, 2/25/35	United States	31,670		30,122
h JP Morgan Mortgage 2005-A3 Trust, 4A1, FRN, 2.816%, 6/25/35	United States	14,333		14,386
JP Morgan Mortgage 2005-S3 Trust, 1A11, 6.00%, 1/25/36	United States	208,516		167,421
h JP Morgan Mortgage 2006-A1 Trust, 1A2, FRN, 2.669%, 2/25/36	United States	52,551		46,607
h JP Morgan Mortgage 2006-A7 Trust, 2A4, FRN, 2.791%, 1/25/37	United States	42,631		37,846
h JP Morgan Mortgage 2007-A1 Trust, 4A2, FRN, 2.714%, 7/25/35	United States	10,348		10,348
JP Morgan Mortgage 2007-S1 Trust, 2A22, 5.75%, 3/25/37	United States	64,283		52,041
h Lehman XS Trust Series, A2A, FRN, 0.666%, 4/25/46	United States	98,454		68,680
h Merrill Lynch Mortgage Investors MLCC, FRN,
2006-1A, 2.677%, 2/25/36	United States	155,649		144,023
2006-2A, 2.515%, 5/25/36	United States	14,874		14,386
c,h Morgan Stanley Capital I 2011-C2 Trust, E, 144A, FRN, 5.465%, 6/15/44	United States	150,000		152,009
c Motel 6 2015-M6MZ Trust, M, 144A, 8.23%, 2/05/20	United States	996,109		953,874
National City Mortgage Capital 2008-1 Trust, 2A1, 6.00%, 3/25/38	United States	71,617		74,743
h New York Mortgage 2006-1 Trust, 2A2, FRN, 2.952%, 5/25/36	United States	36,293		32,659
Nissan Auto Lease 2014-B Trust, A3, 1.12%, 9/15/17	United States	45,000		45,036
Nissan Auto Receivables 2013-C Owner Trust, A3, 0.67%, 8/15/18	United States	11,623		11,607
Nissan Auto Receivables 2015-C Owner Trust, A3, 1.37%, 5/15/20	United States	400,000		401,005
h Ocwen Loan Servicing LLC, MASTR Adjustable Rate Mortgages 2004-7 Trust,
3A1, FRN, 2.644%, 7/25/34	United States	54,562		52,919
Ocwen Loan Servicing LLC, MASTR Alternative Loan 2004-8 Trust, 2A1,
6.00%, 9/25/34	United States	107,142		111,259
c OneMain Financial Issuance 2015-1 Trust, A, 144A, 3.19%, 3/18/26	United States	150,000		151,136
c OneMain Financial Issuance 2015-3 Trust, B, 144A, 4.16%, 11/20/28	United States	155,000		145,980
c OneMain Financial Issuance 2016-2 Trust, B, 144A, 5.94%, 3/20/28	United States	235,000		239,616
c Prestige Auto Receivables 2016-1 Trust, E, 144A, 7.69%, 3/15/23	United States	200,000		200,970
c,h RCO Depositor II LLC 2015-2A Trust, FRN, 144A,
A, 4.50%, 11/25/45	United States	156,001		156,374
M, 5.00%, 11/25/45	United States	213,000		204,106
h RFMSI Series 2005-SA1 Trust, 1A1, FRN, 3.793%, 3/25/35	United States	151,857		116,678
c,h SCG Trust 2013-SRP1, FRN, 144A,
A, 1.834%, 11/15/26	United States	100,000		99,889
B, 2.934%, 11/15/26	United States	100,000		98,140
C, 3.684%, 11/15/26	United States	100,000		97,315
D, 3.778%, 11/15/26	United States	245,000		230,358

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I DAT E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*		Value

Asset-Backed Securities and Commercial
Mortgage-Backed Securities (continued)
Diversified Financial Services (continued)
c Sierra Timeshare 2013-3 Receivables Funding LLC, A, 144A, 2.20%, 10/20/30	United States	53,907	$	53,836
c Sofi Professional Loan Program 2016-A LLC, B, 144A, 3.57%, 1/26/38	United States	230,000		225,246
h Structured Adjustable Rate Mortgage Loan Trust, FRN,
1A, 2.638%, 6/25/34	United States	25,118		24,518
7A3, 2.838%, 9/25/34	United States	46,192		45,864
Structured Asset Securities Corp. 2005-1 Trust, 7A7, 5.50%, 2/25/35	United States	21,608		21,979
c TAL Advantage V LLC, A, 144A, 3.55%, 11/20/38	United States	75,000		72,272
Toyota Auto Receivables 2014-C Owner Trust, A3, 0.93%, 7/16/18	United States	36,108		36,110
Toyota Auto Receivables 2015-B Owner Trust, A3, 1.27%, 5/15/19	United States	255,000		255,379
Toyota Auto Receivables 2015-C Owner Trust, A3, 1.34%, 6/17/19	United States	135,000		135,388
USAA Auto Owner 2015-1 Trust, A3, 1.20%, 6/17/19	United States	150,000		150,222
c VOLT LLC, 2015-NPL2 A1, 144A, 3.375%, 2/25/55	United States	77,622		76,765
h WaMu Mortgage Pass-Through Certificates Series 2007-HY5 Trust, 2A3, FRN,
2.30%, 5/25/37	United States	159,520		132,692
h Wells Fargo Bank, N. A. , Adjustable Rate Mortgage 2004-4 Trust, 3A1, FRN,
3.008%, 3/25/35	United States	55,052		53,592
c,h WF-RBS Commercial Mortgage 2012-C6 Trust, D, 144A, FRN, 5.56%, 4/15/45	United States	150,000		151,580
World Financial Network Credit Card Master Trust,
h 2015-A, FRN, 0.914%, 2/15/22	United States	120,000		119,981
2015-C, 1.26%, 3/15/21	United States	400,000		399,967

				17,757,868

Other ABS 0.0%
c Oak Hill Advisors Residential Loan 2015-NPL2 Trust, A1, 144A,
3.721%, 7/25/55	United States	99,503		98,880

Real Estate Investment Trusts (REITs) 0.1%
c American Homes 4 Rent, 144A,
h 2014-E, FRN, 2.934%, 6/17/31	United States	100,000		96,434
2014-E, 6.231%, 10/17/36	United States	250,000		254,217
2014-E, 6.418%, 12/17/36	United States	100,000		106,952
2015-E, 5.639%, 4/17/52	United States	210,000		211,177
h Citigroup Mortgage Loan 2005-2 Trust, 1A4, FRN, 2.946%, 5/25/35	United States	25,355		23,740
c,h Citigroup Mortgage Loan 2009-10 Trust, 6A2, 144A, FRN, 2.938%, 9/25/34	United States	120,000		110,208
c,h Citigroup Mortgage Loan 2015-2 Trust, 1A1, 144A, FRN, 0.639%, 6/25/47	United States	94,928		83,314
h Citigroup Mortgage Loan Trust Inc. , FRN,
c 2A1, 144A, 0.579%, 8/25/36	United States	81,697		71,853
2A3, 2.766%, 8/25/35	United States	127,006		118,123

				1,076,018

Thrifts & Mortgage Finance 0.1%
Citibank Credit Card Issuance Trust,
h 2013-A2, FRN, 0.723%, 5/26/20	United States	125,000		125,206
h 2013-A7, FRN, 0.868%, 9/10/20	United States	200,000		200,718
2014-A2, 1.02%, 2/22/19	United States	100,000		100,065
2014-A4, 1.23%, 4/24/19	United States	100,000		100,227
h 2014-A7, FRN, 0.643%, 8/24/18	United States	100,000		100,023
2014-A8, 1.73%, 4/09/20	United States	100,000		100,935
Credit Suisse First Boston Mortgage Securities Corp. ,
h 2003-4A1, FRN, 2.833%, 12/25/33	United States	6,439		6,336
2003-4A4, 5.75%, 11/25/33	United States	3,690		3,865

48 Annual Report

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*		Value

Asset-Backed Securities and Commercial
Mortgage-Backed Securities (continued)
Thrifts & Mortgage Finance (continued)
Credit Suisse First Boston Mortgage Securities Corp. ,
h 2003-7A1, FRN, 2.755%, 11/25/33	United States	10,060	$	9,721
h 2004-3A1, FRN, 2.972%, 5/25/34	United States	25,741		24,214
2005-2A1, 5.25%, 11/25/20	United States	61,545		60,545
h GS Mortgage Securities 2007-GG10 Trust, AM, FRN, 5.794%, 8/10/45	United States	510,000		486,974

				1,318,829

Total Asset-Backed Securities and Commercial
Mortgage-Backed Securities (Cost $23,558,556)				23,447,879


		Number of
		Contracts

Options Purchased 0.5%
Calls Exchange-Traded
Air Freight & Logistics 0.0%
Atlas Air Worldwide Holdings Inc. , November Strike Price $55.00,
Expires 11/18/16	United States	57		10,402

Biotechnology 0.0%
Array BioPharma Inc. , June Strike Price $4.00, Expires 6/17/16	United States	75		1,125
Baxalta Inc. , June Strike Price $35.00, Expires 6/17/16	United States	93		95,325

				96,450

Chemicals 0.0%
Monsanto Co. , October Strike Price $110.00, Expires 10/21/16	United States	80		65,600

Construction Materials 0.0%
Cemex SAB de CV, ADR, June Strike Price $5.77, Expires 6/17/16	Mexico	166		12,689

Consumer Finance 0.0%
Encore Capital Group Inc. , June Strike Price $30.00, Expires 6/17/16	United States	14		315
Encore Capital Group Inc. , September Strike Price $35.00, Expires 9/16/16	United States	39		3,120

				3,435

Diversified Consumer Services 0.0%
Ascent Capital Group Inc. , July Strike Price $17.50, Expires 7/15/16	United States	26		8,710

Diversified Financial Services 0.0%
Nikkei 225 Index, September Strike Price 17,500.00 JPY, Expires 9/09/16	Japan	15		88,725

Electrical Equipment 0.0%
SolarCity Corp. , October Strike Price $22.00, Expires 10/21/16	United States	13		4,875

Exchange Traded Funds 0.0%
iShares Russell 2000 ETF, June Strike Price $116.00, Expires 6/17/16	United States	345		33,465
SPDR Barclays High Yield Bond ETF, June Strike Price $34.00,
Expires 6/17/16	United States	148		19,240
SPDR S&P500 ETF Trust, June Strike Price $212.00, Expires 6/17/16	United States	371		32,648
SPDR S&P500 ETF Trust, August Strike Price $224.00, Expires 8/19/16	United States	329		6,909

				92,262

Food Products 0.0%
Bunge Ltd. , July Strike Price $67.50, Expires 7/15/16	United States	15		2,130

franklintempleton.com

Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

		Number of
	Country	Contracts		Value
Options Purchased (continued)
Calls – Exchange-Traded (continued)
Health Care Technology 0.0%^†
Allscripts Healthcare Solutions Inc., June Strike Price $15.00, Expires 6/17/16	United States	88	$	880
Household Durables 0.0%^†
Meritage Homes Corp., June Strike Price $37.50, Expires 6/17/16	United States	22		1,342
Toll Brothers Inc., June Strike Price $32.00, Expires 6/17/16	United States	14		126
Toll Brothers Inc., June Strike Price $33.00, Expires 6/17/16	United States	22		132
				1,600
Insurance 0.0%^†
AmTrust Financial Services Inc., September Strike Price $28.75,
Expires 9/16/16	United States	41		3,075
Internet & Catalog Retail 0.0%^†
Shutterfly Inc., June Strike Price $50.00, Expires 6/17/16	United States	26		910
Internet Software & Services 0.0%^†
Blucora Inc., July Strike Price $10.00, Expires 7/15/16	United States	39		780
MercadoLibre Inc., July Strike Price $145.00, Expires 7/15/16	Argentina	43		11,395
Monster Worldwide Inc., June Strike Price $3.00, Expires 6/17/16	United States	236		2,360
Twitter Inc., September Strike Price $17.00, Expires 9/16/16	United States	45		5,130
Web.com Group Inc., September Strike Price $22.50, Expires 9/16/16	United States	36		540
Web.com Group Inc., June Strike Price $22.50, Expires 6/17/16	United States	36		1,710
WebMD Health Corp., June Strike Price $65.00, Expires 6/17/16	United States	26		5,460
WebMD Health Corp., September Strike Price $70.00, Expires 9/16/16	United States	45		14,400
Yahoo! Inc., June Strike Price $35.00, Expires 6/17/16	United States	96		31,680
				73,455
Machinery 0.0%^†
The Greenbrier Cos Inc., September Strike Price $35.00, Expires 9/16/16	United States	53		4,346
Trinity Industries Inc., July Strike Price $22.00, Expires 7/15/16	United States	27		135
				4,481
Media 0.1%
Charter Communications Inc., January Strike Price $220.00, Expires 1/20/17	United States	333		306,360
Charter Communications Inc., January Strike Price $250.00, Expires 1/20/17	United States	107		23,005
Dish Network Corp., A, September Strike Price $50.00, Expires 9/16/16	United States	132		55,440
Time Warner Inc., July Strike Price $75.00, Expires 7/15/16	United States	144		35,568
				420,373
Metals & Mining 0.0%^†
AK Steel Holding Corp., July Strike Price $4.50, Expires 7/15/16	United States	60		2,100
Newmont Mining Corp., June Strike Price $41.00, Expires 6/17/16	United States	29		116
				2,216
Oil, Gas & Consumable Fuels 0.0%^†
Aegean Marine Petroleum Network Inc., September Strike Price $10.00,
Expires 9/16/16	Greece	54		864
Energy Transfer Equity LP, October Strike Price $11.00, Expires 10/21/16	United States	252		75,600
Energy Transfer Equity LP, October Strike Price $12.00, Expires 10/21/16	United States	272		65,552
				142,016
Pharmaceuticals 0.0%^†
Allergan PLC, January Strike Price $210.00, Expires 1/20/17	United States	26		105,612
Allergan PLC, September Strike Price $310.00, Expires 9/16/16	United States	25		1,375

50 Annual Report

franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

				Number of
	Country			Contracts		Value
Options Purchased (continued)
Calls – Exchange-Traded (continued)
Pharmaceuticals (continued)
Allergan PLC, September Strike Price $325.00, Expires
9/16/16	United States			54	$	1,350
Innoviva Inc., September Strike Price $12.50, Expires 9/16/16	United States			30		1,950
						110,287
Real Estate Investment Trusts (REITs) 0.0%^†
Starwood Property Trust Inc., June Strike Price $20.00,
Expires 6/17/16	United States			83		5,810
Semiconductors & Semiconductor Equipment 0.0%^†
Micron Technology Inc., July Strike Price $15.00,
Expires 7/01/16	United States			15		240
Software 0.0%^†
NetSuite Inc., July Strike Price $90.00, Expires 7/15/16	United States			11		1,595
Red Hat Inc., July Strike Price $80.00, Expires 7/15/16	United States			36		7,200
						8,795
Technology Hardware, Storage & Peripherals 0.0%^†
NCR Corp., July Strike Price $34.00, Expires 7/15/16	United States			60		1,050
Textiles, Apparel & Luxury Goods 0.0%^†
Iconix Brand Group Inc., August Strike Price $10.00,
Expires 8/19/16	United States			54		1,350
Wireless Telecommunication Services 0.0%^†
Vodafone Group PLC, ADR, January Strike Price $40.00,
Expires 1/19/18	United Kingdom			36		2,808
Vodafone Group PLC, ADR, January Strike Price $40.00,
Expires 1/20/17	United Kingdom			79		1,383
						4,191

				Notional
		Counterparty		Amount
Calls – Over-the-Counter
Currency Options 0.0%^†
USD/CAD, July Strike Price $1.41, Expires 7/08/16	United States	MSCO	$	1,000,000		411
Payer Swaptions – Over-the-Counter
Interest Rate 0.0%^†
Pay fixed 10 year 2.57%, receive float 3-month USD LIBOR,
Expires 9/19/16	United States	BOFA		6,200,000		3,532

				Number of
				Contracts
Puts – Exchange-Traded
Diversified Financial Services 0.4%
CAC 40 Index, June Strike Price 4,050.00 EUR, Expires
6/17/16	France			12		497
EURO STOXX 50 Price EUR, June Strike Price 2,750.00 EUR,
Expires 6/17/16	Germany			105		3,388
S&P 500 Index, June Strike Price $1,950.00, Expires 6/17/16	United States			251		31,375
S&P 500 Index, June Strike Price $2,025.00, Expires 6/17/16	United States			22		9,790
S&P 500 Index, June Strike Price $2,050.00, Expires 6/17/16	United States			31		25,110
S&P 500 Index, June Strike Price $2,000.00, Expires 6/30/16	United States			199		167,160

franklintempleton.com

Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

		Number of
	Country	Contracts		Value
Options Purchased (continued)
Puts – Exchange-Traded (continued)
Diversified Financial Services (continued)
S&P 500 Index, July Strike Price $2,000.00, Expires 7/15/16	United States	108	$	151,200
S&P 500 Index, September Strike Price $1,750.00, Expires 9/16/16	United States	4		4,000
S&P 500 Index, December Strike Price $2,050.00, Expires 12/16/16	United States	504		4,193,280
S&P 500 Index, December Strike Price $2,075.00, Expires 12/16/16	United States	24		228,960
STOXX Europe 600 Basic Resources Price EUR, September Strike Price 250.00
EUR, Expires 9/16/16	Germany	74		59,281
				4,874,041
Exchange Traded Funds 0.0%^†
Health Care Select Sector SPDR ETF, September Strike Price $68.00,
Expires 9/16/16	United States	211		30,595
Industrial Select Sector SPDR Fund, September Strike Price $54.00,
Expires 9/16/16	United States	665		91,770
iShares iBoxx USD High Yield Corporate Bond ETF, September Strike Price
$80.00, Expires 9/16/16	United States	481		52,910
iShares JP Morgan USD Emerging Markets Bond ETF, June Strike Price $110.00,
Expires 6/17/16	United States	63		3,150
iShares MSCI Emerging Markets ETF, June Strike Price $31.00, Expires 6/30/16	United States	263		6,575
iShares MSCI Emerging Markets ETF, July Strike Price $32.00, Expires 7/15/16	United States	158		10,112
iShares Russell 2000 ETF, June Strike Price $100.00, Expires 6/30/16	United States	526		6,312
iShares U.S. Real Estate ETF, June Strike Price $74.00, Expires 6/17/16	United States	243		3,402
iShares U.S. Real Estate ETF, July Strike Price $75.00, Expires 7/15/16	United States	242		17,908
SPDR S&P Metals & Mining ETF, September Strike Price $19.00,
Expires 9/16/16	United States	308		26,488
Utilities Select Sector SPDR Fund, September Strike Price $45.00,
Expires 9/16/16	United States	396		24,948
VanEck Vectors Steel ETF, September Strike Price $25.00, Expires 9/16/16	United States	51		11,985
				286,155
Internet Software & Services 0.0%^†
Alibaba Group Holding Ltd., ADR, July Strike Price $72.50, Expires 7/15/16	China	518		39,368
Yahoo! Inc., October Strike Price $32.00, Expires 10/21/16	United States	1,277		137,916
				177,284
Leisure Products 0.0%^†
JAKKS Pacific Inc., June Strike Price $5.00, Expires 6/17/16	United States	112		1,120
Media 0.0%^†
Charter Communications Inc., July Strike Price $180.00, Expires 7/15/16	United States	57		3,420
Vivendi SA, July Strike Price 16.00 EUR, Expires 7/15/16	France	715		7,160
				10,580
Oil, Gas & Consumable Fuels 0.0%^†
Golar LNG Ltd., January Strike Price $10.00, Expires 1/20/17	Bermuda	100		11,250
Scorpio Tankers Inc., July Strike Price $5.00, Expires 7/15/16	Monaco	124		1,240
Southwestern Energy Co., June Strike Price $5.00, Expires 6/17/16	United States	100		100
WPX Energy Inc., August Strike Price $5.00, Expires 8/19/16	United States	65		1,138
				13,728
Professional Services 0.0%^†
ManpowerGroup Inc., September Strike Price $65.00, Expires 9/16/16	United States	16		1,120
Robert Half International Inc., September Strike Price $35.00, Expires 9/16/16	United States	27		1,485
				2,605

52 Annual Report

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

			Number of
	Country		Contracts		Value

Options Purchased (continued)
Puts Exchange-Traded (continued)
Real Estate Investment Trusts (REITs) 0.0%
Spirit Realty Capital Inc. , July Strike Price $10.00, Expires 7/15/16	United States		73	$	2,555

Specialty Retail 0.0%
Restoration Hardware Holdings Inc. , August Strike Price $20.00,
Expires 8/19/16	United States		68		1,530

Technology Hardware, Storage & Peripherals 0.0%
EMC Corp. , June Strike Price $25.00, Expires 6/17/16	United States		245		2,940
NCR Corp. , July Strike Price $27.00, Expires 7/15/16	United States		337		5,897
NCR Corp. , July Strike Price $28.00, Expires 7/15/16	United States		358		11,635

					20,472


			Notional
		Counterparty	Amount*

Puts Over-the-Counter
Currency Options 0.0%
EUR/NOK, July Strike Price 9.76 EUR, Expires 7/08/16	Norway	BOFA	740,000 EUR		40,190

Receiver Swaptions Over-the-Counter
Interest Rate 0.0%
Receive fixed 1 year 4.89%, pay float 28 Day TIIE, Expires 8/17/16	Mexico	DBAB	45,000,000 MXN		3,837
Receive fixed 1 year 8.48%, pay float 28 Day TIIE, Expires 1/09/17	South Africa	DBAB	98,700,000 ZAR		31,090

					34,927

Total Options Purchased (Cost $9,729,993)					6,635,137

Total Investments before Short Term Investments
(Cost $833,160,750)					878,807,428


			Principal
			Amount*

Short Term Investments 3.6%
U. S. Government and Agency Securities 3.6%
m U. S. Treasury Bill,
6/23/16	United States		15,000,000		14,998,365
a 7/14/16 - 5/25/17	United States		10,250,000		10,209,171
a 8/25/16	United States		19,000,000		18,987,194

Total U. S. Government and Agency Securities
(Cost $44,195,710)					44,194,730

Total Investments before Money Market Funds and
Repurchase Agreements (Cost $877,356,460)					923,002,158


			Shares

Money Market Funds 22.3%
n,o Dreyfus Government Cash Management, Institutional Shares,
0.21%	United States		112,500,978		112,500,978
o Fidelity Institutional Money Market Funds, Money Market Portfolio,
Class I, 0.234%	United States		162,744,301		162,744,301

Total Money Market Funds (Cost $275,245,279)					275,245,279

franklintempleton.com

Annual Report

F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

		Principal
	Country	Amount*	Value

Repurchase Agreements (Cost $52,451,581) 4.3%
p Joint Repurchase Agreement, 0.281%, 6/01/16
(Maturity Value $52,451,990)	United States	52,451,581	$ 52,451,581
BNP Paribas Securities Corp. (Maturity Value $20,887,956)
Deutsche Bank Securities Inc. (Maturity Value $4,931,536)
HSBC Securities (USA) Inc. (Maturity Value $26,110,076)
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $522,422)
Collateralized by U. S. Government Agency Securities, 0.00% - 5.50%,
6/10/16 - 2/01/20; U. S. Government Agency Securities, Strips, 6/01/17;
m U. S. Treasury Bill, 5/25/17; and U. S. Treasury Note, 0.875%,
10/15/17 - 4/15/19 (valued at $53,504,497)

Total Investments (Cost $1,205,053,320) 101.1%			1,250,699,018
Options Written (0.1)%			(781,661)
Securities Sold Short (20.4)%			(252,329,246)
Other Assets, less Liabilities 19.4%			239,051,931

Net Assets 100.0%			$1,236,640,042


		Number of
		Contracts

q Options Written (0.1%)
Calls Exchange-Traded
Banks (0.0)%
JPMorgan Chase & Co. , June Strike Price $65.00, Expires 6/17/16	United States	13	(1,599)
Wells Fargo & Co. , June Strike Price $50.00, Expires 6/17/16	United States	17	(1,989)

			(3,588)

Beverages (0.0)%
The Coca-Cola Co. , June Strike Price $46.00, Expires 6/17/16	United States	12	(48)
The Coca-Cola Co. , July Strike Price $48.00, Expires 7/15/16	United States	15	(30)

			(78)

Biotechnology (0.0)%
Baxalta Inc. , June Strike Price $40.00, Expires 6/17/16	United States	93	(50,220)

Chemicals (0.0)%
Monsanto Co. , October Strike Price $125.00, Expires 10/21/16	United States	80	(11,200)

Diversified Financial Services (0.0)%
Nikkei 225 Index, September Strike Price 19,000.00 JPY, Expires 9/09/16	Japan	15	(29,801)

Electric Utilities (0.0)%
NextEra Energy Inc. , June Strike Price $125.00, Expires 6/17/16	United States	7	(140)

Oil, Gas & Consumable Fuels (0.0)%
Chevron Corp. , June Strike Price $105.00, Expires 6/17/16	United States	5	(125)
Energy Transfer Equity LP, October Strike Price $16.00, Expires 10/21/16	United States	437	(41,952)
Exxon Mobil Corp. , June Strike Price $90.00, Expires 6/17/16	United States	12	(876)
Ship Finance International Ltd. , November Strike Price $15.00, Expires 11/18/16	Norway	167	(22,962)

			(65,915)

Pharmaceuticals (0.0)%
Allergan PLC, January Strike Price $300.00, Expires 1/20/17	United States	27	(10,530)
Bristol-Myers Squibb Co. , June Strike Price $72.50, Expires 6/17/16	United States	6	(636)
Johnson & Johnson, June Strike Price $115.00, Expires 6/17/16	United States	9	(216)

			(11,382)

54 Annual Report

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

		Number of
	Country	Contracts	Value

q Options Written (continued)
Calls Exchange-Traded (continued)
Software (0.0)%
Microsoft Corp. , July Strike Price $55.00, Expires 7/15/16	United States	19	$ (912)

Technology Hardware, Storage & Peripherals (0.0)%
EMC Corp. , July Strike Price $28.00, Expires 7/15/16	United States	1,329	(126,255)
NCR Corp. , October Strike Price $34.00, Expires 10/21/16	United States	647	(67,935)
NCR Corp. , October Strike Price $36.00, Expires 10/21/16	United States	48	(3,600)

			(197,790)

Puts Exchange-Traded
Air Freight & Logistics (0.0%)
Atlas Air Worldwide Holdings Inc. , November Strike Price $40.00,
Expires 11/18/16	United States	57	(18,810)

Chemicals (0.0%)
Monsanto Co. , October Strike Price $92.50, Expires 10/21/16	United States	80	(16,000)

Consumer Finance (0.0%)
Encore Capital Group Inc. , June Strike Price $25.00, Expires 6/17/16	United States	14	(875)
Encore Capital Group Inc. , September Strike Price $20.00, Expires 9/16/16	United States	1	(88)
Encore Capital Group Inc. , September Strike Price $22.50, Expires 9/16/16	United States	38	(5,130)

			(6,093)

Diversified Consumer Services (0.0%)
Ascent Capital Group Inc. , July Strike Price $12.50, Expires 7/15/16	United States	26	(4,485)

Diversified Financial Services (0.0%)
EURO STOXX 50 Price EUR, June Strike Price 2,550.00 EUR, Expires 6/17/16	Germany	94	(941)
S&P 500 Index, July Strike Price $1,875.00, Expires 7/15/16	United States	28	(11,480)
S&P 500 Index, September Strike Price $1,550.00, Expires 9/16/16	United States	4	(1,380)
STOXX Europe 600 Basic Resources Price EUR, September Strike Price 200.00
EUR, Expires 9/16/16	Germany	74	(16,467)

			(30,268)

Electrical Equipment (0.0%)
SolarCity Corp. , October Strike Price $17.00, Expires 10/21/16	United States	13	(3,906)

Exchange Traded Funds (0.0%)
Health Care Select Sector SPDR ETF, September Strike Price $62.00,
Expires 9/16/16	United States	211	(10,128)
Industrial Select Sector SPDR Fund, September Strike Price $50.00,
Expires 9/16/16	United States	665	(38,570)
iShares iBoxx USD High Yield Corporate Bond ETF, September Strike Price $75.00,
Expires 9/16/16	United States	481	(12,506)
iShares MSCI Emerging Markets ETF, June Strike Price $31.00, Expires 6/10/16	United States	263	(1,184)
iShares Russell 2000 ETF, June Strike Price $100.00, Expires 6/17/16	United States	526	(2,104)
iShares U. S. Real Estate ETF, June Strike Price $66.00, Expires 6/17/16	United States	485	(1,455)
Utilities Select Sector SPDR Fund, September Strike Price $40.00,
Expires 9/16/16	United States	396	(6,336)

			(72,283)

Food Products (0.0%)
Bunge Ltd. , July Strike Price $52.50, Expires 7/15/16	United States	9	(90)
Bunge Ltd. , July Strike Price $57.50, Expires 7/15/16	United States	14	(385)

			(475)

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Annual Report

F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

		Number of
	Country	Contracts		Value

q Options Written (continued)
Puts Exchange-Traded (continued)
Health Care Technology (0.0%)
Allscripts Healthcare Solutions Inc. , June Strike Price $12.00, Expires 6/17/16	United States	88	$	(880)

Household Durables (0.0%)
Meritage Homes Corp. , June Strike Price $30.00, Expires 6/17/16	United States	22		(330)
Toll Brothers Inc. , June Strike Price $26.00, Expires 6/17/16	United States	37		(277)

				(607)

Insurance (0.0%)
AmTrust Financial Services Inc. , September Strike Price $23.75, Expires 9/16/16	United States	28		(2,450)
AmTrust Financial Services Inc. , September Strike Price $25.00, Expires 9/16/16	United States	13		(1,528)

				(3,978)

Internet & Catalog Retail (0.0%)
Shutterfly Inc. , June Strike Price $42.50, Expires 6/17/16	United States	26		(780)

Internet Software & Services (0.0%)
Blucora Inc. , July Strike Price $7.50, Expires 7/15/16	United States	39		(585)
MercadoLibre Inc. , June Strike Price $115.00, Expires 6/17/16	Argentina	44		(1,320)
MercadoLibre Inc. , July Strike Price $125.00, Expires 7/15/16	Argentina	43		(9,245)
Twitter Inc. , September Strike Price $13.00, Expires 9/16/16	United States	45		(3,600)
Web. com Group Inc. , June Strike Price $17.50, Expires 6/17/16	United States	36		(3,240)
Web. com Group Inc. , September Strike Price $15.00, Expires 9/16/16	United States	36		(2,160)
WebMD Health Corp. , June Strike Price $60.00, Expires 6/17/16	United States	14		(280)
WebMD Health Corp. , September Strike Price $60.00, Expires 9/16/16	United States	45		(11,025)
Yahoo! Inc. , October Strike Price $25.00, Expires 10/21/16	United States	671		(15,433)

				(46,888)

Machinery (0.0%)
The Greenbrier Cos Inc. , September Strike Price $25.00, Expires 9/16/16	United States	53		(7,950)
Trinity Industries Inc. , July Strike Price $18.00, Expires 7/15/16	United States	27		(2,565)

				(10,515)

Media (0.1%)
Charter Communications Inc. , July Strike Price $165.00, Expires 7/15/16	United States	57		(8,550)
Charter Communications Inc. , January Strike Price $145.00, Expires 1/20/17	United States	297		(114,345)

				(122,895)

Metals & Mining (0.0%)
AK Steel Holding Corp. , July Strike Price $3.50, Expires 7/15/16	United States	60		(1,080)
Newmont Mining Corp. , June Strike Price $28.00, Expires 6/17/16	United States	29		(522)

				(1,602)

Oil, Gas & Consumable Fuels (0.0%)
Aegean Marine Petroleum Network Inc. , September Strike Price $7.50,
Expires 9/16/16	Greece	54		(5,940)
Energy Transfer Equity LP, October Strike Price $7.00, Expires 10/21/16	United States	545		(21,800)

				(27,740)

Pharmaceuticals (0.0%)
Allergan PLC, January Strike Price $200.00, Expires 1/20/17	United States	27		(28,080)
Innoviva Inc. , September Strike Price $10.00, Expires 9/16/16	United States	30		(2,850)

				(30,930)

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C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

			Number of
	Country		Contracts		Value

q Options Written (continued)
Puts Exchange-Traded (continued)
Semiconductors & Semiconductor Equipment (0.0%)
Micron Technology Inc. , July Strike Price $10.00, Expires 7/01/16	United States		15	$	(150)

Software (0.0%)
NetSuite Inc. , June Strike Price $65.00, Expires 6/17/16	United States		11		(303)
NetSuite Inc. , July Strike Price $70.00, Expires 7/15/16	United States		11		(1,485)
Red Hat Inc. , June Strike Price $65.00, Expires 6/17/16	United States		36		(360)
Red Hat Inc. , July Strike Price $70.00, Expires 7/15/16	United States		36		(4,140)

					(6,288)

Textiles, Apparel & Luxury Goods (0.0%)
Iconix Brand Group Inc. , August Strike Price $7.50, Expires 8/19/16	United States		54		(4,590)


			Notional
		Counterparty	Amount*

Receiver Swaptions Over-the-Counter
Interest Rate (0.0%)
Receive fixed 10 year 3.07%, pay float 3-month USD LIBOR,
Expires 9/19/16	United States	BOFA	6,200,000		(472)

Total Options Written
(Premiums Received $1,021,236)					(781,661)


			Shares

r Securities Sold Short (20.4)%
Common Stocks (9.2)%
Aerospace & Defense (0.0)%
The Boeing Co	United States		2,751		(347,039)

Air Freight & Logistics (0.1)%
CH Robinson Worldwide Inc	United States		7,721		(578,921)
XPO Logistics Inc	United States		8,754		(256,142)

					(835,063)

Airlines (0.1)%
American Airlines Group Inc	United States		17,633		(562,669)
ANA Holdings Inc	Japan		152,235		(445,288)
Deutsche Lufthansa AG	Germany		28		(392)

					(1,008,349)

Auto Components (0.0)%
Borgwarner Inc	United States		2,508		(85,347)
Lear Corp	United States		709		(84,201)
Magna International Inc	Canada		2,508		(101,649)

					(271,197)

Automobiles (0.0)%
Fiat Chrysler Automobiles NV	United Kingdom		21,727		(155,079)
General Motors Co	United States		2,510		(78,513)
Tesla Motors Inc	United States		491		(109,606)

					(343,198)

Beverages (0.0)%
Anheuser-Busch InBev SA/NV, ADR	Belgium		2,241		(282,859)
Brown-Forman Corp. , B	United States		2,340		(229,484)

					(512,343)

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares		Value
^rSecurities Sold Short (continued)
Common Stocks (continued)
Biotechnology (0.5)%
Ablynx NV	Belgium	11,489	$	(183,119	)
Acorda Therapeutics Inc	United States	10,286		(292,637	)
AMAG Pharmaceuticals Inc	United States	30,836		(661,124	)
Anacor Pharmaceuticals Inc	United States	6,058		(601,559	)
Exelixis Inc	United States	270,995		(1,758,758	)
Ligand Pharmaceuticals Inc	United States	16,045		(1,918,822	)
PDL BioPharma Inc	United States	10,211		(36,657	)
PTC Therapeutics Inc	United States	8,870		(72,379	)
				(5,525,055	)
Building Products (0.1)%
Griffon Corp	United States	39,446		(664,665	)
Capital Markets (0.0)%^†
Cowen Group Inc., A	United States	69,770		(233,729	)
FXCM Inc	United States	2,338		(24,105	)
				(257,834	)
Chemicals (0.2)%
The Mosaic Co	United States	53,393		(1,347,105	)
Potash Corp. of Saskatchewan Inc	Canada	26,383		(430,835	)
TerraVia Holdings Inc	United States	61,229		(151,848	)
Westlake Chemical Corp	United States	17,694		(780,836	)
				(2,710,624	)
Communications Equipment (0.2)%
ARRIS International PLC	United States	7,788		(187,691	)
Palo Alto Networks Inc	United States	20,295		(2,647,686	)
				(2,835,377	)
Construction & Engineering (0.0)%^†
Dycom Industries Inc	United States	5,826		(494,569	)
Construction Materials (0.1)%
Cemex SAB de CV, ADR	Mexico	169,578		(1,078,517	)
LafargeHolcim Ltd., B	Switzerland	5,687		(255,743	)
				(1,334,260	)
Consumer Finance (0.1)%
Encore Capital Group Inc	United States	22,853		(614,517	)
PRA Group Inc	United States	5,880		(161,759	)
				(776,276	)
Diversified Consumer Services (0.2)%
Ascent Capital Group Inc	United States	13,719		(257,094	)
Carriage Services Inc	United States	35,365		(832,492	)
TAL Education Group, ADR	China	26,508		(1,416,058	)
				(2,505,644	)
Diversified Financial Services (0.0)%^†
Element Financial Corp	Canada	25,627		(300,563	)
Diversified Telecommunication Services (0.0)%^†
CenturyLink Inc	United States	5,770		(156,482	)
Iridium Communications Inc	United States	17,930		(156,529	)

58 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares		Value
^rSecurities Sold Short (continued)
Common Stocks (continued)
Diversified Telecommunication Services (continued)
Verizon Communications Inc	United States	3,563	$	(181,357	)
				(494,368	)
Electric Utilities (0.3)%
Emera Inc	Canada	38,119		(1,343,256	)
Fortis Inc	Canada	54,914		(1,735,283	)
				(3,078,539	)
Electrical Equipment (0.1)%
General Cable Corp	United States	29,295		(400,170	)
Rockwell Automation Inc	United States	1,269		(147,267	)
SolarCity Corp	United States	8,872		(198,644	)
				(746,081	)
Electronic Equipment, Instruments & Components (0.2)%
Knowles Corp	United States	14,852		(217,136	)
Vishay Intertechnology Inc	United States	121,082		(1,569,223	)
				(1,786,359	)
Energy Equipment & Services (0.0)%^†
Hornbeck Offshore Services Inc	United States	12,533		(104,149	)
Food & Staples Retailing (0.1)%
Wal-Mart Stores Inc	United States	9,421		(666,819	)
Whole Foods Market Inc	United States	18,286		(591,552	)
				(1,258,371	)
Food Products (0.3)%
Bunge Ltd	United States	3,974		(266,536	)
Campbell Soup Co	United States	3,164		(191,644	)
The Hershey Co	United States	7,677		(712,809	)
The JM Smucker Co	United States	8,160		(1,053,864	)
Post Holdings Inc	United States	22,062		(1,676,933	)
				(3,901,786	)
Health Care Equipment & Supplies (0.3)%
Abbott Laboratories	United States	9,094		(360,395	)
Integra LifeSciences Holdings Corp	United States	16,809		(1,255,800	)
Invacare Corp	United States	18,948		(202,744	)
Nipro Corp	Japan	3,600		(40,638	)
NuVasive Inc	United States	9,031		(491,015	)
Quidel Corp	United States	9,064		(150,553	)
Wright Medical Group NV	United States	35,478		(686,145	)
				(3,187,290	)
Health Care Providers & Services (0.3)%
Aceto Corp	United States	15,320		(341,789	)
Aetna Inc	United States	2,857		(323,498	)
Amsurg Corp	United States	1,014		(75,837	)
HealthSouth Corp	United States	38,122		(1,537,079	)
Molina Healthcare Inc	United States	31,490		(1,525,061	)
				(3,803,264	)

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares		Value
^rSecurities Sold Short (continued)
Common Stocks (continued)
Health Care Technology (0.0)%^†
Allscripts Healthcare Solutions Inc	United States	30,643	$	(413,374	)
Hotels, Restaurants & Leisure (0.2)%
Chipotle Mexican Grill Inc	United States	331		(146,289	)
Hilton Worldwide Holdings Inc	United States	52,664		(1,094,358	)
Marriott International Inc., A	United States	11,309		(746,846	)
				(1,987,493	)
Household Durables (0.1)%
CalAtlantic Group Inc	United States	11,949		(441,993	)
LGI Homes Inc	United States	22,752		(614,759	)
M/I Homes Inc	United States	7,112		(134,275	)
Meritage Homes Corp	United States	2,981		(108,777	)
				(1,299,804	)
Household Products (0.0)%^†
Unicharm Corp	Japan	8,400		(164,495	)
Independent Power & Renewable Electricity Producers (0.1)%
Pattern Energy Group Inc	United States	31,612		(688,509	)
Industrial Conglomerates (0.0)%^†
3M Co	United States	989		(166,469	)
Keihan Holdings Co. Ltd	Japan	2,700		(18,238	)
				(184,707	)
Insurance (0.2)%
AmTrust Financial Services Inc	United States	20,125		(533,715	)
CNP Assurances	France	89,924		(1,525,814	)
				(2,059,529	)
Internet & Catalog Retail (0.5)%
Ctrip.com International Ltd., ADR	China	27,639		(1,264,760	)
HSN Inc	United States	1,319		(69,076	)
Netflix Inc	United States	11,426		(1,171,965	)
Priceline Group Inc	United States	2,494		(3,153,239	)
Shutterfly Inc	United States	10,833		(523,234	)
				(6,182,274	)
Internet Software & Services (1.2)%
Akamai Technologies Inc	United States	1,956		(106,758	)
Blucora Inc	United States	2,001		(17,969	)
j2 Global Inc	United States	9,323		(624,361	)
Linkedin Corp	United States	530		(72,345	)
MercadoLibre Inc	Argentina	12,240		(1,670,760	)
Monster Worldwide Inc	United States	64,185		(170,090	)
Twitter Inc	United States	33		(502	)
VeriSign Inc	United States	113,436		(9,694,241	)
Web.com Group Inc	United States	10,450		(177,337	)
WebMD Health Corp	United States	22,585		(1,484,964	)
Yahoo! Inc	United States	8,746		(331,823	)
				(14,351,150	)
IT Services (0.1)%
CSG Systems International Inc	United States	29,322		(1,246,478	)

60 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares		Value
^rSecurities Sold Short (continued)
Common Stocks (continued)
IT Services (continued)
International Business Machines Corp	United States	1,311	$	(201,553	)
Unisys Corp	United States	31,415		(265,143	)
				(1,713,174	)
Leisure Products (0.0)%^†
JAKKS Pacific Inc	United States	42,245		(315,148	)
Life Sciences Tools & Services (0.1)%
Albany Molecular Research Inc	United States	26,718		(387,945	)
Illumina Inc	United States	961		(139,182	)
Sequenom Inc	United States	151,018		(154,038	)
				(681,165	)
Machinery (0.3)%
Altra Industrial Motion Corp	United States	24,856		(672,106	)
Caterpillar Inc	United States	2,309		(167,426	)
Deere & Co	United States	3,055		(251,396	)
Dover Corp	United States	3,036		(202,653	)
Flowserve Corp	United States	6,262		(301,390	)
The Greenbrier Cos Inc	United States	14,931		(428,520	)
Navistar International Corp	United States	11,225		(126,281	)
PACCAR Inc	United States	15,031		(837,978	)
Trinity Industries Inc	United States	35,158		(634,954	)
Wabash National Corp	United States	43,367		(614,944	)
				(4,237,648	)
Media (0.2)%
Comcast Corp., A	United States	17,585		(1,113,131	)
Liberty Braves Group	United States	1,020		(15,871	)
Liberty Media Group	United States	2,735		(53,278	)
Liberty SiriusXM Group	United States	10,326		(329,296	)
Rizzoli Corriere Della Sera Mediagroup SpA	Italy	1,471		(1,247	)
Sirius XM Holdings Inc	United States	320,619		(1,288,888	)
The Walt Disney Co	United States	1,573		(156,073	)
				(2,957,784	)
Metals & Mining (0.0)%^†
AK Steel Holding Corp	United States	65,530		(280,468	)
Alcoa Inc	United States	11,146		(103,324	)
Newmont Mining Corp	United States	5,057		(163,897	)
				(547,689	)
Oil, Gas & Consumable Fuels (0.6)%
Aegean Marine Petroleum Network Inc	Greece	42,684		(284,275	)
Cobalt International Energy Inc	United States	28,787		(64,483	)
Energy Transfer Equity LP	United States	87,752		(1,109,185	)
Exxon Mobil Corp	United States	3,119		(277,653	)
Golar LNG Ltd	Bermuda	4,563		(79,396	)
Green Plains Inc	United States	31,458		(583,860	)
Renewable Energy Group Inc	United States	21,360		(196,726	)
Scorpio Tankers Inc	Monaco	6,010		(35,339	)
Ship Finance International Ltd	Norway	6,392		(102,464	)
TransCanada Corp	Canada	115,379		(4,781,100	)

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares		Value
^rSecurities Sold Short (continued)
Common Stocks (continued)
Oil, Gas & Consumable Fuels (continued)
Whiting Petroleum Corp	United States	10,216	$	(126,168	)
WPX Energy Inc	United States	12,000		(123,480	)
				(7,764,129	)
Pharmaceuticals (0.5)%
Allergan PLC	United States	87		(20,510	)
Innoviva Inc	United States	49,896		(562,827	)
The Medicines Co	United States	57,426		(2,159,792	)
Shire PLC, ADR	United States	16,021		(2,982,469	)
				(5,725,598	)
Professional Services (0.0)%^†
51job Inc., ADR	China	3,004		(93,154	)
Real Estate Investment Trusts (REITs) (0.4)%
American Homes 4 Rent	United States	35,548		(651,949	)
Colony Capital Inc	United States	16,135		(295,593	)
Colony Starwood Homes	United States	24,674		(671,626	)
Forest City Realty Trust Inc	United States	21,097		(481,223	)
Gramercy Property Trust	United States	240,124		(2,144,305	)
National Health Investors Inc	United States	7,249		(506,198	)
Spirit Realty Capital Inc	United States	9,896		(113,309	)
Starwood Property Trust Inc	United States	13,410		(276,514	)
Welltower Inc	United States	3,307		(227,885	)
				(5,368,602	)
Road & Rail (0.0)%^†
Norfolk Southern Corp	United States	3,261		(274,119	)
SAIA Inc	United States	8,782		(228,947	)
				(503,066	)
Semiconductors & Semiconductor Equipment (0.6)%
Intel Corp	United States	47,844		(1,511,392	)
Microchip Technology Inc	United States	30,552		(1,578,927	)
Micron Technology Inc	United States	12,284		(156,253	)
NVIDIA Corp	United States	74,577		(3,484,237	)
Trina Solar Ltd., ADR	China	17,403		(139,746	)
				(6,870,555	)
Software (0.7)%
Bottomline Technologies de Inc	United States	11,545		(289,318	)
BroadSoft Inc	United States	18,273		(796,703	)
FireEye Inc	United States	3,166		(50,403	)
NetSuite Inc	United States	4,537		(359,829	)
Nuance Communications Inc	United States	21,638		(361,787	)
Red Hat Inc	United States	7,464		(578,161	)
Salesforce.com Inc	United States	11,308		(946,593	)
Take-Two Interactive Software Inc	United States	99,619		(3,876,175	)
VMware Inc., A	United States	4,944		(299,409	)
Workday Inc., A	United States	7,912		(600,046	)
				(8,158,424	)

62 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares		Value
^rSecurities Sold Short (continued)
Common Stocks (continued)
Specialty Retail (0.1)%
AutoNation Inc	United States	1,799	$	(90,742	)
Dick’s Sporting Goods Inc	United States	4,363		(187,173	)
Restoration Hardware Holdings Inc	United States	2,821		(93,826	)
Vitamin Shoppe Inc	United States	7,627		(230,641	)
Williams-Sonoma Inc	United States	4,032		(213,857	)
				(816,239	)
Technology Hardware, Storage & Peripherals (0.0)%^†
Violin Memory Inc	United States	35,018		(19,883	)
Textiles, Apparel & Luxury Goods (0.0)%^†
Iconix Brand Group Inc	United States	30,078		(231,901	)
Tobacco (0.0)%^†
Universal Corp	United States	5,983		(327,270	)
Trading Companies & Distributors (0.1)%
Air Lease Corp	United States	11,923		(358,286	)
Kaman Corp	United States	8,295		(354,280	)
				(712,566	)
Wireless Telecommunication Services (0.0)%^†
T-Mobile U.S. Inc	United States	140		(5,986	)
Vodafone Group PLC, ADR	United Kingdom	850		(28,892	)
				(34,878	)
Total Common Stocks (Proceeds $111,018,866)				(113,492,471	)
Exchange Traded Funds (10.8)%
Consumer Discretionary Select Sector SPDR Fund	United States	37,020		(2,933,465	)
Health Care Select Sector SPDR ETF	United States	79,208		(5,650,699	)
iShares Core S&P Small-Cap ETF	United States	30,875		(3,573,781	)
iShares iBoxx USD High Yield Corporate Bond ETF	United States	1,369		(114,463	)
iShares Micro-Cap ETF	United States	20,086		(1,428,516	)
iShares MSCI Emerging Markets ETF	United States	16,850		(558,241	)
iShares MSCI Japan ETF	Japan	116,395		(1,371,133	)
iShares Nasdaq Biotechnology ETF	United States	16,797		(4,699,297	)
iShares North American Tech ETF	United States	12,451		(1,404,846	)
iShares North American Tech-Multimedia Networking ETF	United States	72,564		(2,603,669	)
iShares North American Tech-Software ETF	United States	16,292		(1,730,048	)
iShares PHLX Semiconductor ETF	United States	5,252		(498,782	)
iShares Russell 2000 ETF	United States	33,385		(3,838,607	)
iShares Russell 2000 Growth ETF	United States	22,207		(3,059,681	)
iShares Russell Mid-Cap Growth ETF	United States	14,355		(1,343,628	)
iShares S&P Small-Cap 600 Growth ETF	United States	11,255		(1,441,090	)
iShares Transportation Average ETF	United States	12,000		(1,679,040	)
iShares U.S. Consumer Goods ETF	United States	18,060		(2,032,111	)
iShares U.S. Technology ETF	United States	12,921		(1,396,631	)
iShares U.S. Telecommunications ETF	United States	22,402		(707,903	)
Powershares Dynamic Media Portfolio	United States	80,190		(2,023,996	)
Powershares Dynamic Retail Portfolio	United States	53,700		(1,863,927	)
PureFunds ISE Cyber Security ETF	United States	129,940		(3,148,446	)
SPDR Barclays High Yield Bond ETF	United States	15,096		(531,832	)
SPDR S&P 500 ETF Trust	United States	336,391		(70,669,021	)

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

	Country	Shares		Value
^rSecurities Sold Short (continued)
Exchange Traded Funds (continued)
SPDR S&P MidCap 400 ETF Trust	United States	8,292	$	(2,254,097	)
SPDR S&P Retail ETF	United States	61,382		(2,597,072	)
SPDR S&P Transportation ETF	United States	55,890		(2,506,667	)
Technology Select Sector SPDR Fund	United States	12,609		(557,444	)
Utilities Select Sector SPDR Fund	United States	28,211		(1,386,571	)
Vanguard Consumer Staples ETF	United States	15,265		(2,060,775	)
Vanguard Small-Cap Growth ETF	United States	13,920		(1,720,651	)
Total Exchange Traded Funds (Proceeds $134,310,533)				(133,386,130	)

		Principal
		Amount*
Convertible Bonds and Notes (0.1)%
Internet & Catalog Retail (0.0)%^†
The Priceline Group Inc., senior note, 0.90%, 9/15/21	United States	484,000		(495,798	)
Metals & Mining (0.0)%^†
RTI International Metals Inc., senior note, 1.625%, 10/15/19	United States	267,000		(286,858	)
Semiconductors & Semiconductor Equipment (0.0)%^†
NXP Semiconductors NV, senior note, 1.00%, 12/01/19	Netherlands	267,000		(316,562	)
Software (0.1)%
Red Hat Inc., senior note, 0.25%, 10/01/19	United States	535,000		(678,781	)
Total Convertible Bonds and Notes
(Proceeds $1,757,674)				(1,777,999	)
Corporate Bonds and Notes (0.2)%
Diversified Telecommunication Services (0.1)%
^cFrontier Communications Corp., senior note, 144A, 11.00%, 9/15/25	United States	1,681,000		(1,716,721	)
Hotels, Restaurants & Leisure (0.0)%^†
Caesars Entertainment Resort Properties LLC / Caesars Entertainment Resort
Properties, senior secured note, first lien, 8.00%, 10/01/20	United States	179,000		(181,238	)
Independent Power & Renewable Electricity Producers (0.0)%^†
NRG Energy Inc., senior note,
7.875%, 5/15/21	United States	78,000		(81,315	)
6.25%, 7/15/22	United States	181,000		(178,681	)
				(259,996	)
Media (0.1)%
^cCCO Holdings LLC / CCO Holdings Capital Corp., senior note, 144A,
5.875%, 4/01/24	United States	843,000		(880,935	)
Total Corporate Bonds and Notes (Proceeds $2,949,752)				(3,038,890	)
U.S. Government and Agency Securities (Proceeds $629,868) (0.1)%
U.S. Treasury Note, 1.625%, 2/15/26	United States	647,000		(633,756	)
Total Securities Sold Short (Proceeds $250,666,693)			$	(252,329,246	)

64 Annual Report

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

Rounds to less than 0.1% of net assets.
*The principal/notional amount is stated in U.S. dollars unless otherwise indicated.

a A portion or all of the security has been segregated as collateral for securities sold short, open swap, forward, futures and written options contracts. At May 31, 2016, the
aggregate value of these securities and/or cash pledged amounted to $475,149,464, representing 38.42% of net assets.
b Non-income producing.
c Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers
or in public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust s Board of Trustees. At
May 31, 2016, the net value of these securities was $147,618,445, representing 11.94% of net assets.
d A portion or all of the security is held in connection with written option contracts open at period end.
e Variable rate security. The rate shown represents the yield at period end.
f Security was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States.
Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption
from registration. These securities have been deemed liquid under guidelines approved by the Trust s Board of Trustees. At May 31, 2016, the aggregate value of these secu-
rities was $35,899,001, representing 2.90% of net assets.
g See Note 7 regarding credit risk and defaulted securities.
h The coupon rate shown represents the rate at period end.
i Perpetual security with no stated maturity date.
j A portion or all of the security purchased on a delayed delivery basis. See Note 1(d).
k Income may be received in additional securities and/or cash.
l See Note 1(i) regarding senior floating rate interests.
m The security is traded on a discount basis with no stated coupon rate.
n A portion or all of the security is owned by K2 Holdings Investment Corp., a wholly-owned subsidiary of the Fund. See Note 1(g).
o The rate shown is the annualized seven-day yield at period end.
p See Note 1(c) regarding joint repurchase agreement.
q See Note 1(e) regarding written options.
r See Note 1(f) regarding securities sold short.

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)
At May 31, 2016, the Fund had the following futures contracts outstanding. See Note 1(e).

Futures Contracts
		Number of		Notional	Expiration		Unrealized		Unrealized
Description	Type	Contracts		Value	Date		Appreciation		Depreciation
Commodity Contracts^a
Aluminum	Long	245	$	9,467,719	6/13/16	$	—	$	(217,867	)
Aluminum	Short	245		9,467,719	6/13/16		—		(187,523	)
Aluminum	Long	15		584,438	9/19/16		—		(16,206	)
Aluminum	Short	15		584,438	9/19/16		—		(17,793	)
Brent Crude Oil	Long	155		7,732,950	6/30/16		116,564		—
Cocoa	Long	71		2,301,402	7/14/16		113,379		—
Coffee	Short	25		1,157,344	9/20/16		1,432		—
Copper	Long	89		10,413,556	6/13/16		—		(555,112	)
Copper	Short	89		10,413,556	6/13/16		—		(148,849	)
Copper	Long	9		1,051,087	9/19/16		—		(69,176	)
Copper	Short	9		1,051,087	9/19/16		—		(1,426	)
Corn	Short	92		1,861,850	7/14/16		—		(191,363	)
Gold 100 Oz	Long	111		13,514,250	8/29/16		—		(327,200	)
Kansas City Wheat	Short	62		1,386,475	7/14/16		87,021		—
Low Sulfur Gas Oil	Long	47		2,132,625	7/12/16		57,729		—
Natural Gas	Short	81		1,853,280	6/28/16		—		(39,619	)
NY Harbor Ultra-Low Sulfur Diesel	Long	18		1,131,808	6/30/16		8,701		—
RBOB Gasoline	Long	66		4,472,345	6/30/16		290,040		—
Silver	Long	60		4,798,200	7/27/16		—		(353,579	)
Soybean Meal	Long	71		2,815,860	7/14/16		363,447		—
Soybean Oil	Long	42		801,864	7/14/16		—		(66,923	)
Soybeans	Long	84		4,529,700	7/14/16		600,688		—
Sugar	Long	73		1,443,882	9/30/16		6,108		—
Wheat	Short	124		2,879,900	7/14/16		108,120		—
Zinc	Long	80		3,839,500	6/13/16		206,368		—
Zinc	Short	80		3,839,500	6/13/16		—		(302,351	)
Zinc	Long	37		1,780,856	9/19/16		26,811		—
Zinc	Short	5		240,656	9/19/16		—		(4,277	)
				107,547,847			1,986,408		(2,499,264	)
Equity Contracts
CAC 40 10 Euro^a	Long	66		3,289,866	6/17/16		35,468		—
DAX Index^a	Long	9		2,569,415	6/17/16		45,190		—
DJIA Mini E-CBOT Index^a	Long	201		17,862,870	6/17/16		407,867		—
EURO STOXX 50 Price EUR^a	Short	95		3,227,057	6/17/16		—		(110,595	)
FTSE 100 Index^a	Long	10		900,802	6/17/16		—		(3,135	)
FTSE 100 Index	Short	52		4,684,173	6/17/16		41,914		—
Hang Seng Index^a	Short	34		4,479,079	6/29/16		—		(215,856	)
Nasdaq 100 E-Mini Index^a	Long	125		11,310,625	6/17/16		238,054		—
Nikkei 225 Index^a	Short	24		3,734,321	6/09/16		—		(72,069	)
Russell 2000 Mini Index^a	Long	118		13,610,120	6/17/16		484,263		—
Russell 2000 Mini Index	Short	27		3,114,180	6/17/16		—		(101,740	)
S&P 500 E-Mini Index^a	Long	129		13,512,105	6/17/16		433,249		—
S&P 500 E-Mini Index	Short	329		34,461,105	6/17/16		—		(917,080	)
STOXX 600 Bank Index	Short	81		685,845	6/17/16		—		(38,990	)
TOPIX Index^a	Short	39		4,849,686	6/09/16		—		(119,220	)
				122,291,249			1,686,005		(1,578,685	)
Interest Rate Contracts
3 Month Euribor^a	Long	844		235,472,206	6/19/17		214,851		—
90 Day Eurodollar^a	Long	277		68,498,637	6/19/17		27,206		—
90 Day Eurodollar	Short	162		40,001,850	12/18/17		—		(74,573	)
90 Day Sterling^a	Long	1,267		227,731,157	6/21/17		447,754		—
Australian 10 Yr. Bond^a	Long	233		22,378,075	6/15/16		137,484		—
Euro-Bund^a	Long	125		22,805,031	6/08/16		111,796		—

66 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

Futures Contracts (continued)
				Number of		Notional Expiration				Unrealized		Unrealized
Description		Type Contracts				Value		Date		Appreciation		Depreciation
Interest Rate Contracts (continued)
Euro-Bund		Short		133	$	24,264,553		6/08/16	$	—	$	(65,235	)
Long Gilt^a		Long		3		533,356		9/28/16		852		—
U.S. Treasury 10 Yr. Note		Short		70		9,078,125		9/21/16		—		(23,697	)
U.S. Treasury Long Bond^a		Long		165		26,946,563		9/21/16		38,423		—
U.S. Treasury Long Bond		Short		17		2,776,313		9/21/16		—		(21,157	)
						680,485,866				978,366		(184,662	)
Total Futures Contracts					$	910,324,962			$	4,650,779	$	(4,262,611	)
Net unrealized appreciation (depreciation)									$	388,168

^aA portion or all of the contract is owned by K2 Holdings Investment Corp., a wholly-owned subsidiary of the Fund. See Note 1(g).

At May 31, 2016, the Fund had the following forward exchange contracts outstanding. See Note 1(e).

Forward Exchange Contracts
						Contract		Settlement		Unrealized		Unrealized
Currency	Counterparty^aType			Quantity		Amount*		Date		Appreciation		Depreciation
OTC Forward Exchange Contracts
Brazilian Real	BOFA	Buy		7,135,000		1,987,465		6/02/16	$	—	$	(12,980	)
Brazilian Real	BOFA	Sell		7,135,000		2,006,780		6/02/16		32,295		—
Euro	BOFA	Sell		1,740,000		1,996,646		6/03/16		60,420		—
Hungarian Forint	BOFA	Buy		538,400,000		1,978,239		6/03/16		—		(67,933	)
New Zealand Dollar	DBAB	Sell		2,848,040		1,887,302	AUD	6/07/16		—		(47,625	)
Euro	BNYM	Sell		2,246,953		2,567,144		6/09/16		66,208		—
New Zealand Dollar	CBOA	Sell		1,300,000		894,576		6/09/16		15,424		—
New Zealand Dollar	DBAB	Sell		805,000		554,598		6/09/16		10,201		—
Swiss Franc	BNYM	Sell		1,863,736		1,921,377		6/09/16		45,558		—
Turkish Lira	DBAB	Sell		4,200,000		1,425,962		6/09/16		6,634		—
Brazilian Real	BOFA	Sell		275,000		73,308		6/10/16		—		(2,557	)
Japanese Yen	MSCS	Buy		160,250,000		1,479,584		6/10/16		—		(31,866	)
Chilean Peso	MSCS	Sell	1,000,000,000			1,479,290		6/13/16		37,794		—
Euro	BNYM	Sell		10,000		11,401		6/13/16		269		—
South Korean Won	BOFA	Sell	1,710,000,000			1,465,170		6/13/16		30,757		—
British Pound	BNYM	Buy		50,000		72,432		6/15/16		—		(6	)
British Pound	BNYM	Sell		335,000		475,514		6/15/16		38		(9,782	)
Chinese Yuan	MSCO	Sell		3,140,715		480,541		6/15/16		4,009		—
Euro	BNYM	Buy		759,105		862,355		6/15/16		—		(17,247	)
Euro	BNYM	Sell		7,730,049		8,594,024		6/15/16		13,405		(25,203	)
Euro	MSCO	Buy		5,635,168		6,360,715		6/15/16		—		(87,111	)
Euro	MSCO	Sell		21,270,969		23,774,111		6/15/16		93,255		—
Japanese Yen	MSCO	Sell		188,316,736		1,660,918		6/15/16		—		(40,692	)
Mexican Peso	MSCO	Buy		52,378,177		2,927,573		6/15/16		—		(94,764	)
Mexican Peso	MSCO	Sell		52,378,177		3,023,717		6/15/16		190,908		—
South Korean Won	MSCO	Sell	2,556,880,299			2,169,865		6/15/16		25,146		—
Swiss Franc	BNYM	Buy		508,766		534,974		6/15/16		—		(22,758	)
Swiss Franc	BNYM	Sell		6,685,600		6,807,843		6/15/16		76,907		—
Australian Dollar^b	MSCO	Buy		29,967,000		22,362,854		6/17/16		—		(718,933	)
Australian Dollar^b	MSCO	Sell		32,297,000		23,529,588		6/17/16		267,082		(64,271	)
British Pound^b	MSCO	Buy		8,976,000		12,922,712		6/17/16		129,109		(49,600	)
British Pound^b	MSCO	Sell		23,016,000		32,970,250		6/17/16		12,250		(381,917	)
Canadian Dollar^b	MSCO	Buy		33,986,000		25,792,050		6/17/16		271,259		(146,840	)
Canadian Dollar^b	MSCO	Sell		24,814,000		18,923,095		6/17/16		54,193		(53,337	)
Euro^b	MSCO	Buy		42,290,000		47,636,029		6/17/16		33,482		(584,607	)
Euro^b	MSCO	Sell		39,706,000		44,642,322		6/17/16		435,194		(801	)
Japanese Yen^b	MSCO	Buy	5,463,293,000			49,421,094		6/17/16		327,599		(379,096	)
Japanese Yen^b	MSCO	Sell	2,649,474,000			24,267,621		6/17/16		352,662		(27,283	)
Mexican Peso^b	MSCO	Buy		26,142,000		1,466,742		6/17/16		—		(53,223	)

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

Forward Exchange Contracts (continued)
				Contract	Settlement	Unrealized	Unrealized
Currency	Counterparty a Type		Quantity	Amount*	Date	Appreciation	Depreciation

OTC Forward Exchange Contracts (continued)
Mexican Peso b	MSCO	Sell	186,222,000	10,391,403	6/17/16	$ 322,226	$
New Zealand Dollar b	MSCO	Buy	25,470,000	17,300,723	6/17/16	98,073		(181,647)
New Zealand Dollar b	MSCO	Sell	18,577,000	12,530,665	6/17/16	61,700		(88,670)
Swiss Franc b	MSCO	Buy	25,744,000	26,803,080	6/17/16	73		(882,023)
Swiss Franc b	MSCO	Sell	39,568,000	40,563,225	6/17/16	722,974
Canadian Dollar	MSCS	Sell	2,600,000	1,994,416	6/20/16	11,756
Mexican Peso	MSCS	Buy	36,800,000	1,987,417	6/20/16	1,676
Colombian Peso	CSFB	Sell	780,000,000	255,236	6/23/16	4,103
Indonesian Rupiah	CSFB	Sell	11,300,000,000	837,658	6/23/16	14,272
Indonesian Rupiah	MSCS	Sell	1,500,000,000	111,152	6/23/16	1,853
Australian Dollar	BNYM	Sell	186,000	140,690	6/30/16	6,421
Australian Dollar	MSCO	Buy	25,567	19,048	6/30/16			(592)
Australian Dollar	MSCO	Sell	25,567	19,695	6/30/16	1,238
British Pound	BNYM	Sell	121,000	177,834	6/30/16	2,540
British Pound	MSCO	Buy	624,909	906,050	6/30/16	900		(1,639)
British Pound	MSCO	Sell	656,590	952,571	6/30/16	2,282		(918)
Canadian Dollar	BNYM	Buy	300,000	233,918	6/30/16			(5,151)
Canadian Dollar	BNYM	Sell	567,000	432,735	6/30/16	366
Canadian Dollar	MSCO	Buy	1,517,664	1,175,291	6/30/16			(17,988)
Canadian Dollar	MSCO	Sell	4,913,218	3,861,316	6/30/16	115,134		(419)
Canadian Dollar	MSCS	Sell	3,150,000	2,492,503	6/30/16	90,453
Euro	BNYM	Buy	1,305,000	1,488,114	6/30/16			(34,415)
Euro	BNYM	Sell	7,424,909	8,387,337	6/30/16	116,392
Euro	CSFB	Sell	130,000	145,630	6/30/16	817
Euro	DBAB	Sell	613,000	686,511	6/30/16	3,662
Euro	MSCO	Buy	564,029	648,288	6/30/16			(19,991)
Euro	MSCO	Sell	2,597,408	2,939,205	6/30/16	45,868		(35)
Hong Kong Dollar	BNYM	Buy	9,000,000	1,160,324	6/30/16			(1,606)
Hong Kong Dollar	BNYM	Sell	10,293,000	1,327,483	6/30/16	2,295
Japanese Yen	BNYM	Sell	90,184,000	801,137	6/30/16			(14,236)
Japanese Yen	MSCO	Buy	46,797,039	422,472	6/30/16	630
Mexican Peso	MSCS	Sell	335,125	18,128	6/30/16	36
Norwegian Krone	MSCS	Buy	20,300,000	2,489,774	6/30/16			(63,379)
Singapore Dollar	BNYM	Buy	360,000	264,706	6/30/16			(3,425)
Singapore Dollar	BNYM	Sell	2,769,000	2,036,928	6/30/16	27,246
South African Rand	MSCO	Buy	9,067,517	582,606	6/30/16	2,725		(12,197)
South African Rand	MSCO	Sell	14,324,263	969,386	6/30/16	63,988
South African Rand	MSCS	Sell	15,000,000	957,854	6/30/16	9,744
Swedish Krona	MSCO	Sell	3,948,429	485,322	6/30/16	11,327
Swiss Franc	MSCO	Buy	273,772	282,406	6/30/16			(6,573)
Brazilian Real	BOFA	Sell	7,135,000	1,968,276	7/05/16	14,947
Colombian Peso	MSCS	Buy	3,100,000,000	1,032,817	7/29/16			(41,431)
Colombian Peso	MSCS	Sell	3,100,000,000	1,054,063	7/29/16	62,677
Chinese Yuan	MSCO	Sell	38,445,840	5,738,379	8/22/16	1,902		(78,477)
Taiwan Dollar	BOFA	Sell	78,550,000	2,405,819	8/23/16			(6,984)
Chinese Yuan	MLCO	Sell	11,100,000	1,682,838	9/19/16	6,729
Chinese Yuan	MSCS	Sell	4,300,000	637,320	9/19/16			(11,983)
Turkish Lira	MLCO	Sell	5,652,374	1,864,916	9/21/16	4,296
Taiwan Dollar	DBAB	Sell	48,000,000	1,489,758	10/06/16	13,983
Saudi Riyal	MSCO	Sell	13,022,466	3,391,267	1/19/17			(50,851)

Total Forward Exchange Contracts						$4,439,362	$(4,445,062)

Net unrealized appreciation (depreciation)							$	(5,700)

*In U.S. dollars unless otherwise indicated.
a May be comprised of multiple contracts with the same counterparty, currency and settlement date.
b A portion or all of the contract is owned by K2 Holdings Investment Corp., a wholly-owned subsidiary of the Fund. See Note 1(g).

68 Annual Report

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)
At May 31, 2016, the Fund had the following credit default swap contracts outstanding. See Note 1(e) .

Credit Default Swap Contracts
					Unamortized
	Periodic				Upfront
	Payment Counterparty/		Notional	Expiration	Payments	Unrealized	Unrealized
Description	Rate	Exchange	Amount a	Date	(Receipts)	Appreciation	Depreciation	Value	Rating b

Centrally Cleared Swap Contracts
Contracts to Buy Protection									��
Single Name
Government of Brazil	1.00%	ICE	423,000	6/20/20	$ 26,854	$ 6,029	$	$ 32,883
Government of Russia	1.00%	ICE	631,000	9/20/20	52,695		(19,721)	32,974
Government of Russia	1.00%	ICE	486,000	9/20/20	43,032		(17,635)	25,397
Government of South Africa	1.00%	ICE	1,617,000	6/20/21	148,020	9,645		157,665
Government of South Africa	1.00%	ICE	1,310,000	6/20/21	126,444	1,288		127,732
Government of Turkey	1.00%	ICE	1,976,000	9/20/20	157,717		(46,930)	110,787
Government of Turkey	1.00%	ICE	1,286,000	12/20/20	93,791		(12,278)	81,513
Government of Turkey	1.00%	ICE	448,000	12/20/20	39,795		(11,398)	28,397
Government of Turkey	1.00%	ICE	1,721,000	12/20/20	104,376	4,710		109,086
Government of Turkey	1.00%	ICE	629,000	6/20/21	50,876		(2,069)	48,807
Traded Index
CDX. NA. HY. 26	5.00%	ICE	4,850,000	6/20/21	(85,845)		(46,047)	(131,892)
iTraxx Europe Crossover	5.00%	ICE	697,000 EUR	12/20/20	(43,995)		(7,976)	(51,971)
Contracts to Sell Protection c
Single Name
Government of Brazil	1.00%	ICE	89,000	6/20/20	(10,805)	3,887		(6,918)	BB
Government of Brazil	1.00%	ICE	334,000	6/20/20	(47,199)	21,236		(25,963)	BB
Government of Brazil	1.00%	ICE	5,222,000	6/20/21	(594,435)		(15,115)	(609,550)	BB
Government of Russia	1.00%	ICE	1,868,856	9/20/20	(219,442)	121,781		(97,661)	BB+
Government of Russia	1.00%	ICE	1,333,073	9/20/20	(158,959)	89,296		(69,663)	BB+
Government of Russia	1.00%	ICE	715,202	9/20/20	(91,902)	54,527		(37,375)	BB+
Government of Turkey	1.00%	ICE	387,000	12/20/20	(35,846)	11,316		(24,530)	BB+

Total Centrally Cleared Swap Contracts					$(444,828)	$323,715	$(179,169)	$(300,282)


OTC Swap Contracts
Contracts to Buy Protection
Single Name
Deutsche Bank AG	1.00%	BZWS	120,000 EUR	6/20/21	5,743		(1,559)	4,184
Government of Turkey	1.00%	BZWS	325,000	6/20/21	22,511	2,057		24,568
Traded Index
iTraxx Asia Ex Japan	1.00%	BZWS	310,000	6/20/21	6,101		(705)	5,396
iTraxx Asia Ex Japan	1.00%	MSCS	635,000	6/20/21	12,935		(1,881)	11,054
Contracts to Sell Protection c					��
Single Name
Deutsche Bank AG	1.00%	BZWS	120,000 EUR	6/20/21	(17,177)	2,606		(14,571)	BBB+

Total OTC Swap Contracts					$ 30,113	$ 4,663	$ (4,145)	$ 30,631

Total Credit Default Swap Contracts			27,533,131		$(414,715)	$328,378	$(183,314)	$(269,651)

Net unrealized appreciation (depreciation)						$145,064

See Notes 1(e) and 8 regarding derivative financial instruments and other derivative information, respectively.

a In U.S. dollars unless otherwise indicated. For contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no
recourse provisions have been entered into in association with the contracts.
b Based on Standard and Poor s (S&P) Rating for single name swaps.
c The Fund enters contracts to sell protection to create a long credit position. Performance triggers include default, bankruptcy or restructuring for single name swaps and fail-
ure to pay or bankruptcy of the underlying securities for traded index swaps.

franklintempleton.com

Annual Report

F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

At May 31, 2016, the Fund had the following interest rate swap contracts outstanding. See Note 1(e) .

Interest Rate Swap Contracts

Counterparty/

Notional Expiration

Unrealized

Description

Exchange

Amount

Date Appreciation Depreciation

OTC Swap Contracts

Receive Floating rate 3 Month ZAR-JIBAR-SAFEX

Pay Fixed rate 7.95%

BZWS

12,500,000 ZAR 5/05/25

$48,852

Net unrealized appreciation (depreciation)

$48,852

At May 31, 2016, the Fund had the following total return swap contracts outstanding. See Note 1(e) .

Total Return Swap Contracts

Counter-

Expiration

Unrealized

Underlying Instrument

Financing Rate

Party Notional Value*

Date

Appreciation

Depreciation

OTC Swap Contracts

Long

Allergan PLC

LIBOR + 75

DBAB

1,953,810

6/30/16

$109,947

Amsurg Corp

LIBOR + 75

DBAB

1,165,386

6/30/16

2,489

Black Hills Corp

LIBOR + 75

DBAB

4,487,678

6/30/16

42,178

Frontier Communications Corp

LIBOR + 75

DBAB

3,043,542

6/30/16

(40,381)

Health Care REIT Inc

LIBOR + 75

DBAB

1,379,694

6/30/16

(44,550)

Liberty Interactive LLC

LIBOR + 75

DBAB

1,328,124

6/30/16

14,238

NextEra Energy Inc

LIBOR + 75

DBAB

2,540,087

6/30/16

18,041

Scorpio Tankers Inc

LIBOR + 75

DBAB

1,108,514

6/30/16

10,303

Ship Finance International Ltd

LIBOR + 75

DBAB

5,213,187

6/30/16

264,090

Siliconware Precision Industries Co. Ltd

LIBOR + 35

DBAB

56,946

6/30/16

3,841

Spirit Realty Capital Inc

LIBOR + 75

DBAB

323,211

6/30/16

(5,660)

T-Mobile U. S. Inc

LIBOR + 75

DBAB

336,146

6/30/16

16,321

WPX Energy Inc

LIBOR + 75

DBAB

1,098,576

6/30/16

56,746

Aabar Investments PJSC

LIBOR + 100

DBAB

856,996 EUR

7/18/16

9,947

Aabar Investments PJSC

LIBOR + 100

DBAB

466,192 EUR

7/18/16

2,480

Inmarsat PLC

LIBOR + 75

DBAB

2,153,889

7/18/16

(5,716)

Alstria Office REIT AG

LIBOR + 75

DBAB

2,383,993 EUR

7/19/16

(1,487)

Aroundtown Property Holdings PLC

LIBOR + 75

DBAB

663,238 EUR

7/19/16

26,328

British Land White 2015 Ltd

LIBOR + 75

DBAB

860,718 GBP

7/19/16

10,016

Carillion Finance Jersey Ltd

LIBOR + 75

DBAB

1,454,551 GBP

7/19/16

18,206

Drillisch AG

LIBOR + 75

DBAB

3,563,571 EUR

7/19/16

(9,576)

Enterprise Funding Corp

LIBOR + 75

DBAB

156,246 GBP

7/19/16

7,180

Great Portland Estates Capital Jersey Ltd

LIBOR + 75

DBAB

1,881,968 GBP

7/19/16

(61,511)

Helical Bar Jersey Ltd

LIBOR + 75

DBAB

416,472 GBP

7/19/16

3,805

PHP Finance Jersey Ltd

LIBOR + 75

DBAB

564,465 GBP

7/19/16

(8,598)

Salzgitter Finance BV

LIBOR + 75

DBAB

447,503 EUR

7/19/16

4,729

St. Modwen Properties Securities Jersey Ltd

LIBOR + 75

DBAB

296,423 GBP

7/19/16

3,798

Unite Jersey Issuer Ltd

LIBOR + 75

DBAB

1,999,018 GBP

7/19/16

95,544

BW Group Ltd

LIBOR + 75

DBAB

683,007

7/20/16

1,884

Hansteen Jersey Securities Ltd

LIBOR + 75

DBAB

1,682,689 EUR

7/29/16

56,538

Cahaya Capital Ltd

LIBOR + 100

DBAB

316,736

8/17/16

Indah Capital Ltd

LIBOR + 100

DBAB

938,357 SGD

8/22/16

(8,744)

Advanced Semiconductor Engineering Inc

LIBOR + 100

DBAB

2,351,738

8/24/16

297,949

Siliconware Precision Industries Co. Ltd

LIBOR + 100

DBAB

781,735

8/24/16

(7,670)

Marine Harvest

LIBOR + 75

DBAB

5,698,456 EUR

9/19/16

364,526

Ebara Corp

LIBOR + 85

DBAB

181,679,702 JPY

11/17/16

57,139

EDION Corp

LIBOR + 85

DBAB

157,500,000 JPY

11/17/16

33,430

Japan Airport Terminal Co. Ltd

LIBOR + 85

DBAB

90,045,000 JPY

11/17/16

7,473

Japan Airport Terminal Co. Ltd

LIBOR + 85

DBAB

200,740,000 JPY

11/17/16

13,083

K s Holdings Corp

LIBOR + 85

DBAB

573,450,715 JPY

11/17/16

(60,964)

Kawasaki Kisen Kaisha Ltd

LIBOR + 85

DBAB

38,354,200 JPY

11/17/16

14,305

LIXIL Group Corp

LIBOR + 85

DBAB

78,461,733 JPY

11/17/16

129

LIXIL Group Corp

LIBOR + 85

DBAB

116,166,600 JPY

11/17/16

(3,044)

70 Annual Report franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

Total Return Swap Contracts (continued)
		Counter-			Expiration		Unrealized		Unrealized
Underlying Instrument	Financing Rate	Party	Notional Value*		Date		Appreciation		Depreciation
OTC Swap Contracts (continued)
Long (continued)
Maeda Corp	LIBOR + 85	DBAB	193,088,940	JPY	11/17/16	$	21,467	$	—
Nagoya Railroad Co. Ltd	LIBOR + 85	DBAB	22,285,867	JPY	11/17/16		6,026		—
Nippon Ceramic Co. Ltd	LIBOR + 85	DBAB	30,937,500	JPY	11/17/16		—		(1,214	)
Nippon Light Metal Holdings Co. Ltd	LIBOR + 85	DBAB	412,888,011	JPY	11/17/16		102,031		—
OSG Corp	LIBOR + 85	DBAB	156,648,000	JPY	11/17/16		17,015		—
Sankyo Co. Ltd	LIBOR + 85	DBAB	111,784,861	JPY	11/17/16		4,682		—
SBI Holdings Inc	LIBOR + 85	DBAB	20,893,686	JPY	11/17/16		—		(858	)
Shionogi & Co. Ltd	LIBOR + 85	DBAB	90,075,400	JPY	11/17/16		21,421		—
Sony Corp	LIBOR + 85	DBAB	216,935,780	JPY	11/17/16		55,222		—
Taiyo Yuden Co. Ltd	LIBOR + 85	DBAB	120,238,400	JPY	11/17/16		26,504		—
Takashimaya Co Ltd	LIBOR + 85	DBAB	39,921,771	JPY	11/17/16		1,499		—
Teijin Ltd	LIBOR + 85	DBAB	251,329,885	JPY	11/17/16		73,991		—
Toho Holdings Co. Ltd	LIBOR + 85	DBAB	163,054,579	JPY	11/17/16		81,123		—
Tohoku Electric Power Co Inc	LIBOR + 85	DBAB	256,699,645	JPY	11/17/16		12,164		—
Tohoku Electric Power Co Inc	LIBOR + 85	DBAB	213,875,101	JPY	11/17/16		4,715		—
Toppan Printing Co	LIBOR + 85	DBAB	30,330,471	JPY	11/17/16		996		—
Unicharm Corp	LIBOR + 85	DBAB	139,292,599	JPY	11/17/16		—		(28,312	)
Yamada Denki Co. Ltd	LIBOR + 85	DBAB	619,495,250	JPY	11/17/16		31,917		—
Bank of Nagoya Ltd	LIBOR + 85	DBAB	288,550		12/19/16		11,306		—
Gunma Bank Ltd	LIBOR + 85	DBAB	93,001		12/19/16		952		—
Oita Bank Ltd	LIBOR + 85	DBAB	1,202,988		12/19/16		2,161		—
Yamagata Bank Ltd	LIBOR + 85	DBAB	750,110		12/19/16		21,515		—
Yamaguchi Financial Group Inc	LIBOR + 85	DBAB	2,404,972		12/19/16		25,918		—
APERAM SA	LIBOR + 75	DBAB	1,829,939		1/18/17		79,715		—
Dana Gas Sukuk Ltd	LIBOR + 75	DBAB	115,764		1/18/17		3,778		—
Magyar Nemzeti Vagyonkezelo Zrt	LIBOR + 75	DBAB	2,283,696	EUR	1/18/17		20,893		—
Anglo American PLC	LIBOR + 50	MSCS	410,563	GBP	1/18/17		—		(92,319	)
ANTOFAGASTA PLC	LIBOR + 50	MSCS	871,918	GBP	1/18/17		—		(123,034	)
Rio Tinto PLC	LIBOR + 50	MSCS	979,033	GBP	1/18/17		39,791		—
Wizz Air Holdings PLC	LIBOR + 50	MSCS	558,138	GBP	1/18/17		93,232		—
Worldpay Group PLC	LIBOR + 100	DBAB	95,852	GBP	2/02/17		3,953		—
Telepizza Group SA	LIBOR + 100	DBAB	182,233	EUR	2/02/17		—		(25,764	)
ACS Actividades Finance BV	LIBOR + 75	DBAB	1,852,480	EUR	2/09/17		—		(881	)
Ascent Capital Group Inc	LIBOR + 100	DBAB	100,874		2/09/17		—		(38,456	)
Bunge Ltd	LIBOR + 100	DBAB	73,500		2/09/17		—		(5,355	)
Green Plains Inc	LIBOR + 100	DBAB	290,973		2/09/17		—		(10,853	)
Nyrstar NV	LIBOR + 75	DBAB	269,659	EUR	2/09/17		15,474		—
OCI NV	LIBOR + 75	DBAB	1,642,856	EUR	2/09/17		—		(106,768	)
Shenzhou International Group Holdings Ltd	LIBOR + 100	DBAB	6,860,580	HKD	2/17/17		19,924		—
Industrivarden AB	LIBOR + 90	DBAB	988,981	EUR	2/27/17		—		(3,573	)
PT Jersey Ltd	LIBOR + 75	DBAB	1,403,567	EUR	2/27/17		87,912		—
BT Group PLC	LIBOR + 40	MSCS	106,395	GBP	2/28/17		—		(594	)
SABMiller PLC	LIBOR + 40	MSCS	3,288,352	GBP	2/28/17		274,550		—
Vodafone Group PLC	LIBOR + 40	MSCS	58,491	GBP	2/28/17		3,412		—
Fonciere Des Regions	LIBOR + 75	DBAB	902,749	EUR	3/15/17		—		(2,643	)
Orpar SA	LIBOR + 75	DBAB	306,513	EUR	3/15/17		4,417		—
ASM Pacific Technology Ltd	LIBOR + 90	DBAB	8,035,222	HKD	3/17/17		7,639		—
Nyrstar NV	LIBOR + 75	DBAB	238,871	EUR	3/17/17		17,188		—
Premier Oil Finance Jersey Ltd	LIBOR + 75	DBAB	446,679		3/17/17		38,670		—
Johnson Electric Holdings Ltd	LIBOR + 90	DBAB	1,563,964		3/20/17		—		(21,271	)
OSIM International Ltd	LIBOR + 100	DBAB	406,523	SGD	3/20/17		4,573		—
Coach Inc	LIBOR + 50	MSCS	732,645		4/17/17		—		(21,831	)
Mead Johnson Nutrition Co	LIBOR + 50	MSCS	799,312		4/17/17		—		(35,326	)
Aroundtown Property Holdings PLC	LIBOR + 100	DBAB	6,749	EUR	4/18/17		299		—
Barclays PLC	LIBOR + 50	MSCS	442,568	GBP	4/18/17		74,617		—
BNP Paribas SA	LIBOR + 50	MSCS	876,029	EUR	4/18/17		105,832		—

franklintempleton.com

Annual Report

F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

Total Return Swap Contracts (continued)

Counter-

Expiration

Unrealized

Underlying Instrument

Financing Rate

Party

Notional Value*

Date

Appreciation

Depreciation

OTC Swap Contracts (continued)

Long (continued)

Croda International PLC

LIBOR + 50

MSCS

1,267,659 GBP

4/18/17

$ 6,533

Iliad SA

LIBOR + 50

MSCS

1,837,413 EUR

4/18/17

24,519

ITV PLC

LIBOR + 50

MSCS

1,326,111 GBP

4/18/17

(31,859)

Remy Cointreau SA

LIBOR + 50

MSCS

2,093,202 EUR

4/18/17

52,130

Rexam PLC

LIBOR + 50

MSCS

2,273,305 GBP

4/18/17

(9,664)

RSA Insurance Group PLC

LIBOR + 50

MSCS

531,748 GBP

4/18/17

15,946

Smith & Nephew PLC

LIBOR + 50

MSCS

870,432 GBP

4/18/17

16,319

Smiths Group PLC

LIBOR + 50

MSCS

488,790 GBP

4/18/17

18,391

Societe Generale SA

LIBOR + 50

MSCS

966,855 EUR

4/18/17

106,090

Sports Direct International PLC

LIBOR + 50

MSCS

1,030,626 GBP

4/18/17

(21,249)

Acciona SA

LIBOR + 75

DBAB

494,728 EUR

4/25/17

6,365

NH Hotel Group SA

LIBOR + 75

DBAB

782,637 EUR

4/25/17

34,591

China Overseas Finance Investment

Cayman V Ltd

LIBOR + 90

DBAB

598,950

5/17/17

1,939

ENN Energy Holdings Ltd

LIBOR + 90

DBAB

264,635

5/17/17

540

TPK Holding Co. Ltd

LIBOR + 90

DBAB

215,625

5/17/17

4,575

Alaska Air Group Inc

LIBOR + 50

MSCS

2,319,081

5/25/17

(53,931)

Brunswick Corp

LIBOR + 50

MSCS

1,825,894

5/25/17

59,132

Constellation Brands Inc

LIBOR + 50

MSCS

2,412,591

5/25/17

264,165

Louisiana-Pacific Corp

LIBOR + 50

MSCS

865,052

5/25/17

58,398

NVR Inc

LIBOR + 50

MSCS

3,600,886

5/25/17

731,613

Resorttrust Inc

LIBOR + 85

DBAB

10,450,000 JPY

6/19/17

437

America Movil SAB de CV

LIBOR + 75

DBAB

3,808,950 EUR

7/25/17

27,502

OHL Investments SA

LIBOR + 75

DBAB

92,301 EUR

7/25/17

(2,129)

Air France

EURIBOR + 50

MSCS

882,237 EUR

8/23/17

(35,396)

Meda AB

STIBOR + 65

MSCS

36,220,040 SEK

8/23/17

Peugeot SA

EURIBOR + 50

MSCS

580,755 EUR

8/23/17

(22,148)

Plastic Omnium SA

EURIBOR + 50

MSCS

1,002,021 EUR

8/23/17

25,739

St. Jude Medical Inc

LIBOR + 35

MSCS

2,461,790

10/11/17

94,136

Starwood Hotels & Resorts Worldwide Inc

LIBOR + 35

MSCS

2,480,909

10/11/17

(70,456)

Tyco International PLC

LIBOR + 35

MSCS

1,225,660

10/11/17

76,402

Rexam PLC

SONIA + 65

MSCS

842,247 GBP

10/26/17

SABMiller PLC

SONIA + 65

MSCS

3,321,366 GBP

10/26/17

Vivendi SA

EONIA + 65

MSCS

2,199,117 EUR

10/30/17

Celesio AG

EONIA + 65

MSCS

1,116,085 EUR

11/02/17

ThyssenKrupp AG

EONIA + 65

MSCS

1,112,906 EUR

11/02/17

Wincor Nixdorf AG

EONIA + 65

MSCS

779,154 EUR

11/02/17

Wincor Nixdorf AG

EONIA + 65

MSCS

197,478 EUR

11/02/17

Asciano Ltd

RBACR + 54

MSCS

5,610,195 AUD

12/05/17

NCR Corp

FEDEF + 40

MSCS

689,149

12/21/17

Moncler SpA

EURIBOR + 50

MSCS

144,550 EUR

1/10/18

18,464

Ryanair Holdings PLC

EURIBOR + 50

MSCS

947,230 EUR

1/10/18

29,344

Home Retail Group PLC

SONIA + 65

MSCS

1,817,325 GBP

2/06/18

44,585

Vinci SA

EURIBOR + 40

MSCS

175,246 EUR

5/08/18

8,285

Janus Capital Group Inc

LIBOR

CITI

784,088

5/29/18

34,460

OTC Swap Contracts

Short

iBoxx USD Liquid High Yield Index

LIBOR

JPHQ

4,872,000

6/20/16

(21,370)

iBoxx USD Liquid High Yield Index

LIBOR

MSCS

277,000

6/20/16

(1,855)

Advanced Semiconductor Engineering Inc

LIBOR - 35

DBAB

270,959

6/30/16

(41,473)

Allergan PLC

LIBOR - 35

DBAB

1,308,041

6/30/16

(62,362)

Amsurg Corp

LIBOR - 35

DBAB

1,056,318

6/30/16

2,686

Black Hills Corp

LIBOR - 35

DBAB

3,978,621

6/30/16

(52,203)

Frontier Communications Corp

LIBOR - 35

DBAB

2,482,707

6/30/16

33,187

HSN Inc

LIBOR - 35

DBAB

45,374

6/30/16

(3,128)

72 Annual Report

franklintempleton.com

F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D S T A T E M E N T O F I N V E S T M E N T S

Franklin K2 Alternative Strategies Fund (continued)

Total Return Swap Contracts (continued)

Counter-

Expiration

Unrealized

Underlying Instrument

Financing Rate

Party

Notional Value*

Date

Appreciation

Depreciation

OTC Swap Contracts (continued)

Short (continued)

NextEra Energy Inc

LIBOR - 35

DBAB

2,431,665

6/30/16

$ 9,829

Scorpio Tankers Inc

LIBOR - 35

DBAB

329,750

6/30/16

(13,123)

Ship Finance International Ltd

LIBOR - 125

DBAB

3,452,071

6/30/16

(73,436)

Spirit Realty Capital Inc

LIBOR - 35

DBAB

93,707

6/30/16

3,997

T-Mobile U. S. Inc

LIBOR - 35

DBAB

281,862

6/30/16

(14,847)

Welltower Inc

LIBOR - 35

DBAB

901,680

6/30/16

46,309

WPX Energy Inc

LIBOR - 35

DBAB

772,810

6/30/16

(52,102)

Inmarsat PLC

LIBOR - 40

DBAB

151,912

7/18/16

4,740

Alstria office REIT-AG

LIBOR - 40

DBAB

1,592,502 EUR

7/19/16

(5,055)

Aroundtown Property Holdings PLC

LIBOR - 439

DBAB

438,603 EUR

7/19/16

(18,222)

ASM Pacific Technology Ltd

LIBOR - 100

DBAB

350,460 HKD

7/19/16

(3,411)

Aurubis AG

LIBOR - 40

DBAB

188,560 EUR

7/19/16

(5,141)

China Overseas Land & Investment Ltd

LIBOR - 40

DBAB

439,066 HKD

7/19/16

(3,599)

Drillisch AG

LIBOR - 40

DBAB

2,998,154 EUR

7/19/16

157,626

ENN Energy Holdings Ltd

LIBOR - 40

DBAB

602,400 HKD

7/19/16

(1,859)

Fonciere Des Regions

LIBOR - 40

DBAB

456,442 EUR

7/19/16

(4,099)

Hansteen Holdings PLC

LIBOR - 40

DBAB

1,023,154 EUR

7/19/16

(44,527)

Johnson Electric Holdings Ltd

LIBOR - 40

DBAB

861,900 HKD

7/19/16

15,751

Playtech PLC

LIBOR - 40

DBAB

903,368 EUR

7/19/16

(82,369)

Shenzhou International Group Holdings Ltd

LIBOR - 40

DBAB

3,240,750 HKD

7/19/16

(20,743)

Siemens AG

LIBOR - 40

DBAB

1,033,003 EUR

7/19/16

(32,968)

Acciona SA

LIBOR - 40

DBAB

305,138 EUR

7/20/16

(5,518)

Iberdrola SA

LIBOR - 40

DBAB

1,008,541 EUR

7/20/16

2,632

Koninklijke KPN NV

LIBOR - 40

DBAB

745,768 EUR

7/20/16

(17,760)

NH Hotel Group SA

LIBOR - 40

DBAB

257,285 EUR

7/20/16

(28,441)

OCI NV

LIBOR - 40

DBAB

151,596 EUR

7/20/16

12,716

Advanced Semiconductor Engineering Inc

LIBOR - 125

DBAB

789,954

8/24/16

(203,046)

IHH Healthcare Bhd

LIBOR - 309

DBAB

844,701 SGD

8/25/16

20,989

Marine Harvest ASA

LIBOR - 40

DBAB

4,875,400 EUR

10/19/16

(295,044)

Tenaga Nasional Bhd

LIBOR - 50

DBAB

606,229

10/19/16

15,325

Abbott Laboratories

LIBOR - 35

MSCS

1,075,849

10/25/16

(50,081)

Consumer Staples Select Sector

SPDR Fund

LIBOR - 78

MSCS

300,717

10/25/16

(9,847)

Industrial Select Sector SPDR Fund

LIBOR - 77

MSCS

155,063

10/25/16

(144)

Johnson Controls Inc

LIBOR - 35

MSCS

1,487,328

10/25/16

(64,150)

Marriott International Inc

LIBOR - 250

MSCS

2,890,652

10/25/16

67,794

Shire PLC

LIBOR - 77

MSCS

2,779,817

10/25/16

(267,493)

Teva Pharmaceutical Industries Ltd

LIBOR - 30

MSCS

459,958

10/25/16

(2,973)

VMware Inc. , A

LIBOR - 175

MSCS

568,123

10/25/16

(60,748)

BW LPG Ltd

LIBOR - 40

DBAB

125,981

11/09/16

17,701

Bank of Nagoya Ltd

LIBOR - 150

DBAB

112,400

11/18/16

(6,964)

Ebara Corp

LIBOR - 40

DBAB

113,935,950 JPY

11/18/16

(61,916)

EDION Corp

LIBOR - 350

DBAB

57,786,600 JPY

11/18/16

(19,160)

Gunma Bank Ltd

LIBOR - 40

DBAB

14,698

11/18/16

(1,340)

Japan Airport Terminal Co. Ltd

LIBOR - 300

DBAB

22,661,000 JPY

11/18/16

(11,532)

K s Holdings Corp

LIBOR - 100

DBAB

260,686,437 JPY

11/18/16

33,774

Kawasaki Kisen Kaisha Ltd

LIBOR - 100

DBAB

5,242,800 JPY

11/18/16

(9,440)

LIXIL Group Corp

LIBOR - 40

DBAB

19,239,800 JPY

11/18/16

161

Maeda Corp

LIBOR - 100

DBAB

101,925,399 JPY

11/18/16

(29,169)

Nagoya Railroad Co. Ltd

LIBOR - 40

DBAB

9,486,000 JPY

11/18/16

(5,053)

Nippon Ceramic Co. Ltd

LIBOR - 600

DBAB

29,819,509 JPY

11/18/16

(1,029)

Nippon Light Metal Holdings Co. Ltd

LIBOR - 40

DBAB

204,824,618 JPY

11/18/16

(110,826)

Oita Bank Ltd

LIBOR - 40

DBAB

507,553

11/18/16

(3,899)

OSG Corp

LIBOR - 40

DBAB

97,794,256 JPY

11/18/16

(14,830)

Resorttrust Inc

LIBOR - 40

DBAB

2,112,300 JPY

11/18/16

120

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS


Franklin K2 Alternative Strategies Fund (continued)

Total Return Swap Contracts (continued)
		Counter-			Expiration		Unrealized		Unrealized
Underlying Instrument	Financing Rate	Party	Notional Value*		Date		Appreciation		Depreciation
OTC Swap Contracts (continued)
Short (continued)
Sankyo Co. Ltd	LIBOR - 40	DBAB	31,503,061	JPY	11/18/16	$	—	$	(11,887	)
SBI Holdings Inc	LIBOR - 40	DBAB	5,399,915	JPY	11/18/16		1,646		—
Shionogi & Co. Ltd	LIBOR - 40	DBAB	72,844,059	JPY	11/18/16		—		(27,233	)
Sony Corp	LIBOR - 40	DBAB	40,946,365	JPY	11/18/16		—		(25,025	)
Taiyo Yuden Co. Ltd	LIBOR - 40	DBAB	18,651,935	JPY	11/18/16		—		(26,336	)
Teijin Ltd	LIBOR - 40	DBAB	107,888,599	JPY	11/18/16		—		(72,560	)
Toho Holdings Co. Ltd	LIBOR - 40	DBAB	104,963,643	JPY	11/18/16		—		(75,921	)
Tohoku Electric Power Co Inc	LIBOR - 40	DBAB	106,095,208	JPY	11/18/16		—		(19,319	)
Toppan Printing Co. Ltd	LIBOR - 40	DBAB	5,790,000	JPY	11/18/16		—		(4,695	)
Unicharm Corp	LIBOR - 40	DBAB	50,826,668	JPY	11/18/16		24,176		—
Yamada Denki Co. Ltd	LIBOR - 100	DBAB	276,877,541	JPY	11/18/16		—		(89,955	)
Yamagata Bank Ltd	LIBOR - 150	DBAB	483,946		11/18/16		—		(54,742	)
Yamaguchi Financial Group Inc	LIBOR - 40	DBAB	3,200,228		11/18/16		14,902		—
British Land Co. PLC	LIBOR - 40	DBAB	64,350	GBP	1/18/17		—		(3,255	)
Carillion PLC	LIBOR - 250	DBAB	406,727	GBP	1/18/17		—		(43,290	)
Enterprise Inns PLC	LIBOR - 40	DBAB	46,879	GBP	1/18/17		—		(6,617	)
Great Portland Estates PLC	LIBOR - 40	DBAB	1,007,894	GBP	1/18/17		52,532		—
Primary Health Properties PLC	LIBOR - 300	DBAB	274,449	GBP	1/18/17		—		(2,243	)
Richter Gedeon Nyrt	LIBOR - 40	DBAB	789,212	EUR	1/18/17		—		(19,001	)
St. Modwen Properties PLC	LIBOR - 40	DBAB	13,789	GBP	1/18/17		—		(1,185	)
UNITE Group PLC	LIBOR - 40	DBAB	1,522,307	GBP	1/18/17		—		(42,701	)
Ball Corp	SONIA - 35	MSCS	304,836	GBP	1/18/17		—		(737	)
Burberry Group PLC	SONIA - 35	MSCS	63,135	GBP	1/18/17		8,656		—
APERAM SA	LIBOR - 40	DBAB	1,586,325		2/01/17		—		(73,053	)
Larsen & Toubro Ltd	LIBOR + 150	DBAB	74,748		2/20/17		828		—
Sky PLC	LIBOR - 35	MSCS	115,193	GBP	2/28/17		8,771		—
OHL Mexico SAB de CV	LIBOR - 50	DBAB	17,901	EUR	3/14/17		—		(7,057	)
Larsen & Toubro Ltd	LIBOR - 200	DBAB	241,211		3/17/17		—		(32,643	)
Nyrstar NV	LIBOR - 550	DBAB	29,621	EUR	3/17/17		898		—
Ball Corp	FEDEF - 35	MSCS	427,548		4/17/17		—		(1,595	)
Industrivarden AB	LIBOR - 40	DBAB	190,708	EUR	4/21/17		—		(2,431	)
Swire Pacific Ltd	HONIX - 50	MSCS	2,217,274	HKD	7/13/17		—		(5,951	)
Sandvik AB	STIBOR - 82	MSCS	1,508,920	SEK	8/23/17		—		—
J Sainsbury PLC	SONIA - 188	MSCS	947,566	GBP	10/26/17		—		(41,402	)
Altice NV	EONIA - 40	MSCS	146,907	EUR	10/30/17		—		—
Faurecia	EONIA - 40	MSCS	74,539	EUR	10/30/17		—		—
Kone OYJ	EONIA - 50	MSCS	1,420,361	EUR	10/30/17		—		—
Bayerische Motoren Werke AG	EONIA - 40	MSCS	67,390	EUR	11/02/17		—		—
Daimler AG	EONIA - 40	MSCS	63,723	EUR	11/02/17		—		—
Volkswagen AG	EONIA - 40	MSCS	88,268	EUR	11/02/17		—		—
STOXX Europe 600 Index	EURIBOR - 45	MSCS	571,579	EUR	11/22/17		55,483		—
Alibaba Group Holding Ltd	LIBOR - 30	MSCS	725,982		12/14/17		—		(81,436	)
Diebold Inc	EONIA - 35	MSCS	162,923	EUR	1/31/18		—		(1,484	)
Weir Group PLC	SONIA - 35	MSCS	108,905	GBP	2/06/18		—		(5,157	)
Mylan NV	STIBOR - 35	MSCS	3,960,527	SEK	2/15/18		—		(157	)
SPDR S&P500 ETF Trust	FEDEF - 35	MSCS	807,389		2/27/18		—		(61,922	)
America Movil SAB de CV	MXONBR - 50	MSCS	2,503,433	MXN	3/06/18		—		(481	)
Williams Partners LP	FEDEF - 35	MSCS	51,423		4/24/18		—		—
Janus Capital Group Inc	LIBOR	CITI	645,149		5/29/18		—		(30,255	)
Total Return Swap Contracts						$	5,359,036	$	(3,733,806	)
Net unrealized appreciation (depreciation)						$	1,625,230

*In U.S. dollars unless otherwise indicated.



See Abbreviations on page 94.

74 Annual Report | The accompanying notes are an integral part of these financial statements.

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S

Consolidated Financial Statements

Consolidated Statement of Assets and Liabilities
May 31, 2016

Franklin K2 Alternative Strategies Fund

Assets:
Investments in securities:
Cost - Unaffiliated issuers		$1,152,601,739
Cost - Repurchase agreements		52,451,581

Total cost of investments		$1,205,053,320

Value - Unaffiliated issuers		$1,198,247,437
Value - Repurchase agreements		52,451,581

Total value of investments		1,250,699,018
Cash		38,853,159
Foreign currency, at value (cost $4,397,854)		4,411,390
Receivables:
Investment securities sold		23,559,625
Capital shares sold		688,034
Dividends and interest		7,786,780
Due from brokers		213,365,350
OTC swap contracts (upfront payments $48,520)		47,290
Unrealized appreciation on OTC forward exchange contracts		4,439,362
Unrealized appreciation on OTC swap contracts		5,412,551
Other assets		640

Total assets		1,549,263,199

Liabilities:
Payables:
Investment securities purchased		35,837,269
Capital shares redeemed		2,058,482
Management fees		1,896,590
Distribution fees		99,001
Transfer agent fees		84,766
Variation margin		298,199
OTC swap contracts (upfront receipts $17,278)		17,177
Options written, at value (premiums received $1,021,236)		781,661
Securities sold short, at value (proceeds $250,666,693)		252,329,246
Due to brokers		10,532,196
Unrealized depreciation on OTC forward exchange contracts		4,445,062
Unrealized depreciation on OTC swap contracts		3,737,951
Accrued expenses and other liabilities		505,557

Total liabilities		312,623,157

Net assets, at value		$1,236,640,042

Net assets consist of:
Paid-in capital		$1,249,367,286
Undistributed net investment income		2,947,721
Net unrealized appreciation (depreciation)		46,430,604
Accumulated net realized gain (loss)		(62,105,569)

Net assets, at value		$1,236,640,042

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The accompanying notes are an integral part of these financial statements. | Annual Report 75

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Assets and Liabilities (continued)
May 31, 2016


Franklin K2 Alternative Strategies Fund

Class A:
Net assets, at value	$	177,412,256
Shares outstanding		16,811,534
Net asset value per share^a	$	10.55
Maximum offering price per share (net asset value per share ÷ 94.25%)	$	11.19
Class C:
Net assets, at value	$	71,154,106
Shares outstanding		6,807,724
Net asset value and maximum offering price per share^a	$	10.45
Class R:
Net assets, at value	$	341,147
Shares outstanding		32,149
Net asset value and maximum offering price per share	$	10.61
Class R6:
Net assets, at value	$	265,516,807
Shares outstanding		25,078,664
Net asset value and maximum offering price per share	$	10.59
Advisor Class:
Net assets, at value	$	722,215,726
Shares outstanding		68,270,344
Net asset value and maximum offering price per share	$	10.58

^aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.

76 Annual Report | The accompanying notes are an integral part of these financial statements.

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Consolidated Statement of Operations
for the year ended May 31, 2016

Franklin K2 Alternative Strategies Fund

Investment income:
Dividends		$ 4,644,737
Interest		21,892,135

Total investment income		26,536,872

Expenses:
Management fees (Note 3a)		22,239,457
Distribution fees: (Note 3c)
Class A		452,515
Class C		653,269
Class R		2,026
Transfer agent fees: (Note 3e)
Class A		158,193
Class C		58,727
Class R		364
Class R6		882
Advisor Class		530,788
Custodian fees (Note 4)		188,774
Reports to shareholders		144,805
Registration and filing fees		237,446
Professional fees		450,129
Trustees fees and expenses		575,412
Dividends and/or interest on securities sold short		4,658,416
Security borrowing fees		2,592,051
Other		108,241

Total expenses		33,051,495
Expense reductions (Note 4)		(20,293)
Expenses waived/paid by affiliates (Note 3f)		(3,695,122)

Net expenses		29,336,080

Net investment income (loss)		(2,799,208)

Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments		(43,440,368)
Written options		521,714
Foreign currency transactions		(2,491,308)
Futures contracts		(5,429,267)
Securities sold short		(1,348,197)
Swap contracts		(1,172,359)

Net realized gain (loss)		(53,359,785)

Net change in unrealized appreciation (depreciation) on:
Investments		16,280,460
Translation of other assets and liabilities denominated in foreign currencies		510,070
Written options		341,679
Futures contracts		(134,549)
Swap contracts		1,803,640

Net change in unrealized appreciation (depreciation)		18,801,300

Net realized and unrealized gain (loss)		(34,558,485)

Net increase (decrease) in net assets resulting from operations		$(37,357,693)

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The accompanying notes are an integral part of these financial statements. | Annual Report 77

F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Consolidated Statements of Changes in Net Assets

Franklin K2 Alternative Strategies Fund

	Year Ended May 31,

	2016	2015

Increase (decrease) in net assets:
Operations:
Net investment income (loss)	$ (2,799,208)	$ (3,810,717)
Net realized gain (loss)	(53,359,785)	18,827,021
Net change in unrealized appreciation (depreciation)	18,801,300	16,163,590

Net increase (decrease) in net assets resulting from operations	(37,357,693)	31,179,894

Distributions to shareholders from:
Net investment income:
Class A	(2,592,416)	(612,244)
Class C	(644,384)	(65,590)
Class R		(45,777)
Class R6	(4,016,413)	(1,926,596)
Advisor Class	(10,110,090)	(1,393,965)
Net realized gains:
Class A	(696,387)
Class C	(262,371)
Class R	(1,174)
Class R6	(894,391)
Advisor Class	(2,315,995)

Total distributions to shareholders	(21,533,621)	(4,044,172)

Capital share transactions: (Note 2)
Class A	38,612,258	46,690,910
Class C	37,013,071	20,037,814
Class R	(8,810,100)	(3,054,919)
Class R6	39,418,868	13,262,210
Advisor Class	424,302,558	265,636,309

Total capital share transactions	530,536,655	342,572,324

Net increase (decrease) in net assets	471,645,341	369,708,046
Net assets:
Beginning of year	764,994,701	395,286,655

End of year	$1,236,640,042	$764,994,701

Undistributed net investment income included in net assets:
End of year	$ 2,947,721	$ 15,818,264

78 Annual Report | The accompanying notes are an integral part of these financial statements.

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S

Notes to Consolidated Financial Statements

Franklin K2 Alternative Strategies Fund

1. Organization and Significant Accounting Policies

Franklin Alternative Strategies Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of three separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin K2 Alternative Strategies Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class A, Class C, Class R, Class R6 and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.

The following summarizes the Fund s significant accounting policies.

a. Financial Instrument Valuation

The Fund s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust s Board of Trustees (the Board), the Fund s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities, exchange traded funds and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of 4 p.m. Eastern time whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time on the day

that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.

Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the date that the values of the foreign debt securities are determined.

Investments in open-end mutual funds are valued at the closing NAV. Repurchase agreements are valued at cost, which approximates fair value.

Certain derivatives trade in the OTC market. The Fund s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.

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Annual Report

F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Franklin K2 Alternative Strategies Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

a. Financial Instrument Valuation (continued)

determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments in the Consolidated Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Joint Repurchase Agreement

The Fund enters into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund s custodian. The fair value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to

80 Annual Report

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Franklin K2 Alternative Strategies Fund (continued)

market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agree -ments. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at year end, as indicated in the Consolidated Statement of Investments, had been entered into on May 31, 2016.

d. Securities Purchased on a Delayed Delivery Basis

The Fund purchases securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.

e. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Consolidated Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Consolidated Statement of Operations.

Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to

counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.

Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable coun-terparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.

The Fund entered into exchange traded futures contracts primarily to manage and/or gain exposure to commodity price, interest rate and equity price risk. A futures contract is an agreement

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin K2 Alternative Strategies Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

e. Derivative Financial Instruments (continued)

between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Consolidated Statement of Assets and Liabilities.

The Fund entered into OTC forward exchange contracts primarily to manage and/or gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

The Fund entered into credit default swap contracts primarily to manage and/or gain exposure to credit risk. A credit default swap is an agreement between the Fund and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. These agreements may be privately negotiated in the over-the-counter market (OTC credit default swaps) or may be executed in a multilateral trade facility platform, such as a registered exchange (centrally cleared credit default swaps). The underlying referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index, a basket of issuers or indices, or a tranche of a credit index or basket of issuers or indices. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount. For centrally cleared credit default swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Consolidated Statement of Assets and Liabilities. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at which time they are realized. Upfront payments and receipts are reflected in the Consolidated Statement of Assets and Liabilities and represent compensating factors between stated terms of the credit default swap agreement and prevailing market conditions (credit spreads and other relevant factors). These upfront payments and

receipts are amortized over the term of the contract as a realized gain or loss in the Consolidated Statement of Operations.

The Fund entered into interest rate swap contracts primarily to manage interest rate risk. An interest rate swap is an agreement between the Fund and a counterparty to exchange cash flows based on the difference between two interest rates, applied to a notional amount. These agreements may be privately negotiated in the over-the-counter market (OTC interest rate swaps) or may be executed on a registered exchange (centrally cleared interest rate swaps). For centrally cleared interest rate swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Consolidated Statement of Assets and Liabilities. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized.

The Fund entered into OTC total return swap contracts primarily to manage and/or gain exposure to interest rate, equity price and credit risk of an underlying instrument such as a stock, bond, index or basket of securities or indices. A total return swap is an agreement between the Fund and a counterparty to exchange a return linked to an underlying instrument for a floating or fixed rate payment, both based upon a notional amount. Over the term of the contract, contractually required payments to be paid or received are accrued daily and recorded as unrealized appreciation or depreciation until the payments are made, at which time they are recognized as realized gain or loss.

The Fund purchased or wrote exchange traded and/or OTC option contracts primarily to manage and/or gain exposure to equity price, interest rate and foreign exchange rate risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.

See Notes 6 and 8 regarding investment transactions and other derivative information, respectively.

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Franklin K2 Alternative Strategies Fund (continued)

f. Securities Sold Short

The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.

The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund.

g. Investments in K2 Holdings Investment Corp. (K2 Subsidiary)

The Fund invests in certain financial instruments and commodity-linked derivative investments through its investment in the K2 Subsidiary. The K2 Subsidiary is a Cayman Islands exempted company with limited liability, is a wholly-owned subsidiary of the Fund, and is able to invest in certain financial instruments and commodity-linked derivative investments consistent with the investment objective of the Fund. At May 31, 2016, the K2 Subsidiary s investments, as well as any other assets and liabilities of the K2 Subsidiary, are reflected in the Fund s Consolidated Statement of Investments and Consolidated Statement of Assets and Liabilities. The financial statements have been consolidated and include the accounts of the Fund and the K2 Subsidiary. All intercompany transactions and balances have been eliminated. At May 31, 2016, the net assets of the K2 Subsidiary were $112,591,405, representing 9.10% of the Fund s consolidated net assets. The Fund s investment in the K2 Subsidiary is limited to 25% of consolidated assets.

h. Senior Floating Rate Interests

The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.

i. Income and Deferred Taxes

It is the Fund s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply, the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of May 31, 2016, the Fund has determined that no tax liability is required in its consolidated financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction s statute of limitation.

j. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated

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Franklin K2 Alternative Strategies Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

j. Security Transactions, Investment Income, Expenses and Distributions (continued)

expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except for certain dividends from foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion

of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

Inflation-indexed bonds are adjusted for inflation through periodic increases or decreases in the security s interest accruals, face amount, or principal redemption value, by amounts corresponding to the rate of inflation as measured by an index. Any increase or decrease in the face amount or principal redemption value will be included as interest income on the Consolidated Statement of Operations.

k. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

l. Guarantees and Indemnifications

Under the Trust s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

2. Shares of Beneficial Interest

At May 31, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund s shares were as follows:

		Year Ended May 31,

		2016		2015

	Shares	Amount	Shares	Amount

Class A Shares:
Shares sold	13,295,280	$ 143,673,278	11,313,392	$123,061,270
Shares issued in reinvestment of distributions	298,189	3,172,727	49,813	539,977
Shares redeemed	(10,133,166)	(108,233,747)	(7,114,359)	(76,910,337)

Net increase (decrease)	3,460,303	$ 38,612,258	4,248,846	$ 46,690,910

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Franklin K2 Alternative Strategies Fund (continued)

			Year Ended May 31,


		2016			2015

	Shares		Amount	Shares		Amount

Class C Shares:
Shares sold	5,119,256	$	55,145,221	3,173,984	$	34,546,633
Shares issued in reinvestment of distributions	79,128		836,381	3,444		37,196
Shares redeemed	(1,811,936)		(18,968,531)	(1,323,981)		(14,546,015)

Net increase (decrease)	3,386,448	$	37,013,071	1,853,447	$	20,037,814

Class R Shares:
Shares sold	13,984	$	149,262	28,828	$	310,648
Shares issued in reinvestment of distributions	106		1,140	92		1,001
Shares redeemed	(804,855)		(8,960,502)	(303,567)		(3,366,568)

Net increase (decrease)	(790,765)	$	(8,810,100)	(274,647)	$	(3,054,919)

Class R6 Shares:
Shares sold	5,337,514	$	57,004,431	3,740,127	$	41,206,775
Shares issued in reinvestment of distributions	459,924		4,902,787	167,937		1,822,117
Shares redeemed	(2,155,223)		(22,488,350)	(2,694,521)		(29,766,682)

Net increase (decrease)	3,642,215	$	39,418,868	1,213,543	$	13,262,210

Advisor Class Shares:
Shares sold	64,566,684	$ 695,799,599		30,206,978	$329,751,933
Shares issued in reinvestment of distributions	966,546		10,303,451	106,628		1,156,912
Shares redeemed	(26,703,118)		(281,800,492)	(5,999,090)		(65,272,536)

Net increase (decrease)	38,830,112	$ 424,302,558		24,314,516	$265,636,309

3. Transactions with Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:

Subsidiary		Affiliation

K2/D&S Management Co. , L. L. C. (K2 Advisors)		Investment manager

Franklin Templeton Services, LLC (FT Services)		Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)		Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)		Transfer agent

a. Management Fees

The Fund and K2 Subsidiary pay an investment management fee to K2 Advisors of 2.05% per year of the average daily net assets of the Fund and K2 Subsidiary. Management fees paid by the Fund are reduced on assets invested in the K2 Subsidiary, in an amount not to exceed the management fees paid by K2 Subsidiary.

Under each subadvisory agreement, the below entities provide subadvisory services to the Fund or K2 Subsidiary. The subadvisory fees are paid by K2 Advisors based on the Fund and K2 Subsidiary average daily net assets, and is not an additional expense of the Fund or K2 Subsidiary.

Subadvisors

Basso Capital Management, L. P.

Chatham Asset Management, LLC

Chilton Investment Company, LLC

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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Franklin K2 Alternative Strategies Fund (continued)

3. Transactions with Affiliates (continued)

a. Management Fees (continued)

Subadvisors (continued)

Emso Asset Management Limited

Graham Capital Management, L. P.

Impala Asset Management, LLC

Jennison Associates, LLC

Lazard Asset Management, LLC

Loomis Sayles & Company, L. P.

P. Schoenfeld Asset Management L. P.

Portland Hill Capital LLP

Wellington Management Company, LLP

York Registered Holdings, L. P.

b. Administrative Fees

Under an agreement with K2 Advisors, FT Services provides administrative services to the Fund and K2 Subsidiary. The fee is paid by K2 Advisors based on the Fund and K2 Subsidiary average daily net assets, and is not an additional expense of the Fund or K2 Subsidiary.

c. Distribution Fees

The Board has adopted distribution plans for each share class, with the exception of Class R6 and Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each fund.

The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:

Class A		0.30%
Class C		1.00%
Class R		0.50%

Effective August 1, 2015, the Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.

d. Sales Charges/Underwriting Agreements

Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund s shares for the year:

Sales charges retained net of commissions paid to unaffiliated broker/dealers		$168,709
CDSC retained		$ 26,681

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Franklin K2 Alternative Strategies Fund (continued)

e. Transfer Agent Fees

Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.

For the year ended May 31, 2016, the Fund paid transfer agent fees of $748,954, of which $241,624 was retained by Investor Services.

f. Waiver and Expense Reimbursements

K2 Advisors has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Fund so that the expenses (excluding distribution fees, acquired fund fees and expenses, and dividend expense on securities sold short) for each class of the Fund do not exceed 1.95%, and Class R6 does not exceed 1.86% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until September 30, 2016. Total expenses waived or paid are not subject to recapture subsequent to the Fund s fiscal year end. Prior to October 1, 2015, expenses for Class R6 were limited to 1.88%.

g. Other Affiliated Transactions
At May 31, 2016, the shares of the Fund were owned by the following entities:
		Percentage of
		Outstanding
	Shares	Shares

Franklin Moderate Allocation Fund	9,471,811	8.09%

Franklin Conservative Allocation Fund	6,250,790	5.34%

Franklin Growth Allocation Fund	5,328,337	4.55%

Franklin LifeSmart 2025 Retirement Target Fund	360,753	0.31%

Franklin LifeSmart 2035 Retirement Target Fund	280,062	0.24%

Franklin LifeSmart 2045 Retirement Target Fund	190,719	0.16%

Franklin LifeSmart 2020 Retirement Target Fund	93,750	0.08%

Franklin LifeSmart 2030 Retirement Target Fund	92,595	0.08%

Franklin LifeSmart 2040 Retirement Target Fund	66,979	0.06%

Franklin LifeSmart 2050 Retirement Target Fund	62,135	0.05%

Franklin NextStep Moderate Fund	8,672	0.01%

Franklin LifeSmart 2055 Retirement Target Fund	6,949	0.01%

Franklin NextStep Growth Fund	3,278	0.00%*

	22,216,830	18.98%

*Rounds to less than 0.01%.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are
used to reduce a portion of the Fund s custodian expenses. During the year ended May 31, 2016, the custodian fees were reduced as
noted in the Consolidated Statement of Operations.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin K2 Alternative Strategies Fund (continued)

5. Income Taxes

For tax purposes, capital losses may be carried over to offset future capital gains, if any. At May 31, 2016, the capital loss carryfor-wards were as follows:


Capital loss carryforwards:
Short term	$	35,428,734
Long term		6,268,117
Total capital loss carryforwards	$	41,696,851

The tax character of distributions paid during the years ended May 31, 2016 and 2015 was as follows:


		2016		2015
Distributions paid from:
Ordinary income	$	17,363,303	$	4,044,172
Long term capital gain		4,170,318		—
Total distributions paid	$	21,533,621	$	4,044,172

At May 31, 2016, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:


Cost of investments	$	1,228,537,026
Unrealized appreciation	$	51,377,099
Unrealized depreciation		(29,215,107	)
Net unrealized appreciation (depreciation)	$	22,161,992
Distributable earnings - undistributed ordinary income	$	7,202,192

The difference between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, bond discounts and premiums, commodity-based derivatives, investments in the K2 Subsidiary and wash sales.

6. Investment Transactions

Purchases and sales of investments and securities sold short (excluding short term securities) for the year ended May 31, 2016, aggregated $2,491,376,328 and $2,258,965,710, respectively.


Transactions in options written during the year ended May 31, 2016, were as follows:

						Options									Swaptions

	Number of					Notional							Notional				Notional
	Contracts			Premiums		Amount			Premiums				Amount		Premiums		Amount				Premiums
Options outstanding
at May 31, 2015	3,168		$	395,803		2,438,000,000	KRW	$	33,740			$	—	$	—		50,000,000		MXN	$	3,293
Options written	37,778			5,840,136		—				—			6,200,000		84,940		—				—
Options expired	(5,263	)		(422,450) (2,438,000,000) KRW						(33,740	)		—		—		—				—
Options exercised	(320	)		(56,070	)	—				—			—		—		—				—
Options closed	(26,397	)		(4,821,123	)	—				—			—		—		(50,000,000	)	MXN		(3,293	)
Options outstanding
at May 31, 2016	8,966			936,296		—			$	—		$	6,200,000	$	84,940	$	—			$	—

See Notes 1(e) and 8 regarding derivative financial instruments and other derivative information, respectively.

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Franklin K2 Alternative Strategies Fund (continued)

The Fund sold certain long positions held in the portfolio and simultaneously entered into total return swaps on the positions, retaining substantially all of the exposure to the economic return and the related risks on the long positions. At May 31, 2016, the transfers of financial assets accounted for as sales were as follows:

				At Year Ended
	At Original Transactions Dates			May 31, 2016


		Gross	Fair Value of	Gross	Gross
	Cost Basis	Cash Received	Transferred	Derivative Assets	Derivative Liabilities
	of Positions Sold	for Positions Sold	Assets a	Recorded b	Recorded b

Sales and total return swaps	$1,336,321	$1,561,793	$114,311	$1,676,104	$1,561,793

a $114,311 of gross derivative assets is included as unrealized appreciation on OTC swap contracts in the Consolidated Statement of Assets and Liabilities. See Note 8 regard-
ing other derivative information.
b Balances are presented on a gross basis, based on each leg of the swap contract, before the application of counterparty and cash collateral offsetting.

7. Credit Risk and Defaulted Securities

The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and are about to be or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest.

At May 31, 2016, the aggregate long value of distressed company securities for which interest recognition has been discontinued was $4,038,890 representing 0.33% of the Fund s net assets. For information as to specific securities, see the accompanying Consolidated Statement of Investments.

8. Other Derivative Information

At May 31, 2016, the Fund s investments in derivative contracts are reflected in the Consolidated Statement of Assets and Liabilities as follows:

	Asset Derivatives		Liability Derivatives


Derivative Contracts	Consolidated Statement		Consolidated Statement
Not Accounted for as	of Assets and		of Assets and
Hedging Instruments	Liabilities Location	Fair Value	Liabilities Location	Fair Value

Interest rate contracts	Investments in securities, at	$ 38,459a	Options written, at value	$ 472
	value
	Variation margin	978,366b	Variation margin	184,662b
	Unrealized appreciation on	2,300,048	Unrealized depreciation on	387,285
	OTC swap contracts		OTC swap contracts
Foreign exchange contracts	Investments in securities, at	40,601a
	value
	Unrealized appreciation on	4,439,362	Unrealized depreciation on	4,445,062
	OTC forward exchange		OTC forward exchange
	contracts		contracts
Credit contracts	Variation margin	323,715b	Variation margin	179,169b
	OTC swap contracts (upfront	47,290	OTC swap contracts (upfront	17,177
	payments)		receipts)
	Unrealized appreciation on	4,663	Unrealized depreciation on	27,370
	OTC swap contracts		OTC swap contracts

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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Franklin K2 Alternative Strategies Fund (continued)

8. Other Derivative Information (continued)
	Asset Derivatives		Liability Derivatives

Derivative Contracts	Consolidated Statement		Consolidated Statement
Not Accounted for as	of Assets and		of Assets and
Hedging Instruments	Liabilities Location	Fair Value	Liabilities Location	Fair Value

Equity contracts	Investments in securities, at	$ 6,556,077a	Options written, at value	$ 781,189
	value
	Variation margin	1,686,005b	Variation margin	1,578,685b
	Unrealized appreciation on	3,107,840	Unrealized depreciation on	3,323,296
	OTC swap contracts		OTC swap contracts
Commodity contracts	Variation margin	1,986,408b	Variation margin	2,499,264b

Totals		$21,508,834		$13,423,631

a Purchased option contracts are included in investments in securities, at value in the Consolidated Statement of Assets and Liabilities. b This amount reflects the cumulative appreciation (depreciation) of futures contracts and centrally cleared swaps contracts as reported in the Consolidated Statement of Investments. Only the variation margin receivable/payable at period end is separately reported within the Consolidated Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.

For the year ended May 31, 2016, the effect of derivative contracts in the Fund s Consolidated Statement of Operations was as follows:

				Net Change in
				Unrealized
Derivative Contracts		Net Realized		Appreciation
Not Accounted for as	Consolidated Statement of	Gain (Loss)	Consolidated Statement of	(Depreciation)
Hedging Instruments	Operations Locations	for the Year	Operations Locations	for the Year

	Net realized gain (loss) from:		Net change in unrealized
			appreciation (depreciation) on:
Interest rate contracts	Investments	$ (45,503)a	Investments	$ (150,866)a
	Written options	3,114	Written options	83,525
	Futures contracts	(893,064)	Futures contracts	644,247
	Swap contracts	(8,994,941)	Swap contracts	1,902,366
Foreign exchange contracts	Investments	102,224 a	Investments	7,500 a
	Written options	201	Written options	1,832
	Foreign currency transactions	(2,583,230)b	Translation of other assets and	526,101b
			liabilities denominated in
			foreign currencies
	Futures contracts	2,109
Credit contracts	Swap contracts	1,199,667	Swap contracts	164,811
Equity contracts	Investments	(4,083,058)a	Investments	(2,547,211)a
	Written options	518,399	Written options	256,322
	Futures contracts	(7,969,266)	Futures contracts	(328,069)
	Swap contracts	6,622,915	Swap contracts	(263,537)
Commodity contracts	Futures contracts	3,430,954	Futures contracts	(450,727)

Totals		$(12,689,479)		$ (153,706)

a Purchased option contracts are included in net realized gain (loss) from investments and net change in unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations. b Forward exchange contracts are included in net realized gain (loss) from foreign currency transactions and net change in unrealized appreciation (depreciation) translation of other assets and liabilities denominated in foreign currencies in the Consolidated Statement of Operations.

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Franklin K2 Alternative Strategies Fund (continued)

For the year ended May 31, 2016, the average month end fair value of derivatives represented 2.45% of average month end net assets. The average month end number of open derivative contracts for the year was 814.

At May 31, 2016, the Fund s OTC derivative assets and liabilities are as follows:

	Gross and Net Amounts
	of Assets and Liabilities
	Presented in the
	Consolidated Statement of
	Assets and Liabilities


	Assets a	Liabilitiesa

Derivatives
Forward Exchange Contracts	$4,439,362	$4,445,062
Options Purchased	79,060
Options Written		472
Swap Contracts	5,459,841	3,755,128

Total	$9,978,263	$8,200,662

a Absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities.

At May 31, 2016, the Fund s OTC derivative assets, which may be offset against the Fund s OTC derivative liabilities and collateral received from the counterparty, are as follows:

		Amounts Not Offset in the Consolidated
		Statement of Assets and Liabilities


	Gross and Net
	Amounts of Assets			Financials
	Presented in the		Financial	Instruments		Cash
	Consolidated Statement of	Instruments		Collateral	Collateral		Net Amount (Not
	Assets and Liabilities	Available for Offset		Received a	Received a		Less than Zero)

Counterparty
BNYM	$ 357,645	$		$	$		$ 357,645
BOFA	182,141		(90,926)				91,215
BZWS	87,870		(19,441)				68,429
CBOA	15,424						15,424
CITI	34,460		(30,255)				4,205
CSFB	19,192						19,192
DBAB	3,011,654		(2,554,386)			(30,000)	427,268
JPHQ
MLCO	11,025						11,025
MSCO	559,723		(412,247)				147,476
MSCOc	3,087,876		(3,087,876)
MSCS	2,611,253		(1,325,960)				1,285,293

Total	$9,978,263	$(7,521,091)		$	$(30,000)		$2,427,172

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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Franklin K2 Alternative Strategies Fund (continued)

8. Other Derivative Information (continued)

At May 31, 2016, the Fund s OTC derivative liabilities, which may be offset against the Fund s OTC derivative assets and collateral pledged to the counterparty, are as follows:

		Amounts Not Offset in the Consolidated
		Statement of Assets and Liabilities


	Gross and Net
	Amounts of Liabilities			Financials
	Presented in the		Financial	Instruments		Cash
	Consolidated Statement of	Instruments		Collateral	Collateral		Net Amount (Not
	Assets and Liabilities	Available for Offset		Pledged a	Pledged a		Less than Zero)

Counterparty
BNYM	$ 133,829	$		$	$		$133,829
BOFA	90,926		(90,926)
BZWS	19,441		(19,441)
CBOA
CITI	30,255		(30,255)
CSFB
DBAB	2,554,386		(2,554,386)
JPHQ	21,370						21,370
MLCO
MSCO	412,247		(412,247)
MSCOb	3,612,248		(3,087,876)		(524,372)
MSCS	1,325,960		(1,325,960)

Total	$8,200,662	$(7,521,091)		$	$(524,372)		$155,199

a In some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit collateral amounts to avoid the effect of over-
collateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein.
b Represents derivatives owned by the K2 Holdings Investment Corp., a wholly-owned subsidiary of the Fund. See Note 1(g).

See Notes 1(e) and 6 regarding derivative financial instruments and investment transactions, respectively.

See Abbreviations on page 94.

9. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. Effective February 12, 2016, the annual commitment fee is 0.15%. These fees are reflected in other expenses in the Consolidated Statement of Operations. During the year ended May 31, 2016, the Fund did not use the Global Credit Facility.

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N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

Franklin K2 Alternative Strategies Fund (continued)

10. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund s financial instruments and are summarized in the following fair value hierarchy:

Level 1 quoted prices in active markets for identical financial instruments
Level 2 other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepay- ment speed, credit risk, etc. )
Level 3 significant unobservable inputs (including the Fund s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of May 31, 2016, in valuing the Fund s assets and liabilities carried at fair value, is as follows:

	Level 1	Level 2	Level 3	Total


Assets:
Investments in Securities:
Common Stocks and Other Equity Interestsa	$413,512,300	$	$	$ 413,512,300
Exchange Traded Funds	1,595,254			1,595,254
Convertible Preferred Stocks	1,053,778	1,827,800		2,881,578
Preferred Stocks	2,680,863			2,680,863
Convertible Bonds		172,672,647		172,672,647
Convertible Bonds in Reorganization		24,245		24,245
Corporate Bonds and Notes		221,571,622		221,571,622
Corporate Bonds and Notes in Reorganization		4,038,890		4,038,890
Senior Floating Rate Interests		1,692,352		1,692,352
Foreign Government and Agency Securities		28,054,661		28,054,661
Asset-Backed Securities and Commercial Mortgage-Backed
Securities		23,447,879		23,447,879
Options Purchased	6,556,077	79,060		6,635,137
U. S. Government and Agency Securities	44,194,730			44,194,730
Short Term Investments	275,245,279	52,451,581		327,696,860

Total Investments in Securities	$744,838,281	$505,860,737	$	$1,250,699,018

Other Financial Instruments:
Futures Contracts	$ 4,650,779	$	$	$ 4,650,779
Forward Exchange Contracts		4,439,362		4,439,362
Swap Contracts		5,736,266		5,736,266

Total Other Financial Instruments	$ 4,650,779	$ 10,175,628	$	$ 14,826,407


Liabilities:
Other Financial Instruments:
Options Written	$ 781,189	$ 472	$	$ 781,661
Securities Sold Shorta	246,878,601	5,450,645		252,329,246
Futures Contracts	4,262,611			4,262,611
Forward Exchange Contracts		4,445,062		4,445,062
Swap Contracts		3,917,120		3,917,120

Total Other Financial Instruments	$251,922,401	$ 13,813,299	$	$ 265,735,700

a For detailed categories, see the accompanying Consolidated Statement of Investments.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin K2 Alternative Strategies Fund (continued)

10. Fair Value Measurements (continued)

A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year.

11. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the consolidated financial statements and determined that no events have occurred that require disclosure.


Abbreviations
Counterparty/Exchange		Currency		Selected Portfolio
BNYM	The Bank of New York Mellon	AUD	Australian Dollar	ABS	Asset Backed Security
BOFA	Bank of America Corp	BRL	Brazilian Real	ADR	American Depositary Receipt
BZWS	Barclays Bank PLC	CAD	Canadian Dollar	ARM	Adjustable Rate Mortgage
CBOA	Commonwealth Bank of Australia	COP	Colombian Peso	ETF	Exchange Traded Fund
CITI	Citigroup, Inc.	EUR	Euro	EONIA	Euro Overnight Index Average
CSFB	Credit Suisse First Boston	GBP	British Pound	EURIBOR	Euro Interbank Offered Rate
DBAB	Deutsche Bank AG	HKD	Hong Kong Dollar	FEDEF	Federal Funds Effective Rate
ICE	Intercontinental Exchange, Inc.	JPY	Japanese Yen	FRN	Floating Rate Note
JPHQ	JP Morgan Chase & Co.	KRW	Korean Won	HONIX	Hong Kong Overnight Index Rate
MLCO	Merrill Lynch & Co., Inc.	MXN	Mexican Peso	IDR	International Depositary Receipt
MSCO	Morgan Stanley & Co., Inc.	SEK	Swedish Krona	JIBAR	Johannesburg Interbank Agreed Rate
MSCS	Morgan Stanley Capital Services	SGD	Singapore Dollar	LIBOR	London InterBank Offered Rate
		USD	United States Dollar	MXONBR	Bank of Mexico Official Overnight Rate
		ZAR	South African Rand	PIK	Payment In-Kind
				RBACR	Reserve Bank of Australia Cash Rate
				REIT	Real Estate Investment Trust
				SAFEX	South African Futures Exchange
				SONIA	Sterling Overnight Index Average
				SPDR	Standard & Poor’s Depositary Receipt
				STIBOR	Stockholm Interbank Offered Rate

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of Franklin Alternative Strategies Funds and Shareholders of Franklin K2 Alternative Strategies Fund:

We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated statement of investments, of Franklin K2 Alternative Strategies Fund (the “Fund”) (one of the funds constituting the Franklin Alternative Strategies Funds), as of May 31, 2016, and the related consolidated statement of operations for the year then ended, the consolidated statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2016, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from the brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the consolidated financial position of Franklin K2 Alternative Strategies Fund (one of the funds constituting the Franklin Alternative Strategies Funds) at May 31, 2016, the consolidated results of its operations for the year then ended, the consolidated changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Boston, Massachusetts
July 26, 2016

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Tax Information (unaudited)

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $4,170,318 as a long term capital gain dividend for the fiscal year ended May 31, 2016.

Under Section 854(b)(1)(A) of the Code, the Fund hereby reports 11.99% of the ordinary income dividends as income qualifying for the dividends deduction for the fiscal year ended May 31, 2016.

Under Section 854(b)(1)(B) of the Code, the Fund hereby reports the maximum amount allowable but no less than $4,002,303 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended May 31, 2016. Distributions, including qualified dividend income, paid during calendar year 2016 will be reported to shareholders on Form 1099-DIV by mid-February 2017. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns.

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F R A N K L I N A L T E R N A T I V E S T R A T E G I E S F U N D S

Board Members and Officers

The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust,
principal occupations during at least the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton
Investments fund complex are shown below. Generally, each board member serves until that person s successor is elected
and qualified.

Independent Board Members

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years


Edward I. Altman, Ph. D. (1941)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Max L. Heine Professor of Finance, Emeritus and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School
of Business, New York University; editor and author of numerous financial publications; financial consultant; an adviser to numerous financial
and publishing organizations; and formerly, Vice Director, Salomon Center, Stern School of Business, New York University.


Ann Torre Bates (1958)	Trustee	Since 2011	39	Navient Corporation (loan
c/o Franklin Mutual Advisers, LLC				management, servicing and asset
101 John F. Kennedy Parkway				recovery) (2014-present), Ares Capital
Short Hills, NJ 07078-2789				Corporation (specialty finance
				company) (2010-present), United
				Natural Foods, Inc. (distributor of
				natural, organic and specialty foods)
				(2013-present), Allied Capital
				Corporation (financial services) (2003-
				2010) and SLM Corporation (Sallie
				Mae) (1997-2014) .
Principal Occupation During at Least the Past 5 Years:
Director of various companies; and formerly, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily
housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995) .


Burton J. Greenwald (1929)	Trustee	Trustee since	15	Franklin Templeton Emerging Markets
c/o Franklin Mutual Advisers, LLC	and Vice	2011 and Vice		Debt Opportunities Fund PLC and
101 John F. Kennedy Parkway	Chairman of	Chairman since		Fiduciary International Ireland Limited
Short Hills, NJ 07078-2789	the Board	2015		(1999-2015) .
Principal Occupation During at Least the Past 5 Years:
Managing Director, B. J. Greenwald Associates (management consultants to the financial services industry); and formerly, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L. F. Rothschild Fund Management, Inc. ; President and Director, Merit Mutual
Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment Company Institute;
and Chairman, ICI Public Information Committee.


Keith E. Mitchell (1954)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Director of various boards of asset management firms; and formerly, Managing Member, Mitchell, Hartley & Bechtel Advisers, LLC (formerly,
Mitchell Advisers, LLC) (advisory firm) (2003-2015) and Managing Director, Putman Lovell NBF.

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Independent Board Members (continued)

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years


David W. Niemiec (1949)	Trustee	Since 2015	39	Emeritus Corporation (assisted living)
c/o Franklin Mutual Advisers, LLC				(1999-2010) and OSI Pharmaceuticals,
101 John F. Kennedy Parkway				Inc. (pharmaceutical products)
Short Hills, NJ 07078-2789				(2006-2010) .
Principal Occupation During at Least the Past 5 Years:
Advisor, Saratoga Partners (private equity fund); and formerly, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon
Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial
Officer, Dillon, Read & Co. Inc. (1982-1997) .


Charles Rubens II (1930)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Private investor and president of non-profit organizations; and formerly, an executive of Time, Inc. ; and Trustee of Colorado College.


Jan Hopkins Trachtman (1947)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
President and Founder, The Jan Hopkins Group (communications consulting firm); serves on Advisory Board of Knight Bagehot Fellowship;
and formerly, President, Economic Club of New York (2001-2015); Anchor/Correspondent, CNN Financial News (until 2003); Managing
Director and Head of Client Communications, Citigroup Private Bank (until 2005); Off-Air Reporter, ABC News World News Tonight; and
Editor, CBS Network News.


Robert E. Wade (1946)	Trustee and	Trustee and	39	El Oro Ltd (investments)
c/o Franklin Mutual Advisers, LLC	Chairman of	Chairman of the		(2003-present) .
101 John F. Kennedy Parkway	the Board	Board since
Short Hills, NJ 07078-2789		2011
Principal Occupation During at Least the Past 5 Years:
Attorney at law engaged in private practice (1972-2008) and member of various boards.


Gregory H. Williams (1943)	Trustee	Since 2015	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Private investor; Consultant; and formerly, President, University of Cincinnati (2009-2012); President, The City College of New York (2001-
2009); Dean, College of Law, Ohio State University (1993-2001); and Associate Vice President, Academic Affairs and Professor of Law,
University of Iowa (1977-1993) .

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Interested Board Members and Officers

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years


**Gregory E. Johnson (1961)	Trustee	Since 2011	160	None
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Chairman of the Board, Member Office of the Chairman, Director and Chief Executive Officer, Franklin Resources, Inc. ; officer and/or director
or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin
Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015) .


**Jennifer M. Johnson (1964)	Trustee	Since 2015	12	None
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Co-President, Franklin Resources, Inc. ; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of four of the investment companies in Franklin Templeton Investments; and formerly, Chief Operating Officer and
Executive Vice President, Franklin Resources, Inc. (1994-2015); Executive Vice President of Operations and Technology, Franklin Resources,
Inc. (2005-2010); and Senior Vice President, Franklin Resources, Inc. (2003-2005) .


Alison E. Baur (1964)	Vice	Since 2012	Not Applicable	Not Applicable
One Franklin Parkway	President
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45
of the investment companies in Franklin Templeton Investments.


Laura F. Fergerson (1962)	Chief	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway	Executive
San Mateo, CA 94403-1906	Officer
	Finance and
	Administration
Principal Occupation During at Least the Past 5 Years:
Senior Vice President, Franklin Templeton Services, LLC; Vice President, Franklin Advisers, Inc. and Franklin Templeton Institutional, LLC;
and officer of 45 of the investment companies in Franklin Templeton Investments.


Aliya S. Gordon (1973)	Vice	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway	President
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.


Steven J. Gray (1955)	Secretary	Secretary and	Not Applicable	Not Applicable
One Franklin Parkway	and Vice	Vice President
San Mateo, CA 94403-1906	President	since 2011
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and Franklin
Alternative Strategies Advisers, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.

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Interested Board Members and Officers (continued)

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years


Robert G. Kubilis (1973)	Treasurer,	Since 2015	Not Applicable	Not Applicable
300 S. E. 2nd Street	Chief
Fort Lauderdale, FL 33301-1923	Financial
	Officer and
	Chief
	Accounting
	Officer
Principal Occupation During at Least the Past 5 Years:
Treasurer, U. S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of four of the investment companies in Franklin
Templeton Investments.


Robert Lim (1948)	Vice	Since May 2016	Not Applicable	Not Applicable
One Franklin Parkway	President
San Mateo, CA 94403-1906	AML
	Compliance
Principal Occupation During at Least the Past 5 Years:
Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton
Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments


Kimberly H. Novotny (1972)	Vice	Since 2013	Not Applicable	Not Applicable
300 S. E. 2nd Street	President
Fort Lauderdale, FL 33301-1923
Principal Occupation During at Least the Past 5 Years:
Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the
South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc. ; and officer of 45 of the investment
companies in Franklin Templeton Investments.


Robert C. Rosselot (1960)	Chief	Since 2013	Not Applicable	Not Applicable
300 S. E. 2nd Street	Compliance
Fort Lauderdale, FL 33301-1923	Officer
Principal Occupation During at Least the Past 5 Years:
Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the
investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments
(2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013) .


Karen L. Skidmore (1952)	Vice	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway	President
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.


Navid Tofigh (1972)	Vice	Since	Not Applicable	Not Applicable
One Franklin Parkway	President	November 2015
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.

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Interested Board Members and Officers (continued)

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years


Craig S. Tyle (1960)	Vice	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway	President
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
General Counsel and Executive Vice President, Franklin Resources, Inc. ; and officer of some of the other subsidiaries of Franklin Resources,
Inc. and of 45 of the investment companies in Franklin Templeton Investments.


Lori A. Weber (1964)	Vice	Since 2011	Not Applicable	Not Applicable
300 S. E. 2nd Street	President
Fort Lauderdale, FL 33301-1923
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc. ; Vice President and
Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.


William Y. Yun (1959)	President	Since 2011	Not Applicable	Not Applicable
600 Fifth Avenue	and Chief
New York, NY 10020	Executive
	Officer
	Investment
	Management
Principal Occupation During at Least the Past 5 Years:
Executive Vice President, Franklin Advisers, Inc. and Franklin Templeton Institutional, LLC; Chief Executive Officer, Franklin Alternative
Strategies Advisers, LLC; Director, Fiduciary Investments Corporation and K2 Advisors Holdings, LLC; officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of one of the investment companies in Franklin Templeton
Investments; and formerly, Executive Vice President Alternative Strategies, Franklin Resources, Inc. (2005-2015) .

*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These
portfolios have a common investment manager or affiliated investment managers.
**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin
Resources, Inc., which is the parent company of the Fund s investment manager and distributor. Jennifer M. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to her position as officer and director of Resources.
Note 1: Gregory E. Johnson and Jennifer M. Johnson are siblings.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.

The Fund s Board has determined that certain of the members of the Audit Committee, including Ann Torre Bates, are audit committee financial experts, and
independent, under those provisions of the Sarbanes-Oxley Act of 2002, and the rules and form amendments adopted by the Securities and Exchange
Commission, relating to audit committee financial experts.

The Statement of Information (SAI) include additional information about board members and is available, without charge, upon request. Shareholders may
call (800) DIAL BEN/342-5236 to request the SAI.

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FRANKLIN FRANKLIN	ALTERNATIVE STRATEGIES FUNDS K2 ALTERNATIVE STRATEGIES FUND

Shareholder Information

Board Review of Investment Management Agreement and Sub-Advisory Agreements

The Board of Trustees (Board), including a majority of trustees that are not “interested persons” as such term is defined in section 2(a)(19) of the Investment Company Act of 1940 (hereinafter referred to as “independent Trustees”), at a Board meeting held on May 16, 2016, unanimously approved the renewal of the Fund’s investment management agreement with K2/D&S Management Co., L.L.C. (K2 Advisors), and of each sub-advisory agreement between K2 Advisors and each of Basso Capital Management, L.P. (Basso), Chatham Asset Management, LLC (Chatham), Chilton Investment Company, LLC (Chilton), Graham Capital Management, L.P. (Graham), Impala Asset Management, LLC (Impala), Jennison Associates, LLC (Jennison), Lazard Asset Management, LLC (Lazard), Loomis Sayles & Company, L.P. (Loomis), P. Schoenfeld Asset Management L.P. (PSAM), Wellington Management Company LLP (Wellington) and York Registered Holdings, L.P. (together with Basso, Chatham, Chilton, Graham, Impala, Jennison, Lazard, Loomis, PSAM and Wellington, the Sub-Advisors).

Prior to a meeting of all of the trustees for the purpose of considering such renewal, the independent trustees held two other meetings dedicated to the renewal process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of K2 Advisors and certain Sub-Advisors (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the renewal of the investment management agreement and the sub-advisory agreements for the Fund, the Board, including the independent trustees, determined that the investment management fee structure was fair and reasonable and that continuance of the agreement was in the best interests of the Fund and its shareholders.

In making the foregoing approvals, the Board considered various materials related to the investment management agreement and the sub-advisory agreements including: (1) a copy of the investment management agreement and sub-advisory agreements; (2) information describing the nature, quality and extent of services that K2 Advisors and each Sub-Advisor provided, and is expected to provide, to the Fund, and the investment management fees and sub-advisory fees payable to K2 Advisors and each Sub-Advisor; (3) reports from K2 Advisors on the

continued diligence conducted on each Sub-Advisor and the reasons for recommending renewal of each of the sub-advisory agreements, including, but not limited to, each Sub-Advisor’s background, experience, personnel, operations, policies, procedures and compliance functions; and (4) a report from the Fund’s Chief Compliance Officer regarding K2 Advisors’ and each Sub-Advisor’s compliance program and capabilities, including policies and procedures in place to address potential conflicts of interest, and the diligence undertaken by the Fund’s Chief Compliance Officer with respect thereto. The Board also noted that they received an annual report on all marketing support payments made by Franklin Templeton Investments (FTI) to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the U.S. Securities and Exchange Commission (SEC) relating to mutual fund distribution and sub accounting fees.

The Board also took into account information furnished throughout the year at regular Board meetings, as well as information specifically requested and furnished for the renewal process, which culminated in the meetings referred to above for the specific purpose of considering such agreements. Information furnished throughout the year included, among others, reports on the Fund’s investment performance, expenses, portfolio composition, derivatives, asset segregation, portfolio turnover, Rule 12b-1 plans, distribution, shareholder servicing, legal and compliance matters, pricing of securities and sales and redemptions, and marketing support payments made to financial intermediaries, as well as a third-party survey of transfer agent fees charged funds within the FTI complex in comparison with those charged other fund complexes deemed comparable. Also, related financial statements and other information about the scope and quality of services provided by K2 Advisors and its affiliates and enhancements to such services over the past year were provided. In addition, the trustees received periodic reports throughout the year and during the renewal process relating to compliance with the Fund’s investment policies and restrictions. During the renewal process, the independent trustees considered K2 Advisors’ methods of operation within the Franklin Templeton group and its activities on behalf of other clients.

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Section 15(c) Report). The trustees reviewed this information and its usefulness in the renewal process with respect to matters such as comparative fees, expenses, expense ratios and performance. The Board considered K2 Advisors views that the peer group determined by Broadridge for comparison purposes may not be an entirely appropriate representation of the Fund s peer universe. K2 Advisors explained that the universe of funds that are managed using multi-manager, multi-strategy structures, like the Fund, is still evolving, and has presented challenges in identifying an appropriate set of peers for the Fund. It was noted by K2 Advisors that the peer group compiled by Broadridge includes several single-manager funds which, due to their nature and relative simplicity, have lower expense ratios and are not very useful for comparison purposes. In addition, many of the sponsors of funds with multi-manager strategies that K2 Advisors considers to be peers were excluded from the peer group and K2 Advisors believes that the Fund s expenses are consistent with those funds. It was noted that as more funds are launched that are managed similarly to the Fund, the peer group likely will become larger, and may also be sub-divided so that a peer group is available that is comprised of funds that provide a more meaningful comparison. While noting the limitations of the Broadridge Section 15(c) Report, the Board concluded that the Broadridge Section 15(c) Report was helpful in the performance of its duties.

In addition, the trustees received a Profitability Study (Profitability Study) prepared by management discussing the profitability to FTI from its overall U.S. Fund operations, as well as on an individual fund-by-fund basis. Over the past year, the Board and counsel to the independent trustees continued to receive reports on management s handling of recent regulatory inquiries and pending legal actions against K2 Advisors and its affiliates. The independent trustees were satisfied with the actions taken to date by management in response to such regulatory and legal matters. The independent trustees also received reports from the Trust s Chief Compliance Officer on regulatory inquiries and pending legal actions against the Sub-Advisors applicable to the services provided by the Sub-Advisors to the Fund and noted that there were not any issues in this regard that should prevent the renewal of the sub-advisory agreements.

The trustees reviewed the personnel, operations, financial condition, and investment management capabilities, methodologies and resources of K2 Advisors and each Sub-Advisor, including each management team s expertise in the management of other alternative strategies funds. As part of this review, particular attention was given to (1) the diligent risk management program

of K2 Advisors and its parent, including those aspects of the program related to selecting and overseeing sub-advisors to the Fund and continual monitoring and management of counter-party credit risk and collateral, (2) each Sub-Advisor s risk management program, and (3) derivatives and other complex instruments that are held and expected to be held by the Fund and how such instruments are used to carry out the Fund s investment objectives.

The Board also took into account, among other things, manage-ment s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of K2 Advisors parent company and its commitment to the mutual fund business. In addition, the Board received updates from management on the SEC s progress in implementing the rule-making requirements established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted July 21, 2010, and K2 Advisors and its affiliates compliance with rules and regulations already promulgated by the SEC under such act.

In addition to the above and other matters considered by the trustees throughout the course of the year, the following sets forth some of the primary information and factors relevant to the Board s decisions. This discussion of the information and factors considered by the Board (including the information and factors discussed above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.

NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services provided, and to be provided, by K2 Advisors and each Sub-Advisor. In this regard, they reviewed the Fund s investment goal and K2 Advisors and each Sub-Advisor s investment strategy and sub-strategy, and K2 Advisors and each Sub-Advisor s ability to implement such investment strategy and/or sub-strategy, including, but not limited to, K2 Advisors and each Sub-Advisor s trading practices, investment decision processes and reputation.

The Board noted that the Fund employs a manager of manag-ers structure, whereby K2 Advisors is responsible for selecting sub-advisors (subject to Board approval), allocating the Fund s

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assets among them, and overseeing the sub-advisors day-today management of the Fund s assets. The Board noted the responsibilities that K2 Advisors has as the Fund s investment manager, including (1) due diligence on the Sub-Advisors and any potential new sub-advisors to the Fund, their respective trading strategies, risk management, operations and businesses, (2) on-going oversight and monitoring of the day-to-day investment activities of Sub-Advisors and other service providers, including their respective compliance with the investment mandate and restrictions, compliance policies and procedures and federal securities laws, and K2 Advisors ongoing assessment of their performance, (3) portfolio construction with respect to the allocation of assets among Sub-Advisors, investment funds, cash and other investments, (4) risk management, (5) preparing quarterly reports to the Board, and (6) the implementation of Board directives as they relate to the Fund. The Trustees also considered the successful performance of K2 Advisors in managing the Fund and other investment products with similar investment strategies to the investment strategies of the Fund that are not subject to the Investment Company Act of 1940, as amended.

With respect to the sub-advisory services provided, and to be provided, by each Sub-Advisor, the Board noted the responsibilities that each Sub-Advisor has with respect to the portion of the Fund s assets allocated to the Sub-Advisor by K2 Advisors (Sub-Advised Portion), including, among others, implementing the investment strategies with respect to the Sub-Advised Portion and ensuring compliance with the investment strategies, policies and limitations of the Sub-Advised Portion. The trustees considered the successful performance of each Sub-Advisor in managing the Fund and other investment products with similar investment strategies to the investment strategies of its Sub-Advised Portion of the Fund, including, with respect to certain Sub-Advisors, mutual funds with similar investment strategies. The Board considered K2 Advisors rationale for recommending the continued retention of each Sub-Advisor.

The trustees reviewed the Fund s portfolio management teams at K2 Advisors and each Sub-Advisor, including each such team s performance, staffing, skills and compensation program. With respect to portfolio manager compensation, management assured the trustees that the Fund s long-term performance is a significant component of incentive-based compensation for K2 Advisors portfolio management team and noted that a portion of a K2 Advisors portfolio manager s incentive-based compensation is paid in shares of predesignated funds from the portfolio manager s fund management area. The trustees noted

that the portfolio manager compensation program aligned the interests of the portfolio managers with that of Fund shareholders. During regular Board meetings and the aforementioned meetings of the independent trustees, the trustees considered periodic reports provided to them showing that K2 Advisors and the Sub-Advisors complied with the investment policies and restrictions of the Fund as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics covering the investment management personnel, the adherence to fair value pricing procedures established by the Board and the accuracy of net asset value calculations. The Board noted the extent of the benefits provided to Fund shareholders from being part of the Franklin Templeton group, including the right to exchange investments between funds (same class) without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings of other funds to obtain reduced sales charges.

The trustees considered various other products, portfolios and entities that are advised by K2 Advisors and each Sub-Advisor and the allocation of assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts.

The Board also considered a report from the Trust s Chief Compliance Officer regarding K2 Advisors and each Sub-Advisor s compliance programs and capabilities as such programs and capabilities relate to the operations of the Fund and the monitoring and testing of such program undertaken by the Trust s Chief Compliance Officer. The Board considered the selection and due diligence process employed by K2 Advisors in selecting and deciding to retain each Sub-Advisor as a sub-advisor to the Fund, including the due diligence undertaken with respect to the Sub-Advisor s compliance and risk management capabilities. The trustees considered K2 Advisors significant efforts in developing and implementing compliance procedures established in accordance with Securities and Exchange Commission and other requirements.

The Board also considered the nature, extent and quality of the services to be provided under the Fund s other service agreements to determine that, on an overall basis, Fund shareholders were well served. In this connection, the Board also took into account transfer agent and shareholder services provided to Fund shareholders by an affiliate of K2 Advisors, noting continuing expenditures by management to increase and improve the scope of such services and favorable periodic reports on shareholder services conducted by independent third

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parties. While such considerations directly affected the trustees decision in renewing the Fund s transfer agent and shareholder services agreement, the Board also considered these commitments as incidental benefits to Fund shareholders deriving from the investment management relationship.

Based on their review, the trustees were satisfied with the nature and quality of the overall services provided, and to be provided, by K2 Advisors and its affiliates and each Sub-Advisor to the Fund and its shareholders and were confident in the abilities of K2 Advisors and each Sub-Advisor to implement their respective investment strategy and/or sub-strategy and to provide quality services to the Fund and its shareholders.

INVESTMENT PERFORMANCE. As the Fund commenced operations in October 2013, the trustees reviewed the investment performance of the Fund and each Sub-Advisor for the one- and two-year periods ended December 31, 2015. As part of their review, they inquired of management regarding benchmark and hedging activities. Consideration was also given to performance in the context of available levels of cash, including as affected by net flows, during the periods. The trustees had meetings during the year, including the meetings referred to above held in connection with the renewal process, with the Fund s portfolio managers to discuss performance and the management of the Fund and each Sub-Advisor.

In addition, attention in assessing performance was given to the Broadridge Section 15(c) Report. That report showed the investment performance of the Fund (Class A shares) in comparison to other funds determined comparable by Broad-ridge. The comparable funds to the Fund, as chosen by Broadridge, included a representative class/fund from each retail portfolio in the alternative multi-strategy classification, excluding outliers. The Fund had total returns in the second-best performing quintile for the one-year period ended December 31, 2015 and total returns in the best performing quintile for the two-year period ended December 31, 2015. The Board was satisfied with such performance.

The trustees also compared Fund performance to other industry benchmarks, including measures of risk-adjusted performance of a fund, as part of their evaluation of investment performance. The trustees concluded that the Fund had performed well in comparison to its various benchmarks and in the context of the Fund s objectives.

COMPARATIVE EXPENSES AND PROFITABILITY.

The Board considered the cost of the services provided, and to be provided, by K2 Advisors and each Sub-Advisor and the

profits realized by K2 Advisors and its affiliates from their rela -tionships with the Fund. In considering the appropriateness of the management fee and other expenses charged to the Fund, the Board took into account various factors including investment performance and matters relating to Fund operations, including, but not limited to, the quality and experience of K2 Advisors personnel. The Board also reviewed and considered the investment management fees in light of the nature, extent and quality of the investment management services provided, and to be provided, by K2 Advisors and each Sub-Advisor, as more fully discussed above. The Board noted that the sub-advisory fees are paid by K2 Advisors to each Sub-Advisor and are not additional fees borne by the Fund. The Board also noted that the sub-advisory fees paid, and to be paid, by K2 Advisors to each Sub-Advisor were the product of arms-length negotiations between K2 Advisors and each Sub-Advisor. Furthermore, the Board took into account that information regarding Sub-Advisor profitability is not legally required to be provided and noted that, despite requests by K2 Advisors of such information, the Sub-Advisors had not provided profitability information. Accordingly, profitability information of the sub-advisors was given lesser weight than other factors. In addition, the Board considered the allocation of the investment management fee charged to the Fund between K2 Advisors and each Sub-Advisor in light of the nature, extent and quality of the investment management services provided, and to be provided, by K2 Advisors and each Sub-Advisor. As part of this discussion, the Board took into account the fee waiver and expense limitation arrangement in effect, and the amount of Fund expenses that were absorbed since inception of the Fund by K2 Advisors through such waivers and arrangements.

In reviewing comparative costs, emphasis was given to the Fund s contractual management fee in comparison with the contractual management fee that would have been charged by other funds within its Broadridge expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Broad-ridge expense group. The Broadridge contractual management

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fee analysis includes administrative charges as being part of the management fee, and total expenses, for comparative consistency, are shown by Broadridge for Fund Class A shares. The Fund s contractual management fee rate was in the most expensive quintile of its Broadridge expense group and its total expenses were in the middle quintile of such group. Noting the factors and limitations noted above with respect to the Broad-ridge Section 15(c) Report and factors relating to the Fund s operations, such as the quality and experience of K2 Advisors and the Sub-Advisors and the nature and quality of the services provided and to be provided by K2 Advisors and the Sub-Advisors, the Board found such comparative fees and expenses to be acceptable.

The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources, Inc., from its overall U.S. fund business, as well as profitability to K2 Advisors and its affiliates, from providing investment management and other services to the Fund during the 12-month period ended September 30, 2015, the most recent fiscal year-end of Franklin Resources, Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocation methodology utilized in the Profitability Study, it being recognized that allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the reasonableness of the cost allocation methodologies was reviewed by independent accountants on an every other year basis.

operations conducted by it and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability.

The Board also took into account management s expenditures in improving shareholder services provided to the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act, the Dodd-Frank Act and recent SEC and other regulatory requirements. The trustees also considered the extent to which K2 Advisors and the Sub-Advisors may derive ancillary benefits from Fund operations, including those derived from the allocation of Fund brokerage and the use of commission dollars to pay for research and other similar services.

Based upon their consideration of all these factors, the trustees determined that the level of profits realized by K2 Advisors and its affiliates in providing services to the Fund was not excessive in view of the nature, quality and extent of services provided. In addition, the Board noted that shareholders are able to redeem their Fund shares at any time if shareholders believe that Fund fees and expenses are too high or if they are dissatisfied with the performance of the Fund.

ECONOMIES OF SCALE. The Board considered economies of scale realized by K2 Advisors and its affiliates and the Sub-Advisors as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management fees charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. The Board also considered the fee waiver and expense limitation arrangement in effect, and the amount of Fund expenses that were absorbed since inception of the Fund by K2 Advisors through such waiver and arrangement. The Board concluded that economies of scale were deemed not to be a significant factor at that time in light of, among other matters, the fee waiver and expense limitation arrangement in effect and the fact that the Fund had less than three complete years of operating results.

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Proxy Voting Policies and Procedures

The Fund s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission s website at sec.gov and reflect the most recent 12-month period ended June 30.

Quarterly Statement of Investments

The Trust, on behalf of the Fund, files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission s website at sec.gov. The filed form may also be viewed and copied at the Commission s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.

Householding of Reports and Prospectuses

You will receive the Fund s financial reports every six months as well as an annual updated summary prospectus (prospectus available upon request). To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and summary prospectus. This process, called householding, will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at (800) 632-2301. At any time you may view current prospectuses/summary prospectuses and financial reports on our website. If you choose, you may receive these documents through electronic delivery.

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Annual Report and Shareholder Letter
Franklin K2 Alternative Strategies Fund

Investment Manager
K2/D&S Management Co., L.L.C.

Distributor
Franklin Templeton Distributors, Inc.
(800) DIAL BEN^®/ 342-5236
franklintempleton.com

Shareholder Services
(800) 632-2301

Authorized for distribution only when accompanied or preceded by a summary prospectus and/or prospectus. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. A prospectus contains this and other information; please read it carefully before investing.

To help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.


© 2016 Franklin Templeton Investments. All rights reserved.	068 A 07/16

Annual Report
and Shareholder Letter
May 31, 2016

Franklin K2 Long Short Credit Fund

A SERIES OF FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Sign up for electronic delivery at franklintempleton.com/edelivery


Contents
Annual Report
Franklin K2 Long Short Credit Fund	3
Performance Summary	7
Your Fund’s Expenses	12
Financial Highlights and Statement of Investments	14
Financial Statements	29
Notes to Financial Statements	33
Report of Independent Registered
Public Accounting Firm	46
Tax Information	47
Board Members and Officers	48
Shareholder Information	53

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Annual Report

Franklin K2 Long Short Credit Fund

We are pleased to bring you Franklin K2 Long Short Credit Fund’s annual report for the period since the Fund’s inception on September 8, 2015, through May 31, 2016.

Your Fund’s Goal and Main Investments

The Fund seeks total return over a complete market cycle through a combination of current income, capital preservation and capital appreciation. The Fund seeks to achieve its investment goal by allocating its assets across multiple non-traditional or “alternative” strategies, including but not limited to credit long short, structured credit and emerging market credit. The Fund is structured as a multi-manager fund, meaning the Fund’s assets are managed by multiple investment advisors (subadvisors), while the Fund’s investment manager has overall responsibility for the Fund’s investments.

Under normal market conditions, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in credit-related investments. The Fund invests in a wide range of securities and other investments including, but not limited to: corporate bonds, mortgage-backed securities and asset-backed securities, U.S. government and agency securities, collateralized debt and loan obligations, foreign government and supranational debt securities, loans and loan participations and derivatives with similar economic characteristics. The Fund may also invest in mortgage dollar rolls, repurchase agreements, reverse repurchase agreements, mortgage real estate investment trusts (REITs) and other similar transactions.

Performance Overview

The Fund’s Class A shares posted a +2.99% cumulative total return for period since the Fund’s inception on September 8, 2015, through May 31, 2016. For comparison, the Fund’s primary benchmark, the BofA Merrill Lynch 3-Month U.S. Treasury Bill Index, which is an index of short-term U.S. government securities with a remaining term to final maturity of less than three months, produced a +0.15% total return for the same period.¹Also for comparison, the Fund’s secondary benchmark, the HFRX Fixed Income-Credit Index, which

measures performance of strategies with exposure to credit across a broad continuum of credit substrategies, had a -3.42% total return for the same period.²You can find more of the Fund’s performance data in the Performance Summary beginning on page 7.

Economic and Market Overview

The global economy expanded moderately during the period under review. Concerns about global economic growth, China’s slowing economy and tumbling stock market, declining commodity prices, geopolitical tensions in several regions, fear of the U.K.’s potential exit from the European Union (commonly referred to as Brexit) and uncertainty about the U.S. Federal Reserve’s (Fed’s) timing for raising interest rates contributed to stock market volatility. However, toward period-end, equity markets strengthened after the Fed’s decision to leave its federal funds target rate unchanged after raising it for the first time in nine years in December. Further helping

1. Source: Morningstar.
2. Source: FactSet. Hedge Fund Research, Inc. – www.hedgefundresearch.com. The HFRX Fixed Income-Credit Index is being used under license from Hedge Fund
Research, Inc., which does not endorse or approve of any of the contents of this report.
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
See www.franklintempletondatasources.com for additional data provider information.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI). The SOI
begins on page 19.

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Annual Report

FRANKLIN K2 LONG SHORT CREDIT FUND

global stocks were the Bank of Japan’s (BOJ’s) decision to cut interest rates, hopes of additional stimulus measures by global central banks, and finalization of a new debt deal for Greece. An improvement in metal prices and signs of stabilization in crude oil prices also improved investor sentiment. During much of the reporting period, oil prices declined, largely due to strong global supply, but lower output expectations resulted in a small gain by period-end. Prices of many other commodities also fell for much of the period but partially recovered toward period-end.

U.S. economic growth moderated in the third and fourth quarters of 2015. Growth slowed further in 2016’s first quarter as non-residential investments, private inventory investments and federal government spending declined, although the impact was partially offset by healthy consumer spending. After maintaining a near-zero interest rate for seven years to support the U.S. economy’s recovery, the Fed raised its target range for the federal funds rate to 0.25%–0.50% at its December meeting but kept interest rates unchanged through period-end. At its April meeting, the Fed indicated that its monetary policy remained accommodative, thus supporting further labor market improvement and progress toward its 2.0% inflation objective.

In emerging markets, economic growth generally moderated while retreating in some countries. China’s economy grew in

the fourth quarter of 2015 and the first quarter of 2016 at an annual rate that was largely in line with the government’s target. Russia’s 2015 economic growth contracted because of declining oil prices and a weakening Russian ruble. Brazil’s economy shrank during the reporting period amid lower oil prices, weakness in the mining and services sectors, and the country’s ongoing political turmoil, including the temporary suspension of its president in May pending an impeachment trial. The People’s Bank of China cut its benchmark interest rate and the cash reserve requirement ratio for the country’s banks and lowered its currency valuation in May to the lowest level since March 2011. Elsewhere, the Reserve Bank of India slashed interest rates to the lowest in five years and took steps to increase monetary liquidity. In the recent global environment, emerging market stocks overall, as measured by the MSCI Emerging Markets Index, were relatively flat over the reporting period.

Investment Strategy

Credit long short strategies seek to isolate issuer-specific exposure, while limiting general market risks, by taking long and/or short positions in debt securities and other related instruments. Structured credit strategies aim to profit from trading in interest-rate sensitive securities such as residential and commercial mortgage-backed securities, credit default swaps on various indexes, collateralized loan obligations and asset-backed securities. Emerging market credit strategies invest in corporate and sovereign securities in emerging markets countries with a focus on fixed income.

The Fund may take long and/or short positions in a wide range of asset classes, including credit, fixed income and currencies, among others. The Fund may gain long or short exposure to select instruments by utilizing derivatives, engaging in short sales or entering into a series of purchase and sale contracts or repurchase agreements. Long positions benefit from an increase in the price of the underlying instrument, while short positions benefit from a decrease in that price. The Fund may also use

4 Annual Report

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FRANKLIN K2 LONG SHORT CREDIT FUND

derivatives for hedging and nonhedging (investment) purposes. Such derivative investments may include currency forward contracts; futures contracts; put and call options on currencies, securities and indexes; and swaps. The Fund may engage in active and frequent trading as part of its investment strategies.

What is a currency forward contract?

A currency forward contract is an agreement between the Fund
and a counterparty to buy or sell a foreign currency in exchange
for another currency at a specific exchange rate on a future date.

What is a futures contract?

A futures contract is an agreement between the Fund and a
counterparty made through a U.S. or foreign futures exchange to
buy or sell an underlying instrument or asset at a specific price
on a future date.

What is an option?

An option is a contract to buy or sell a specific financial product
known as the option’s underlying instrument at a specific price.
The buyer of an option has the right, but not the obligation, to
buy or sell the underlying instrument at or until a specified
expiration date. Conversely, the seller (“writer”) of an option who
opens a transaction is obligated to buy or sell the underlying
instrument should the option holder exercise that right.

What are swap agreements?

Swap agreements, such as interest rate, currency and credit
default swaps, are contracts between the Fund and another
party (the swap counterparty). In a basic swap transaction, the
Fund agrees with the swap counterparty to exchange the returns
(or differentials in rates of return) earned or realized on a partic-
ular “notional amount” of underlying instruments. The notional
amount is the set amount selected by the parties as the basis on
which to calculate the obligations that they have agreed to
exchange. The parties typically do not actually exchange the
notional amount. Instead, they agree to exchange the returns
that would be earned or realized if the notional amount were
invested in given instruments or at given interest rates.

Manager’s Discussion

The Fund’s subadvisors for the review period covering September 8, 2015, to May 31, 2016, were Apollo Credit Management, Candlewood Investment Group, Chatham Asset Management, Ellington Global Asset Management and Emso Asset Management.

All three strategies—credit long short, emerging market credit and structured credit—generated positive absolute performance. On a subadvisor level, four of the five subadvisors contributed to absolute performance for the period. The only subadvisor with modest negative performance was Candlewood, in the structured credit strategy.

Subadvisors
5/31/16

Credit Long Short

Apollo Credit Management LLC Chatham Asset Management, LLC

Emerging Market Credit

Emso Asset Management Limited

Structured Credit

Candlewood Investment Group, L.P. Ellington Global Asset Management, L.L.C.

Apollo led subadvisor performance in the credit long short strategy as the subadvisor effectively managed long and short exposures during a volatile period in the credit markets. Contributors were widespread across long and short positions in consumer cyclical, consumer non-cyclical, industrial and communications issuers. Investments in technology and energy also benefited returns, while utilities had a minor negative impact on performance. A short position in a communication services provider was a key contributor. In late 2015, the company’s pending acquisition by a European telecommunications firm caused the existing bonds to trade down as investors worried that the company’s bond offering to finance the transaction would add a significant amount of leverage to the capital structure. The subadvisor later purchased the new bond issue related to the acquisition and sold it into the secondary market for a gain. On the other hand, a long convertible bond position in a real estate developer declined in February as the subadvisor noted investors seemed to be broadly negative about the real estate sector. Although the position detracted from returns, the company completed an unsecured deal in March to refinance some of the front-end bonds.

Chatham, the other subadvisor in the long short strategy, provided modest positive returns as strong gains between mid-February and May 2016 (when high yield bonds rallied) were offset by losses earlier in the period. A long position in a U.S. magazine publisher contributed to performance as the company announced strong results from some of its subsidiaries. The company also successfully exchanged lien notes in the review period. In early 2016, a short-term trading position in a high yield exchange-traded index benefited performance. Also contributing to returns was a long position in a gaming company, as the company’s high yield bonds rallied in March. A short position in a petroleum company’s high yield securities also strengthened results, particularly in early 2016, as the energy sector faced volatility and pessimism. In January, returns were curbed by a security from a natural gas pipeline company amid sector pessimism. S&P Index options also detracted from performance as a robust market rally began in mid-February.

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Annual Report 5

FRANKLIN K2 LONG SHORT CREDIT FUND

Both structured credit subadvisors enjoyed solid performance near period-end, and overall for the period, healthy performance for Ellington more than offset a modest decline for Candlewood.

The structured credit market was muted during the period, but subadvisors were able to benefit from carry, or yield, from the mortgage-backed securities in their portfolios. Ellington also enjoyed a large price gain in one of their residential mortgage-backed security (RMBS) positions, which they exited. The subadvisor believed RMBS would enjoy lower volatility relative to high yield bonds and equities during periods of market unrest, and this thesis was rewarded during the review period. Conversely, detracting from performance were shorts in commercial mortgage backed index credit-default swaps and short exposure to the high yield bond credit index. The subadvisor remained defensively positioned, waiting for what the sub-advisor believes will be better entry points in the market.

For Candlewood, the other structured credit subadvisor, long positions in securitized bonds backed by private student loans and hedges in the high yield credit index weighed on returns, particularly in February. In contrast, mortgage-backed securities generally added value.

Emso was added to the Fund in late January, and credit securities rallied in emerging markets for much of the period between February and May. Argentinian sovereign government debt benefited returns as the country reached a resolution in February with holdout bondholders from the country’s 2001 bond default. Following the agreement, Argentina issued new government bonds across maturities, and investor appetite led to an over-subscribed bond auction. Likewise, Greek sovereign government debt contributed to gains as investors began to anticipate a favorable review with creditors. Near period-end, eurozone finance ministers and the International Monetary Fund reached an agreement that resulted in a new series of financial aid for Greece. In contrast, short exposure in the Chinese yuan relative to the U.S. dollar weighed on returns. A combination of U.S. dollar weakness and a generally stabilizing environment in China during the past few months provided a tailwind for the yuan. A short position in the euro also curbed returns as investors grew more skeptical of the Fed’s ability to raise interest rates in the near term.

Thank you for your participation in Franklin K2 Long Short Credit Fund. We look forward to continuing to serve your future investment needs.

Portfolio Management Team

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FRANKLIN K2 LONG SHORT CREDIT FUND

Performance Summary as of May 31, 2016


Net Asset Value

Share Class (Symbol)		5/31/16		9/8/15		Change
A (FKLSX)	$	10.15	$	10.00	+$	0.15
C (FKLCX)	$	10.07	$	10.00	+$	0.07
R (FKLRX)	$	10.10	$	10.00	+$	0.10
R6 (FKLQX)	$	10.15	$	10.00	+$	0.15
Advisor (FKLZX)	$	10.15	$	10.00	+$	0.15


Distributions¹(9/8/15–5/31/16)

		Dividend		Short-Term
Share Class		Income		Capital Gain		Total
A	$	0.0812	$	0.0637	$	0.1449
C	$	0.0827	$	0.0637	$	0.1464
R	$	0.0813	$	0.0637	$	0.1450
R6	$	0.0830	$	0.0637	$	0.1467
Advisor	$	0.0813	$	0.0637	$	0.1450

See page 11 for Performance Summary footnotes.

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F R A N K L I N K 2 L O N G S H O R T C R E D I T F U N D

P E R F O R M A N C E S U M M A R Y


							Average Annual
	Cumulative		Average Annual			Value of $10,000	Total Return		Total Annual Operating Expenses⁷
Share Class	Total Return³		Total Return⁴			Investment⁵	(6/30/16	)⁶	(with waiver)		(without waiver)

A									2.72	%	3.80	%
Since Inception (9/8/15)	+2.99	%	-2.93	%	$	9,707	-1.88	%

C									3.47	%	4.55	%
Since Inception (9/8/15)	+2.20	%	+1.20	%	$	10,120	+2.21	%

R									2.97	%	4.05	%
Since Inception (9/8/15)	+2.48	%	+2.48	%	$	10,248	+3.50	%

R6									2.41	%	3.49	%
Since Inception (9/8/15)	+3.01	%	+3.01	%	$	10,301	+4.12	%

Advisor									2.47	%	3.55	%
Since Inception (9/8/15)	+2.99	%	+2.99	%	$	10,299	+4.10	%

See page 11 for Performance Summary footnotes.

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F R A N K L I N K 2 L O N G S H O R T C R E D I T F U N D
P E R F O R M A N C E S U M M A R Y

Total Return Index Comparison for a Hypothetical $10,000 Investment 2

Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales
charge, Fund expenses, account fees and reinvested distributions. The unmanaged indexes include reinvestment of any income or
distributions. These differ from the Fund in composition and do not pay management fees or expenses. One cannot invest directly in
an index.

See page 11 for Performance Summary footnotes.

franklintempleton.com Annual Report 9

F R A N K L I N K 2 L O N G S H O R T C R E D I T F U N D
P E R F O R M A N C E S U M M A R Y

Total Return Index Comparison for a Hypothetical $10,000 Investment 2 (continued)

See page 11 for Performance Summary footnotes.

10 Annual Report franklintempleton.com

FRANKLIN K2 LONG SHORT CREDIT FUND
PERFORMANCE SUMMARY


	Total Return Index Comparison for a Hypothetical $10,000 Investment²(continued)
	Advisor Class (9/8/15–5/31/16)	Average Annual Total Return
$	15,000	Advisor Class	5/31/16
		Since Inception (9/8/15)	+2.99	%


$	5,000
		9/15		5/16

		Franklin K2 Long Short	BofA Merrill Lynch 3-Month	HFRX Fixed Income -
		Credit Fund	U.S. Treasury Bill Index⁸	Credit Index⁹

All investments involve risks, including possible loss of principal. The market values of securities owned by the Fund will go up or down, sometimes rapidly or unpredictably. The Fund’s performance depends on the manager’s skill in selecting, overseeing, and allocating Fund assets to the subadvisors. The Fund is actively managed and could experience losses if the manager’s and subadvisors’ judgment about particular Fund portfolio investments prove to be incorrect. Some subadvisors may have little or no experience managing the assets of a registered investment company. Bond prices generally move in the opposite direction of interest rates. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. Lower rated or high yield debt securities (junk bonds) involve greater credit risk, including the possibility of default or bankruptcy. Liquidity risk exists when securities become more difficult to sell, or are unable to be sold, at the price at which they’ve been valued. Investments in derivatives involve costs and create economic leverage, which may result in significant volatility and cause the Fund to participate in losses (as well as gains) that significantly exceed the Fund’s initial investment. The Fund may make short sales of securities, which involves the risk that losses may exceed the original amount invested. The Fund’s prospectus also includes a description of the main investment risks.


Class C:	These shares have higher annual fees and expenses than Class A shares.
Class R:	Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares.
Class R6:	Shares are available to certain eligible investors as described in the prospectus.
Advisor Class:	Shares are available to certain eligible investors as described in the prospectus.

1. The distribution amount is the sum of the dividend payments to shareholders for the period shown and includes only estimated tax-basis net investment income
and capital gain.
2. The Fund has an expense reduction contractually guaranteed through at least 9/30/16. The transfer agent has contractually agreed to waive or limit its transfer agency fees
for Class R6 shares of the Fund so that transfer agency fees for that class do not exceed 0.01% until 9/30/16. Fund investment results reflect the expense reduction and fee
cap, to the extent applicable; without these reductions, the results would have been lower.
3. Cumulative total return represents the change in value of an investment over the periods indicated.
4. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, if any, has not
been annualized.
5. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
6. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
7. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Financial Highlights in this report. In periods of market vola-
tility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
8. Source: Morningstar. The BofA Merrill Lynch 3-Month U.S. T-Bill Index is an index of short-term U.S. government securities with a remaining term to final maturity of less
than three months.
9. Source: Factset. Hedge Fund Research, Inc. – www.hedgefundresearch.com. The HFRX Global Hedge Fund Index is being used under license from Hedge Fund
Research, Inc., which does not endorse or approve of any of the contents of this report. The HFRX Global Hedge Fund Index is designed to be representative of the overall
composition of the hedge fund universe. It is composed of all eligible hedge fund strategies, including but not limited to convertible arbitrage, distressed securities, equity
hedge, equity market neutral, event driven, macro, merger arbitrage and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the
hedge fund industry.
See www.franklintempletondatasources.com for additional data provider information.

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Annual Report

FRANKLIN K2 LONG SHORT CREDIT FUND

Your Fund’s Expenses

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1. Divide your account value by $1,000.

If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

2. Multiply the result by the number under the heading “Expenses Paid During Period.”

If Expenses Paid During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

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FRANKLIN K2 LONG SHORT CREDIT FUND
YOUR FUND’S EXPENSES


		Beginning Account		Ending Account		Expenses Paid During
Share Class		Value 12/1/15		Value 5/31/16		*Period 12/1/15–5/31/16**
A
Actual	$	1,000	$	1,021.70	$	10.87
Hypothetical (5% return before expenses)	$	1,000	$	1,014.25	$	10.83
C
Actual	$	1,000	$	1,015.90	$	16.28
Hypothetical (5% return before expenses)	$	1,000	$	1,008.85	$	16.22
R
Actual	$	1,000	$	1,017.70	$	13.77
Hypothetical (5% return before expenses)	$	1,000	$	1,011.35	$	13.73
R6
Actual	$	1,000	$	1,021.90	$	11.37
Hypothetical (5% return before expenses)	$	1,000	$	1,013.75	$	11.33
Advisor
Actual	$	1,000	$	1,020.70	$	11.27
Hypothetical (5% return before expenses)	$	1,000	$	1,013.85	$	11.23

*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 2.15%;
C: 3.23%; R: 2.73%; R6: 2.25% and Advisor: 2.23%), multiplied by the average account value over the period, multiplied by 183/366 to reflect
the one-half year period for Hypothetical expenses.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS


Financial Highlights
Franklin K2 Long Short Credit Fund
		Period Ended
		May 31, 2016^a
Class A
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period	$	10.00
Income from investment operations^b:
Net investment income^c		0.21
Net realized and unrealized gains (losses)		0.08
Total from investment operations		0.29
Less distributions from:
Net investment income		(0.08	)
Net realized gains		(0.06	)
Total distributions		(0.14	)
Net asset value, end of period	$	10.15

Total return^d		2.99	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f,g		3.37	%
Expenses net of waiver, payments by affiliates and expense reduction^f,h		2.30	%
Expenses incurred in connection with securities sold short		0.40	%
Net investment income		2.85	%

Supplemental data
Net assets, end of period (000’s)	$	28,198
Portfolio turnover rate		511.62	%

^aFor the period September 8, 2015 (commencement of operations) to May 31, 2016.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(e).
^gRatios are adjusted to exclude the effects of annualization for non-recurring expenses.
^hBenefit of expense reduction rounds to less than 0.01%.

14 Annual Report | The accompanying notes are an integral part of these financial statements.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
FINANCIAL H IGHLIGHTS


Franklin K2 Long Short Credit Fund (continued)
		Period Ended
		May 31, 2016^a
Class C
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period	$	10.00
Income from investment operations^b:
Net investment income^c		0.09
Net realized and unrealized gains (losses)		0.12
Total from investment operations		0.21
Less distributions from:
Net investment income		(0.08	)
Net realized gains		(0.06	)
Total distributions		(0.14	)
Net asset value, end of period	$	10.07

Total return^d		2.20	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f,g		3.62	%
Expenses net of waiver, payments by affiliates and expense reduction^f,h		2.55	%
Expenses incurred in connection with securities sold short		0.40	%
Net investment income		2.60	%

Supplemental data
Net assets, end of period (000’s)	$	270
Portfolio turnover rate		511.62	%

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The accompanying notes are an integral part of these financial statements. | Annual Report 15

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
FINANCIAL H IGHLIGHTS


Franklin K2 Long Short Credit Fund (continued)
		Period Ended
		May 31, 2016^a
Class R
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period	$	10.00
Income from investment operations^b:
Net investment income^c		0.08
Net realized and unrealized gains (losses)		0.16
Total from investment operations		0.24
Less distributions from:
Net investment income		(0.08	)
Net realized gains		(0.06	)
Total distributions		(0.14	)
Net asset value, end of period	$	10.10

Total return^d		2.48	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f,g		3.37	%
Expenses net of waiver, payments by affiliates and expense reduction^f,h		2.30	%
Expenses incurred in connection with securities sold short		0.40	%
Net investment income		2.85	%

Supplemental data
Net assets, end of period (000’s)	$	12
Portfolio turnover rate		511.62	%

^aFor the period September 8, 2015 (commencement of operations) to May 31, 2016.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(e).
^gRatios are adjusted to exclude the effects of annualization for non-recurring expenses.
^hBenefit of expense reduction rounds to less than 0.01%.

16 Annual Report | The accompanying notes are an integral part of these financial statements.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
FINANCIAL H IGHLIGHTS


Franklin K2 Long Short Credit Fund (continued)
		Period Ended
		May 31, 2016^a
Class R6
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period	$	10.00
Income from investment operations^b:
Net investment income^c		0.23
Net realized and unrealized gains (losses)		0.06
Total from investment operations		0.29
Less distributions from:
Net investment income		(0.08	)
Net realized gains		(0.06	)
Total distributions		(0.14	)
Net asset value, end of period	$	10.15

Total return^d		3.01	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f,g		3.35	%
Expenses net of waiver, payments by affiliates and expense reduction^f,h		2.28	%
Expenses incurred in connection with securities sold short		0.40	%
Net investment income		2.87	%

Supplemental data
Net assets, end of period (000’s)	$	12,384
Portfolio turnover rate		511.62	%

^aFor the period September 8, 2015 (commencement of operations) to May 31, 2016.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(e).
^gRatios are adjusted to exclude the effects of annualization for non-recurring expenses.
^hBenefit of expense reduction rounds to less than 0.01%.

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The accompanying notes are an integral part of these financial statements. | Annual Report 17

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
FINANCIAL H IGHLIGHTS


Franklin K2 Long Short Credit Fund (continued)
		Period Ended
		May 31, 2016^a
Advisor Class
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period	$	10.00
Income from investment operations^b:
Net investment income^c		0.20
Net realized and unrealized gains (losses)		0.09
Total from investment operations		0.29
Less distributions from:
Net investment income		(0.08	)
Net realized gains		(0.06	)
Total distributions		(0.14	)
Net asset value, end of period	$	10.15

Total return^d		2.99	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction^f,g		3.36	%
Expenses net of waiver, payments by affiliates and expense reduction^f,h		2.29	%
Expenses incurred in connection with securities sold short		0.40	%
Net investment income		2.86	%

Supplemental data
Net assets, end of period (000’s)	$	23,058
Portfolio turnover rate		511.62	%

^aFor the period September 8, 2015 (commencement of operations) to May 31, 2016.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases
of Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fIncludes dividend and/or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the
periods presented. See Note 1(e).
^gRatios are adjusted to exclude the effects of annualization for non-recurring expenses.
^hBenefit of expense reduction rounds to less than 0.01%.

18 Annual Report | The accompanying notes are an integral part of these financial statements.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS


Statement of Investments, May 31, 2016
Franklin K2 Long Short Credit Fund
	Country	Shares		Value
Common Stocks 0.2%
Health Care Providers & Services 0.1%
^aCommunity Health Systems Inc	United States	3,352	$	45,051
Hotels, Restaurants & Leisure 0.1%
^aPinnacle Entertainment Inc	United States	2,960		33,329
Independent Power & Renewable Electricity Producers 0.0%^†
NRG Yield Inc., A	United States	1,513		21,939
NRG Yield Inc., C	United States	720		11,131
				33,070
Total Common Stocks (Cost $109,328)				111,450
^bPreferred Stocks (Cost $255,772) 0.5%
Thrifts & Mortgage Finance 0.5%
^aFHLMC, pfd., Series Z, 0.00%	United States	67,844		302,584

		Principal
		Amount*
Convertible Bonds 3.4%
Health Care Providers & Services 0.8%
^cBrookdale Senior Living Inc., senior note, 2.75%, 6/15/18	United States	530,000		525,362
Independent Power & Renewable Electricity Producers 1.1%
^dNRG Yield Inc., senior note, 144A, 3.50%, 2/01/19	United States	175,000		169,313
^dPattern Energy Group Inc., senior note, 144A, 4.00%, 7/15/20	United States	543,000		530,782
				700,095
Real Estate Investment Trusts (REITs) 1.5%
American Realty Capital Properties Inc., 3.00%, 8/01/18	United States	403,000		398,466
^ciStar Inc., senior note, 3.00%, 11/15/16	United States	500,000		520,938
				919,404
Total Convertible Bonds (Cost $2,197,826)				2,144,861

Corporate Bonds and Notes 37.5%
Auto Components 0.8%


^dHerc Spinoff Escrow Issuer LLC / Herc Spinoff Escrow Issuer Corp., secured note,
second lien, 144A,
7.50%, 6/01/22	United States	251,000	252,883
7.75%, 6/01/24	United States	252,000	253,260
			506,143
Chemicals 1.2%
^dGCP Applied Technologies Inc., senior note, 144A, 9.50%, 2/01/23	United States	370,000	411,625
^dTPC Group Inc., secured, first lien note, 144A, 8.75%, 12/15/20	United States	425,000	329,375
			741,000
Commercial Services & Supplies 0.5%
RR Donnelley & Sons Co.,
senior bond, 6.00%, 4/01/24	United States	253,000	226,435
senior note, 7.00%, 2/15/22	United States	104,000	101,140
			327,575
Construction Materials 0.5%
^c,dStandard Industries Inc., senior note, 144A, 5.125%, 2/15/21	United States	286,000	298,155

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
STATEMENT O F INVESTMENTS


Franklin K2 Long Short Credit Fund (continued)

		Principal
	Country	Amount*			Value
Corporate Bonds and Notes (continued)
Containers & Packaging 1.2%
^cReynolds Group Issuer Inc. / Reynolds Group Issuer LLC, senior secured note,
first lien, 6.875%, 2/15/21	United States	750,000	$		778,087
Diversified Financial Services 4.8%
^cEveri Payments Inc., senior note, 10.00%, 1/15/22	United States	576,000			478,080
^dGarfunkelux Holdco 3 SA, senior note, 144A, 8.50%, 11/01/22	Luxembourg	339,000		GBP	499,191
^diPayment Inc., senior note, 144A, 9.50%, 12/15/19	United States	677,673			684,450
NewStar Financial Inc., senior note, 7.25%, 5/01/20	United States	254,000			237,172
^dOpal Acquisition Inc., senior note, 144A, 8.875%, 12/15/21	United States	368,000			289,800
^dROC Finance LLC / ROC Finance 1 Corp., secured note, second lien, 144A,
12.125%, 9/01/18	United States	853,000			895,650
					3,084,343
Diversified Telecommunication Services 2.6%
^dIntelsat Jackson Holdings SA, senior secured note, first lien, 144A, 8.00%, 2/15/24	Luxembourg	407,000			416,666
^c,dLevel 3 Financing Inc., senior note, 144A, 5.25%, 3/15/26	United States	576,000			576,000
^c,dNumericable-SFR SA, secured bond, 144A, 7.375%, 5/01/26	France	679,000			684,517
					1,677,183
Electric Utilities 0.5%
^c,dReal Alloy Holding Inc., senior note, 144A, 10.00%, 1/15/19	United States	296,000			296,000
Energy Equipment & Services 0.7%
^ePetroleos Mexicanos, senior bond, Reg S, 6.875%, 8/04/26	Mexico	409,000			445,442
Health Care Equipment & Supplies 0.7%
Universal Hospital Services Inc., senior note, 7.625%, 8/15/20	United States	509,000			477,824
Health Care Providers & Services 0.9%
Community Health Systems Inc., senior note, 6.875%, 2/01/22	United States	250,000			216,098
IASIS Healthcare LLC / IASIS Capital Corp., senior note, 8.375%, 5/15/19	United States	113,000			109,045
Kindred Healthcare Inc., senior note, 8.75%, 1/15/23	United States	226,000			222,045
					547,188
Hotels, Restaurants & Leisure 3.6%
^dDownstream Development Authority of the Quapaw Tribe of Oklahoma, secured note,
144A, 10.50%, 7/01/19	United States	478,000			449,320
^dGolden Nugget Escrow Inc., senior note, 144A, 8.50%, 12/01/21	United States	281,000			292,943
Mohegan Tribal Gaming Authority, senior note, 9.75%, 9/01/21	United States	123,000			130,226
^dPizzaexpress Financing 2 PLC, senior secured note, first lien, 144A,
6.625%, 8/01/21	United Kingdom	543,000		GBP	788,959
^cScientific Games International Inc., senior note, 10.00%, 12/01/22	United States	770,000			627,550
					2,288,998
Independent Power & Renewable Electricity Producers 0.6%
^dTerraForm Power Operating LLC, senior note, 144A, 5.875%, 2/01/23	United States	407,000			362,230
IT Services 0.9%
^c,dFirst Data Corp., secured note, first lien, 144A, 5.00%, 1/15/24	United States	576,000			577,797
Life Sciences Tools & Services 2.3%
inVentiv Health Inc.,
^c,dsecured note, first lien, 144A, 9.00%, 1/15/18	United States	573,000			588,757
senior note, 10.00%, 8/15/18	United States	562,000			560,595
senior note, 10.00%, 8/15/18	United States	66,000			65,010
^d,fsenior note, 144A, PIK, 10.00%, 8/15/18	United States	249,000			254,603
					1,468,965

20 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
STATEMENT O F INVESTMENTS


Franklin K2 Long Short Credit Fund (continued)

		Principal
	Country	Amount*			Value
Corporate Bonds and Notes (continued)
Media 5.6%
American Media Inc.,
^dsecured note, second lien, 144A, 7.00%, 7/15/20	United States	1,064,631		$	1,189,725
senior secured note, first lien, 11.50%, 12/15/17	United States	26,000			26,650
^dLee Enterprises Inc., senior secured note, first lien, 144A, 9.50%, 3/15/22	United States	446,000			446,000
The McClatchy Co., senior secured note, first lien, 9.00%, 12/15/22	United States	515,000			491,825
^cPostmedia Network Inc., secured note, second lien, 12.50%, 7/15/18	Canada	393,000			158,183
^dTime Inc., senior note, 144A, 5.75%, 4/15/22	United States	586,000			561,095
WideOpenWest Finance LLC / Capital Corp., senior note, 10.25%, 7/15/19	United States	701,000			733,421
					3,606,899
Metals & Mining 1.1%
AK Steel Corp.,
senior bond, 7.625%, 5/15/20	United States	247,000			199,452
senior bond, 8.375%, 4/01/22	United States	254,000			196,533
senior note, 7.625%, 10/01/21	United States	331,000			255,284
^dTeck Resources Ltd., senior note, 144A, 8.50%, 6/01/24	Canada	46,000			47,265
United States Steel Corp.,
senior bond, 7.375%, 4/01/20	United States	16,000			13,960
senior bond, 7.50%, 3/15/22	United States	10,000			7,850
senior note, 6.875%, 4/01/21	United States	20,000			15,600
					735,944
Multiline Retail 0.9%
J.C. Penney Corp. Inc., senior bond, 7.95%, 4/01/17	United States	543,000			561,326
Oil, Gas & Consumable Fuels 4.9%
Kinder Morgan Inc., senior bond, 8.05%, 10/15/30	United States	228,000			249,143
^dNGPL PipeCo LLC, secured note, 144A,
7.119%, 12/15/17	United States	421,000			444,155
9.625%, 6/01/19	United States	430,000			450,962
Petrobras Global Finance BV,
senior bond, 5.75%, 1/20/20	Brazil	33,000			31,045
senior bond, 8.75%, 5/23/26	Brazil	89,000			84,683
senior bond, 6.85%, 6/05/15	Brazil	315,000			214,200
senior note, 4.875%, 3/07/18	Brazil	100,000	EUR		110,652
senior note, 4.875%, 3/17/20	Brazil	498,000			451,038
senior note, 8.375%, 5/23/21	Brazil	53,000			52,587
^ePetroleos de Venezuela SA, senior bond, Reg S,
6.00%, 5/16/24	Venezuela	163,000			53,888
6.00%, 11/15/26	Venezuela	633,000			205,662
Southwestern Energy Co., senior bond, 7.50%, 2/01/18	United States	756,000			763,560
					3,111,575
Paper & Forest Products 0.3%
Resolute Forest Products Inc., senior note, 5.875%, 5/15/23	United States	289,000			215,666
Pharmaceuticals 0.9%
^dConvaTec Healthcare SA, senior note, 144A, 10.50%, 12/15/18	Luxembourg	543,000			559,969
Real Estate Investment Trusts (REITs) 0.4%
^dCommunications Sales & Leasing Inc., secured note, first lien, 144A, 6.00%, 4/15/23	United States	271,000			270,323
Semiconductors & Semiconductor Equipment 1.1%
^dMicron Technology Inc., senior secured note, 144A, 7.50%, 9/15/23	United States	677,000			712,542

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
STATEMENT O F INVESTMENTS


Franklin K2 Long Short Credit Fund (continued)

		Principal
	Country	Amount*			Value
Corporate Bonds and Notes (continued)
Software 0.3%
^dOpen Text Corp., senior bond, 144A, 5.875%, 6/01/26	Canada	201,000	$		202,005
Technology Hardware, Storage & Peripherals 0.2%
^dDiamond 1 Finance Corp. / Diamond 2 Finance Corp., senior secured note, first lien,
144A,
4.42%, 6/15/21	United States	51,000			52,128
5.45%, 6/15/23	United States	99,000			100,758
					152,886
Total Corporate Bonds and Notes (Cost $23,272,061)					24,006,065

Foreign Government and Agency Securities 5.5%
Government of Argentina,
^esenior bond, Reg S, 7.50%, 4/22/26	Argentina	150,000			157,800
senior bond, 7.82%, 12/31/33	Argentina	499,525		EUR	563,833
senior note, 8.75%, 6/02/17	Argentina	300,000			316,500
Government of Brazil, senior bond, 6.00%, 4/07/26	Brazil	200,000			203,000
Government of Hellenic Republic,
^esenior bond, Reg S, 3.00% to 2/24/20, 3.65% to 2/24/21, 4.30% thereafter,
2/24/42	Greece	606,400		EUR	461,884
^dsenior note, 144A, 3.375%, 7/17/17	Greece	974,000		EUR	1,041,949
^dsenior note, 144A, 4.75%, 4/17/19	Greece	25,000		EUR	26,015
Government of Hungary, senior bond, 5.375%, 2/21/23	Hungary	140,000			154,272
^eGovernment of Iraq, senior bond, Reg S, 5.80%, 1/15/28	Iraq	250,000			182,813
^eGovernment of Paraguay, senior note, Reg S, 4.625%, 1/25/23	Paraguay	200,000			205,500
^eGovernment of Sri Lanka, senior note, Reg S, 6.85%, 11/03/25	Sri Lanka	209,000			201,216
Total Foreign Government and Agency Securities
(Cost $3,189,388)					3,514,782
Asset-Backed Securities and Commercial Mortgage-Backed
Securities 31.3%
Banks 7.3%
^gWachovia Bank Commercial Mortgage 2007-C30 Trust, AJ, FRN,
5.413%, 12/15/43	United States	1,750,000			1,745,236
^gWachovia Bank Commercial Mortgage 2007-C31 Trust, AJ, FRN, 5.66%, 4/15/47	United States	2,610,000			2,618,357
^gWashington Mutual Mortgage Pass-Through Certificates, 2006-4, 3A2B, FRN,
0.526%, 5/25/36	United States	552,413			291,518
					4,655,111
Consumer Finance 0.4%
^gImpac CMB 2004-11 Trust, 1A2, FRN, 0.966%, 3/25/35	United States	316,802			235,755
Diversified Financial Services 18.3%
^d,gAnchorage Capital CLO Ltd. 2013-1A Trust, C, 144A, FRN, 4.13%, 7/13/25	Cayman Islands	1,000,000			913,993
^dAvant Loans Funding 2016-B Trust, A, 144A, 3.92%, 8/15/19	United States	750,000			753,257
^gBanc of America Funding 2006-G Trust, M1, FRN, 0.738%, 7/20/36	United States	3,500,000			2,300,649
^gBear Stearns ARM 2006-2 Trust, 4A1, FRN, 3.997%, 7/25/36	United States	134,598			116,920
^gBear Stearns ARM 2007-4 Trust, 22A1, FRN, 4.798%, 6/25/47	United States	118,290			105,371
^d,gCornerstone CLO Ltd. 2007-C Trust, 144A, FRN, 3.028%, 7/15/21	United States	1,000,000			938,987
Credit Suisse First Boston Mortgage Securities Corp., 1A2, 7.50%, 3/25/32	United States	665,836			671,919
^gHome Equity Mortgage Loan Asset-Backed 2001-A Trust, AV, FRN,
0.966%, 3/25/31	United States	112,515			100,964
^gIndyMac Index Mortgage Loan 2005-AR13 Trust, 4A1, FRN, 2.72%, 8/25/35	United States	614,796			534,653

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
STATEMENT O F INVESTMENTS


Franklin K2 Long Short Credit Fund (continued)

			Principal
	Country		Amount*		Value
Asset-Backed Securities and Commercial
Mortgage-Backed Securities (continued)
Diversified Financial Services (continued)
^gIndyMac Index Mortgage Loan 2007-AR7 Trust, 1A1, FRN,
0.746%, 6/25/37	United States		2,938,610	$	1,440,360
^gJP Morgan Mortgage 2007-A2 Trust, 2A1, FRN,
2.813%, 4/25/37	United States		482,841		426,691
^d,gKatonah Ltd. 2007-B1L Trust, 144A, FRN, 3.638%, 4/23/22	United States		1,000,000		958,038
^dOneMain Financial Issuance Trust, 2014-1A, A, 144A,
2.43%, 6/18/24	United States		115,613		115,733
^d,gSound Point CLO Ltd., 2013-1A, B1L, 144A, FRN,
4.386%, 4/26/25	Cayman Islands		1,000,000		959,069
^gStructured Asset Mortgage Investments 2003-AR2 Trust, A1,
FRN, 1.179%, 12/19/33	United States		32,071		30,858
^gWaMu Mortgage Pass-Through Certificates 2007-OA3 Trust,
2A1A, FRN, 1.17%, 4/25/47	United States		102,250		91,532
^d,gWaterfall Commercial Mortgage 2015-SBC5 Trust, A, 144A,
FRN, 4.104%, 9/14/22	United States		1,291,889		1,270,747
					11,729,741
Thrifts & Mortgage Finance 5.3%
Banc of America Commercial Mortgage 2006-6 Trust, AJ,
5.421%, 10/10/45	United States		900,000		896,754
^gNational Collegiate Student Loan 2007-4 Trust, FRN,
A3A1, 3.682%, 3/25/38	United States		950,000		945,742
A3A2, 6.50%, 3/25/38	United States		2,000,000		1,571,442
					3,413,938
Total Asset-Backed Securities and Commercial
Mortgage-Backed Securities
(Cost $19,837,476)					20,034,545

			Number of
			Contracts
Options Purchased 0.1%
Calls – Exchange-Traded
Health Care Providers & Services 0.0%^†
Community Health Systems Inc., September Strike Price $16.00,
Expires 9/16/16	United States		34		2,295

			Notional
		Counterparty	Amount*
Payer Swaptions – Over-the-Counter
Interest Rate 0.0%^†
Pay fixed 10 year 2.00%, receive float 6-month USD LIBOR,	��
Expires 10/21/16	United States	JPHQ	678,000		5,735

			Number of
			Contracts
Puts – Exchange-Traded
Diversified Financial Services 0.0%^†
S&P 500 Index, June Strike Price $1,950.00, Expires 6/17/16	United States		17		2,125
S&P 500 Index, June Strike Price $2,000.00, Expires 6/30/16	United States		13		10,920
					13,045

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
STATEMENT O F INVESTMENTS


Franklin K2 Long Short Credit Fund (continued)

		Number of
	Country	Contracts		Value

Options Purchased (continued)
Exchange Traded Funds 0.1%
iShares iBoxx USD High Yield Corporate Bond ETF, July Strike Price $81.00,
Expires 7/15/16	United States	147	$	7,497
SPDR S&P 500 ETF Trust, July Strike Price $205.00, Expires 7/15/16	United States	106		24,804
				32,301
Oil, Gas & Consumable Fuels 0.0%^†
Southwestern Energy Co., June Strike Price $12.00, Expires 6/17/16	United States	30		870
Total Options Purchased (Cost $74,807)				54,246

		Principal
		Amount*

U.S.	Government and Agency Securities 2.9%
U.S.	Treasury Note,


1.25%, 3/31/21	United States	581,000		577,527
1.625%, 2/15/26	United States	1,284,000		1,257,718
Total U.S. Government and Agency Securities
(Cost $1,850,783)				1,835,245
Total Investments before Short Term Investments
(Cost $50,787,441)				52,003,778

		Shares
Short Term Investments 9.7%
Money Market Funds (Cost $5,185,565) 8.1%
^hFidelity Institutional Money Market Funds, Money Market Portfolio, Class I, 0.234%	United States	5,185,565		5,185,565

		Principal
		Amount*
Repurchase Agreements (Cost $1,037,523) 1.6%
ⁱJoint Repurchase Agreement, 0.281%, 6/01/16
(Maturity Value $1,037,531),	United States	1,037,523		1,037,523
BNP Paribas Securities Corp. (Maturity Value $413,176)
Deutsche Bank Securities Inc. (Maturity Value $97,549)
HSBC Securities (USA) Inc. (Maturity Value $516,472)
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $10,334)
Collateralized by U.S. Government Agency Securities, 0.00% - 5.50%,
6/10/16 - 2/01/20; U.S. Government Agency Securities, Strips, 6/01/17;
^jU.S. Treasury Bill, 5/25/17; and U.S. Treasury Note, 0.875%,
10/15/17 - 4/15/19 (valued at $1,058,350)
Total Investments (Cost $57,010,529) 91.1%				58,226,866
Options Written (0.0)%^†				(10,643	)
Securities Sold Short (8.5)%				(5,422,676	)
Other Assets, less Liabilities 17.4%				11,128,222
Net Assets 100.0%			$	63,921,769

24 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
STATEMENT O F INVESTMENTS


Franklin K2 Long Short Credit Fund (continued)

		Number of
	Country	Contracts		Value
Options Written (0.0%)^†
Puts – Exchange-Traded
Exchange Traded Funds (0.0%)^†
SPDR S&P 500 ETF Trust, July Strike Price $195.00, Expires 7/15/16	United States	106	$	(9,328	)
Health Care Providers & Services (0.0%)^†
Community Health Systems Inc., September Strike Price $9.00, Expires 9/16/16	United States	34		(1,105	)
Oil, Gas & Consumable Fuels (0.0%)^†
Southwestern Energy Co., June Strike Price $10.00, Expires 6/17/16	United States	30		(210	)
Total Options Written (Premiums Received $9,583)				(10,643	)

		Principal
		Amount*
^kSecurities Sold Short (8.5)%
Corporate Bonds and Notes (8.0)%
Auto Components (1.8)%
Dana Holding Corp., senior bond, 5.50%, 12/15/24	United States	576,000		(554,400	)
MPG Holdco I Inc., senior note, 7.375%, 10/15/22	United States	576,000		(573,120	)
				(1,127,520	)
Chemicals (2.5)%
CF Industries Inc., senior bond, 3.45%, 6/01/23	United States	575,000		(566,257	)
The Mosaic Co., senior bond, 4.25%, 11/15/23	United States	500,000		(532,650	)
Potash Corp. of Saskatchewan Inc., senior bond, 3.00%, 4/01/25	Canada	500,000		(493,468	)
				(1,592,375	)
Commercial Services & Supplies (0.5)%
United Rentals North America Inc., senior bond, 5.50%, 7/15/25	United States	326,000		(321,110	)
Diversified Telecommunication Services (0.2)%
^dFrontier Communications Corp., senior note, 144A, 11.00%, 9/15/25	United States	112,000		(114,380	)
Hotels, Restaurants & Leisure (1.0)%
^dScientific Games International Inc., senior secured note, first lien, 144A,
7.00%, 1/01/22	United States	662,000		(671,930	)
Media (0.1)%
^dCCO Holdings LLC / CCO Holdings Capital Corp., senior note, 144A,
5.875%, 4/01/24	United States	56,000		(58,520	)
Road & Rail (0.9)%
Hertz Corp., senior note, 6.75%, 4/15/19	United States	576,000		(584,854	)
Trading Companies & Distributors (1.0)%
GATX Corp., senior bond, 4.85%, 6/01/21	United States	576,000		(611,476	)
Total Corporate Bonds and Notes (Proceeds $5,010,775)				(5,082,165	)

U.	S. Government and Agency Securities (0.5)%
U.	S. Treasury Note,


1.375%, 4/30/21	United States	48,000		(47,989	)
1.625%, 4/30/23	United States	88,000		(87,800	)
1.625%, 2/15/26	United States	209,000		(204,722	)
Total U.S. Government and Agency Securities
(Proceeds $343,070)				(340,511	)
Total Securities Sold Short (Proceeds $5,353,845)			$	(5,422,676	)

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
STATEMENT O F INVESTMENTS

Franklin K2 Long Short Credit Fund (continued)

^†Rounds to less than 0.1% of net assets.
*The principal/notional amount is stated in U.S. dollars unless otherwise indicated.
^aNon-income producing.
^bVariable rate security. The rate shown represents the yield at period end.

^cA portion or all of the security has been segregated as collateral for securities sold short and open written option contracts. At May 31, 2016, the aggregate value of these securities and/or cash pledged amounted to $9,540,115, representing 14.92% of net assets. ^dSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At May 31, 2016, the net value of these securities was $21,072,161, representing 32.97% of net assets. ^eSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At May 31, 2016, the aggregate value of these securities was $1,914,205, representing 2.99% of net assets. ^fIncome may be received in additional securities and/or cash. ^gThe coupon rate shown represents the rate at period end. ^hThe rate shown is the annualized seven-day yield at period end. ⁱSee Note 1(c) regarding joint repurchase agreement. ^jThe security is traded on a discount basis with no stated coupon rate. ^kSee Note 1(e) regarding securities sold short.


At May 31, 2016, the Fund had the following futures contracts outstanding. See Note 1(d).

Futures Contracts
			Number of		Notional	Expiration		Unrealized		Unrealized
Description		Type	Contracts		Value	Date		Appreciation		Depreciation
Equity Contracts
S&P 500 E-Mini Index		Short	2	$	209,490	6/17/16	$	—	$	(8,594	)
Interest Rate Contracts
90 Day Eurodollar		Short	7		1,728,475	12/18/17		—		(276	)
U.S. Treasury 10 Yr. Note		Short	1		129,688	9/21/16		—		(439	)
U.S. Treasury Long Bond		Short	3		489,937	9/21/16		—		(3,733	)
					2,348,100			—		(4,448	)
Total Futures Contracts				$	2,557,590		$	—	$	(13,042	)
Net unrealized appreciation (depreciation)									$	(13,042	)

At May 31, 2016, the Fund had the following forward exchange contracts outstanding. See Note 1(d).

Forward Exchange Contracts
					Contract	Settlement		Unrealized		Unrealized
Currency	Counterparty^aType		Quantity		Amount	Date		Appreciation		Depreciation
OTC Forward Exchange Contracts
Chinese Yuan	MSCO	Sell	5,321,200	$	814,164	6/15/16	$	6,793	$	—
Euro	MSCO	Buy	1,033,853		1,168,776	6/15/16		—		(17,796	)
Euro	MSCO	Sell	3,016,843		3,371,007	6/15/16		12,371		—
Japanese Yen	MSCO	Sell	25,231,430		222,536	6/15/16		—		(5,452	)
Mexican Peso	MSCO	Buy	7,009,291		390,207	6/15/16		—		(11,118	)
Mexican Peso	MSCO	Sell	7,009,291		404,636	6/15/16		25,548		—
South Korean Won	MSCO	Sell	339,815,557		288,380	6/15/16		3,342		—
British Pound	JPHQ	Sell	930,000		1,356,413	6/30/16		9,114		—
Turkish Lira	MLCO	Sell	785,511		259,168	9/21/16		597		—
Total Forward Exchange Contracts							$	57,765	$	(34,366	)
Net unrealized appreciation (depreciation)							$	23,399

^aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.

26 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
STATEMENT O F INVESTMENTS


Franklin K2 Long Short Credit Fund (continued)
At May 31, 2016, the Fund had the following credit default swap contracts outstanding. See Note 1(d).

Credit Default Swap Contracts
									Unamortized
	Periodic								Upfront
	Payment Counterparty/			Notional	Expiration				Payments				Unrealized			Unrealized
Description	Rate		Exchange	Amount^a			Date		(Receipts)				Appreciation			Depreciation		Value		Rating^b
Centrally Cleared Swap Contracts
Contracts to Buy Protection
Traded Index
CDX.NA.HY.25	5.00	%	ICE	1,445,400			12/20/20		$	14,454			$	—	$	(67,821) $(53,367)
Single Name
Government of Turkey	1.00	%	ICE	504,000			12/20/20			41,464				—		(9,518	)	31,946
Government of South Africa	1.00	%	ICE	235,000			6/12/21			21,512				1,402		—		22,914
Government of Turkey	1.00	%	ICE	149,000			6/12/21			10,088				1,473		—		11,561
Government of South Africa	1.00	%	ICE	172,000			6/20/21			16,602				169		—		16,771
Government of Turkey	1.00	%	ICE	141,000			6/20/21			11,405				—		(464	)	10,941
Contracts to Sell Protection^c
Single Name
Government of Brazil	1.00	%	ICE	701,000			6/20/21			(79,797	)			—		(2,028	)	(81,825)		BB
Government of Russia	1.00	%	ICE	395,000			6/20/21			(28,844	)			113		—		(28,731)		BB+
Total Centrally Cleared Swap Contracts									$	6,884		$	3,157		$	(79,831) $(69,790)
OTC Swap Contracts
Contracts to Buy Protection
Single Name
American Axle & Manufacturing Inc	5.00	%	JPHQ	570,000			6/20/21			(29,064	)			—		(23,053	)	(52,117	)
Catepillar Financial Services Corp	1.00	%	JPHQ	882,000			6/20/21			3,777				—		(7,000	)	(3,223	)
Domtar Corp	1.00	%	JPHQ	679,000			6/20/21			31,090				—		(18,090	)	13,000
Eastman Chemical Co	1.00	%	JPHQ	543,000			6/20/21			(519	)			—		(5,855	)	(6,374	)
Expedia Inc	1.00	%	JPHQ	597,000			6/20/21			7,596				—		(8,850	)	(1,254	)
Marubeni Corp	1.00	%	GSCO	62,079,000		JPY	6/20/21			3,888				—		(8,190	)	(4,302	)
Pizzaexpress Financing 1 PLC	5.00	%	JPHQ	651,000		EUR	6/20/21			(33,731	)			25,740		—		(7,991	)
Sprint Nextel	5.00	%	JPHQ	217,000			6/20/19			25,424				—		(8,231	)	17,193
Sprint Nextel	5.00	%	JPHQ	217,000			6/20/21			49,190				—		(10,749	)	38,441
Transocean Inc	5.00	%	JPHQ	271,000			6/20/21			58,541				2,880		—		61,421
Whirlpool Corp	1.00	%	JPHQ	746,000			6/20/21			(7,165	)			20		—		(7,145	)
Windstream Corp	5.00	%	JPHQ	271,000			6/20/21			27,275				—		(4,580	)	22,695
Total OTC Swap Contracts								$	136,302			$	28,640		$	(94,598) $ 70,344
Total Credit Default Swap Contracts				71,465,400				$	143,186			$	31,797		$	(174,429	) $	554
Net unrealized appreciation (depreciation)															$	(142,632	)

^aIn U.S. dollars unless otherwise indicated. For contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no
recourse provisions have been entered into in association with the contracts.
^bBased on Standard and Poor’s (S&P) Rating for single name swaps.
^cThe Fund enters contracts to sell protection to create a long credit position. Performance triggers include default, bankruptcy or restructuring for single name swaps and fail-
ure to pay or bankruptcy of the underlying securities for traded index swaps.

See Notes 1(d) and 8 regarding derivative financial instruments and other derivative information, respectively.

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
STATEMENT O F INVESTMENTS


Franklin K2 Long Short Credit Fund (continued)
At May 31, 2016, the Fund had the following total return swap contracts outstanding. See Note 1(d).
Total Return Swap Contracts
		Counter-			Expiration		Unrealized		Unrealized
Underlying Instrument	Financing Rate	party		Notional Value	Date		Appreciation		Depreciation
OTC Swap Contracts
Short
iBoxx USD Liquid High Yield Index	LIBOR	JPHQ	$	328,000	6/20/16	$	—	$	(1,449)
iBoxx USD Liquid High Yield Index	LIBOR	MSCS		18,000	6/20/16		—		(120)
Total Return Swap Contracts						$	—	$	(1,569)
Net unrealized appreciation (depreciation)								$	(1,569)

See Abbreviations on page 45.

28 Annual Report | The accompanying notes are an integral part of these financial statements.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Financial Statements

Statement of Assets and Liabilities
May 31, 2016


Franklin K2 Long Short Credit Fund

Assets:
Investments in securities:
Cost - Unaffiliated issuers	$	55,973,006
Cost - Repurchase agreements		1,037,523
Total cost of investments	$	57,010,529
Value - Unaffiliated issuers	$	57,189,343
Value - Repurchase agreements		1,037,523
Total value of investments		58,226,866
Cash		4,035,978
Foreign currency, at value (cost $61,104)		59,806
Receivables:
Investment securities sold		7,122,056
Dividends and interest		688,455
Due from brokers		4,548,808
Offering costs		116,489
OTC swap contracts (upfront payments $210,820)		206,781
Unrealized appreciation on OTC forward exchange contracts		57,765
Unrealized appreciation on OTC swap contracts		28,640
Other assets		7
Total assets		75,091,651
Liabilities:
Payables:
Investment securities purchased		5,349,823
Management fees		76,156
Distribution fees		589
Transfer agent fees		485
Variation margin		3,365
OTC swap contracts (upfront receipts $71,302)		70,479
Options written, at value (premiums received $9,583)		10,643
Securities sold short, at value (proceeds $5,353,845)		5,422,676
Due to brokers		896
Unrealized depreciation on OTC forward exchange contracts		34,366
Unrealized depreciation on OTC swap contracts		96,167
Accrued expenses and other liabilities		104,237
Total liabilities		11,169,882
Net assets, at value	$	63,921,769
Net assets consist of:
Paid-in capital	$	62,617,210
Undistributed net investment income		498,976
Net unrealized appreciation (depreciation)		1,010,861
Accumulated net realized gain (loss)		(205,278	)
Net assets, at value	$	63,921,769

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The accompanying notes are an integral part of these financial statements. | Annual Report 29

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
FINANCIAL STATEMENTS


Statement of Assets and Liabilities (continued)
May 31, 2016

Franklin K2 Long Short Credit Fund

Class A:
Net assets, at value	$	28,197,685
Shares outstanding		2,777,822
Net asset value per share^a	$	10.15
Maximum offering price per share (net asset value per share ÷ 94.25%)	$	10.77
Class C:
Net assets, at value	$	270,043
Shares outstanding		26,807
Net asset value and maximum offering price per share^a	$	10.07
Class R:
Net assets, at value	$	12,067
Shares outstanding		1,195
Net asset value and maximum offering price per share	$	10.10
Class R6:
Net assets, at value	$	12,384,402
Shares outstanding		1,219,926
Net asset value and maximum offering price per share	$	10.15
Advisor Class:
Net assets, at value	$	23,057,572
Shares outstanding		2,270,909
Net asset value and maximum offering price per share	$	10.15

^aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.

30 Annual Report | The accompanying notes are an integral part of these financial statements.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
FINANCIAL STATEMENTS

Statement of Operations
for the period ended May 31, 2016^a


Franklin K2 Long Short Credit Fund

Investment income:
Dividends	$	61,199
Interest		1,673,212
Paydown gain (loss)		436,385
Total investment income		2,170,796
Expenses:
Management fees (Note 3a)		864,522
Distribution fees: (Note 3c)
Class A		1,160
Class C		899
Class R		40
Transfer agent fees: (Note 3e)
Class A		1,102
Class C		20
Class R		15
Class R6		52
Advisor Class		960
Custodian fees (Note 4)		42,309
Reports to shareholders		15,569
Registration and filing fees		9,952
Professional fees		72,222
Trustees’ fees and expenses		10,402
Amortization of offering costs		309,861
Interest on securities sold short		157,950
Security borrowing fees		9,695
Other		5,759
Total expenses		1,502,489
Expense reductions (Note 4)		(861	)
Expenses waived/paid by affiliates (Note 3f)		(535,116	)
Net expenses		966,512
Net investment income		1,204,284
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments		(314,645	)
Written options		45,054
Foreign currency transactions		(94,505	)
Futures contracts		(7,200	)
Securities sold short		224,334
Swap contracts		(111,686	)
Net realized gain (loss)		(258,648	)
Net change in unrealized appreciation (depreciation) on:
Investments		1,147,506
Translation of other assets and liabilities denominated in foreign currencies		21,658
Written options		(1,060	)
Futures contracts		(13,042	)
Swap contracts		(144,201	)
Net change in unrealized appreciation (depreciation)		1,010,861
Net realized and unrealized gain (loss)		752,213
Net increase (decrease) in net assets resulting from operations	$	1,956,497

^aFor the period September 8, 2015 (commencement of operations) to May 31, 2016.

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The accompanying notes are an integral part of these financial statements. | Annual Report 31

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
FINANCIAL STATEMENTS


Statement of Changes in Net Assets

Franklin K2 Long Short Credit Fund

		Period Ended
		May 31, 2016^a
Increase (decrease) in net assets:
Operations:
Net investment income	$	1,204,284
Net realized gain (loss)		(258,648	)
Net change in unrealized appreciation (depreciation)		1,010,861
Net increase (decrease) in net assets resulting from operations		1,956,497
Distributions to shareholders from:
Net investment income:
Class A		(223,550	)
Class C		(748	)
Class R		(97	)
Class R6		(99	)
Advisor Class		(199,097	)
Net realized gains:
Class A		(175,371	)
Class C		(576	)
Class R		(76	)
Class R6		(76	)
Advisor Class		(155,996	)
Total distributions to shareholders		(755,686	)
Capital share transactions: (Note 2)
Class A		27,777,884
Class C		262,842
Class R		10,000
Class R6		11,915,470
Advisor Class		22,754,762
Total capital share transactions		62,720,958
Net increase (decrease) in net assets		63,921,769
Net assets:
End of period	$	63,921,769
Undistributed net investment income included in net assets:
End of period	$	498,976

^aFor the period September 8, 2015 (commencement of operations) to May 31, 2016.

32 Annual Report | The accompanying notes are an integral part of these financial statements.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Notes to Financial Statements

Franklin K2 Long Short Credit Fund

1. Organization and Significant Accounting Policies

Franklin Alternative Strategies Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of three separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin K2 Long Short Credit Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund commenced operations on September 8, 2015, with five classes of shares: Class A, Class C, Class R, Class R6 and Advisor Class. Effective September 28, 2015, the Fund began publicly offering its shares. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according

to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.

Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the date that the values of the foreign debt securities are determined.

Investments in open-end mutual funds are valued at the closing NAV. Repurchase agreements are valued at cost, which approximates fair value.

Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

a. Financial Instrument Valuation (continued)

duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on

the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

c. Joint Repurchase Agreement

The Fund enters into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The fair value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers).

34 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on May 31, 2016.

d. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.

the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.

Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the Fund or the applicable coun-terparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.

The Fund entered into exchange traded futures contracts primarily to manage and/or gain exposure to interest rate and equity price risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities.

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

d. Derivative Financial Instruments (continued)

The Fund entered into credit default swap contracts primarily to manage and/or gain exposure to credit risk. A credit default swap is an agreement between the Fund and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. These agreements may be privately negotiated in the over-the-counter market (OTC credit default swaps) or may be executed in a multilateral trade facility platform, such as a registered exchange (centrally cleared credit default swaps). The underlying referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index, a basket of issuers or indices, or a tranche of a credit index or basket of issuers or indices. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount. For centrally cleared credit default swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Statement of Assets and Liabilities. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at which time they are realized. Upfront payments and receipts are reflected in the Statement of Assets and Liabilities and represent compensating factors between stated terms of the credit default swap agreement and prevailing market conditions (credit spreads and other relevant factors). These upfront payments and receipts are amortized over the term of the contract as a realized gain or loss in the Statement of Operations.

The Fund entered into OTC total return swap contracts primarily to manage and/or gain exposure to credit risk of an underlying instrument such as a stock, bond, index or basket of securities or indices. A total return swap is an agreement between the Fund and a counterparty to exchange a return linked to an underlying instrument for a floating or fixed rate payment, both based upon a notional amount. Over the term of the contract, contractually required payments to be paid or

received are accrued daily and recorded as unrealized appreciation or depreciation until the payments are made, at which time they are recognized as realized gain or loss.

The Fund purchased or wrote exchange traded and/or OTC option contracts primarily to manage and/or gain exposure to equity price, interest rate and credit risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.

See Notes 6 and 8 regarding investment transactions and other derivative information, respectively.

e. Securities Sold Short

The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund.

36 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

f. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of May 31, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions (or expected to be taken in future tax years).

g. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Paydown gains and losses are recorded as an adjustment to interest income separately in the Statement of Operations. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary.

Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

h. Offering Costs

Offering costs are amortized on a straight line basis over twelve months.

i. Accounting Estimates

j. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

2. Shares of Beneficial Interest

At May 31, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:


	Period Ended
	May 31, 2016^a
	Shares			Amount

Class A Shares:
Shares sold	2,783,146		$	27,833,801
Shares issued in reinvestment of distributions	74			736
Shares redeemed	(5,398	)		(56,653	)
Net increase (decrease)	2,777,822		$	27,777,884
Class C Shares:
Shares sold	526,223		$	5,258,893
Shares issued in reinvestment of distributions	117			1,149
Shares redeemed	(499,533	)		(4,997,200	)
Net increase (decrease)	26,807		$	262,842
Class R Shares:
Shares sold	500,001		$	5,000,010
Shares redeemed	(498,806	)		(4,990,010	)
Net increase (decrease)	1,195		$	10,000
Class R6 Shares:
Shares sold	1,993,087		$	19,659,680
Shares redeemed	(773,161	)		(7,744,210	)
Net increase (decrease)	1,219,926		$	11,915,470
Advisor Class Shares:
Shares sold	2,506,772		$	25,097,674
Shares issued in reinvestment of distributions	2,934			29,016
Shares redeemed	(238,797	)		(2,371,928	)
Net increase (decrease)	2,270,909		$	22,754,762

^aFor the period September 8, 2015 (commencement of operations) to May 31, 2016.

3. Transactions with Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton
Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:


Subsidiary		Affiliation
K2/D&S Management Co., L.L.C. (K2 Advisors)		Investment manager
Franklin Templeton Services, LLC (FT Services)		Administrative manager
Franklin Templeton Distributors, Inc. (Distributors)		Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services)		Transfer agent

a. Management Fees

The Fund pays an investment management fee to K2 Advisors of 2.05% per year of the average daily net assets of the Fund.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

Under each subadvisory agreement, the below entities provide subadvisory services to the Fund. The subadvisory fees are paid by
K2 Advisors based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

Subadvisors

Apollo Credit Management LLC

Candlewood Investment Group, L.P.

Chatham Asset Management, LLC

Ellington Global Asset Management, L.L.C.

Emso Asset Management Limited

b. Administrative Fees

Under an agreement with K2 Advisors, FT Services provides administrative services to the Fund. The fee is paid by K2 Advisors based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

c. Distribution Fees

The Board has adopted distribution plans for each share class, with the exception of Class R6 and Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C and R compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate for each class. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31 for each fund.

The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:


Class A	0.25	%
Class C	1.00	%
Class R	0.50	%

d. Sales Charges/Underwriting Agreements


Sales charges retained net of commissions paid to unaffiliated broker/dealers	$	618
CDSC retained	$	6

e. Transfer Agent Fees

Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.

For the period ended May 31, 2016, the Fund paid transfer agent fees of $2,149, of which $972 was retained by Investor Services.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

3. Transactions with Affiliates (continued)

f. Waiver and Expense Reimbursements

K2 Advisors has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Fund so that the expenses (excluding distribution fees, acquired fund fees and expenses, and expenses related to securities sold short) for each class of the Fund do not exceed 1.95%, and Class R6 does not exceed 1.89% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until September 30, 2016. Total expenses waived or paid are not subject to recapture subsequent to the Fund’s fiscal year end.


g. Other Affiliated Transactions
At May 31, 2016, the shares of the Fund were owned by the following entities:
		Percentage of
		Outstanding
	Shares	Shares
Franklin Resources, Inc	5,000,389	79.41	%^a
Franklin LifeSmart 2025 Retirement Target Fund	372,832	5.92	%
Franklin LifeSmart 2035 Retirement Target Fund	295,504	4.69	%
Franklin LifeSmart 2045 Retirement Target Fund	202,253	3.21	%
Franklin LifeSmart 2030 Retirement Target Fund	102,505	1.63	%
Franklin LifeSmart 2020 Retirement Target Fund	98,026	1.56	%
Franklin LifeSmart 2040 Retirement Target Fund	74,832	1.19	%
Franklin LifeSmart 2050 Retirement Target Fund	65,441	1.04	%
Franklin LifeSmart 2055 Retirement Target Fund	7,340	0.12	%
	6,219,122	98.77	%
^aInvestment activities of this shareholder could have a material impact on the Fund.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended May 31, 2016, the custodian fees were reduced as noted in the Statement of Operations.

5. Income Taxes

For tax purposes, capital losses may be carried over to offset future capital gains, if any. At May 31, 2016, the capital loss carryfor-wards were as follows:


Capital loss carryforwards:
Short term	$	52,924
Long term		9,129
Total capital loss carryforwards	$	62,053

The tax character of distributions paid during the period ended May 31, 2016, was as follows:

Distributions paid from ordinary income

$755,686

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

At May 31, 2016, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:


Cost of investments	$	57,166,796
Unrealized appreciation	$	1,922,858
Unrealized depreciation		(862,788	)
Net unrealized appreciation (depreciation)	$	1,060,070
Distributable earnings - undistributed ordinary income	$	499,669

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of bond discounts and premiums, swaps, offering costs and wash sales.

6. Investment Transactions

Purchases and sales of investments and securities sold short (excluding short term securities) for the period ended May 31, 2016, aggregated $279,101,174 and $235,026,991, respectively.


Transactions in options written during the period ended May 31, 2016, were as follows:
	Options						Swaptions

	Number of						Notional
	Contracts			Premiums			Amount			Premiums
Options written	330		$	79,476		$	6,000,000		$	38,400
Options expired	(136	)		(40,055	)		(6,000,000	)		(38,400		)
Options exercised	—			—			—				—
Options closed	(24	)		(29,838	)		—				—
Options outstanding at May 31, 2016	170		$	9,583		$	—			$	—

See Notes 1(d) and 8 regarding derivative financial instruments and other derivative information, respectively.

7. Credit Risk

At May 31, 2016, the Fund had 22.1% of its portfolio invested in high yield and other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.

8. Other Derivative Information

At May 31, 2016, the Fund’s investments in derivative contracts are reflected in the Statement of Assets and Liabilities as follows:


	Asset Derivatives				Liability Derivatives

Derivative Contracts
Not Accounted for as	Statement of Assets and				Statement of Assets and
Hedging Instruments	Liabilities Location		Fair Value		Liabilities Location		Fair Value
Interest rate contracts	Investments in securities, at	$	5,735	^a	Variation margin	$	4,448	^b
	value
Foreign exchange contracts	Unrealized appreciation on		57,765		Unrealized depreciation on		34,366
	OTC forward exchange				OTC forward exchange
	contracts				contracts

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS


Franklin K2 Long Short Credit Fund (continued)

8. Other Derivative Information (continued)
	Asset Derivatives				Liability Derivatives
Derivative Contracts
Not Accounted for as	Statement of Assets and				Statement of Assets and
Hedging Instruments	Liabilities Location		Fair Value		Liabilities Location		Fair Value
Credit contracts	Variation margin	$	3,157	^b	Variation margin	$	79,831	^b
	OTC swap contracts		206,781		OTC swap contracts (upfront		70,479
	(upfront payments)				receipts)
	Unrealized appreciation on		28,640		Unrealized depreciation on		96,167
	OTC swap contracts				OTC swap contracts
Equity contracts	Investments in securities, at		48,511	^a	Options written, at value		10,643
	value
					Variation margin		8,594	^b
Totals		$	350,589			$	304,528

^aPurchased option contracts are included in investments in securities, at value in the Statement of Assets and Liabilities.
^bThis amount reflects the cumulative appreciation (depreciation) of futures contracts and centrally cleared swaps contracts as reported in the Statement of Investments. Only
the variation margin receivable/payable at period end is separately reported within the Statement of Assets and Liabilities. Prior variation margin movements were recorded to
cash upon receipt or payment.

For the period ended May 31, 2016, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:


							Net Change in
							Unrealized
Derivative Contracts			Net Realized				Appreciation
Not Accounted for as	Statement of		Gain (Loss)		Statement of		(Depreciation)
Hedging Instruments	Operations Locations		for the Period		Operations Locations		for the Period
	Net realized gain (loss)				Net change in unrealized
	from:				appreciation (depreciation) on:
Interest rate contracts	Futures contracts	$	2,353		Investments	$	(4,096	)^a
					Futures contracts		(4,448	)
Foreign exchange contracts	Foreign currency		(136,975	)	Translation of other assets and		23,399	^b
	transactions				liabilities denominated in
					foreign currencies
Credit contracts	Written options		38,400		Swap contracts		(144,201	)
	Swap contracts		(111,686	)
Equity contracts	Investments		(101,671	)^a	Investments		(16,465	)^a
	Written options		6,654		Written options		(1,060	)
	Futures contracts		(9,553	)	Futures contracts		(8,594	)
Totals		$	(312,478	)		$	(155,465	)

^aPurchased option contracts are included in net realized gain (loss) from investments and net change in unrealized appreciation (depreciation) on investments in the Statement
of Operations.
^bForward exchange contracts are included in net realized gain (loss) from foreign currency transactions and net change in unrealized appreciation (depreciation) translation of
other assets and liabilities denominated in foreign currencies in the Statement of Operations.

For the period ended May 31, 2016, the average month end fair value of derivatives represented 0.34% of average month end net
assets. The average month end number of open derivative contracts for the period was 29.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

At May 31, 2016, the Fund’s OTC derivative assets and liabilities are as follows:


		Gross and Net Amounts
		of Assets and Liabilities
		Presented in the
		Statement of
		Assets and Liabilities

		Assets^a		Liabilities^a
Derivatives
Forward Exchange Contracts	$	57,765	$	34,366
Options Purchased		5,735		—
Swap Contracts		235,421		166,646
Total	$	298,921	$	201,012

^aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.

At May 31, 2016, the Fund’s OTC derivative assets, which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, are as follows:


				Amounts Not Offset in the
				Statement of Assets and Liabilities

		Gross and Net
		Amounts of Assets					Financial
		Presented in the		Financial			Instruments		Cash
		Statement of		Instruments			Collateral		Collateral		Net Amount (Not
		Assets and Liabilities		Available for Offset			Received		Received		less than zero)
Counterparty
JPHQ	$	246,382	$	(158,336	)	$	—	$	—	$	88,046
GSCO		3,888		(3,888	)		—		—		—
MLCO		597		—			—		—		597
MSCO		48,054		(34,366	)		—		—		13,688
MSCS		—		—			—		—		—
Total	$	298,921	$	(196,590	)	$	—	$	—	$	102,331

At May 31, 2016, the Fund’s OTC derivative liabilities, which may be offset against the Fund’s OTC derivative assets and collateral pledged to the counterparty, are as follows:


				Amounts Not Offset in the
				Statement of Assets and Liabilities

		Gross and Net
		Amounts of Liabilities					Financial
		Presented in the		Financial			Instruments		Cash
		Statement of		Instruments			Collateral		Collateral		Net Amount (Not
		Assets and Liabilities		Available for Offset			Pledged^a,b		Pledged^a		less than zero)
Counterparty
JPHQ	$	158,336	$	(158,336	)	$	—	$	—	$	—
GSCO		8,190		(3,888	)		—		—		4,302
MLCO		—		—			—		—		—
MSCO		34,366		(34,366	)		—		—		—
MSCS		120		—			—		—		120
Total	$	201,012	$	(196,590	)	$	—	$	—	$	4,422

^aIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit collateral amounts to avoid the effect of over collateraliza-
tion. Actual collateral received and/or pledged may be more than the amounts disclosed herein.
^bSee the accompanying Statement of Investments for securities pledged as collateral for derivatives.

See Notes 1(d) and 6 regarding derivative financial instruments and investment transactions, respectively.

See Abbreviations on page 45.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS

Franklin K2 Long Short Credit Fund (continued)

9. Credit Facility

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.15% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses in the Statement of Operations. During the period ended May 31, 2016, the Fund did not use the Global Credit Facility.

10. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

Level 1 – quoted prices in active markets for identical financial instruments
Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepay- ment speed, credit risk, etc.)
Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of May 31, 2016, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:


		Level 1		Level 2		Level 3		Total

Assets:
Investments in Securities:^a
Common Stocks	$	111,450	$	—	$	—	$	111,450
Preferred Stocks		302,584		—		—		302,584
Convertible Bonds		—		2,144,861		—		2,144,861
Corporate Bonds and Notes		—		24,006,065		—		24,006,065
Foreign Government and Agency Securities		—		3,514,782		—		3,514,782
Asset-Backed Securities and Commercial Mortgage-Backed
Securities		—		20,034,545		—		20,034,545
Options Purchased		48,511		5,735		—		54,246
U.S. Government and Agency Securities		—		1,835,245		—		1,835,245
Short Term Investments		5,185,565		1,037,523		—		6,223,088
Total Investments in Securities	$	5,648,110	$	52,578,756	$	—	$	58,226,866

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO FINANCIAL STATEMENTS


Franklin K2 Long Short Credit Fund (continued)

10. Fair Value Measurements (continued)

		Level 1		Level 2		Level 3		Total
Other Financial Instruments
Forward Exchange Contracts	$	—	$	57,765	$	—	$	57,765
Swap Contracts		—		31,797		—		31,797
Total Other Financial Instruments	$	—	$	89,562	$	—	$	89,562

Liabilities:
Other Financial Instruments
Options Written	$	10,643	$	—	$	—	$	10,643
Securities Sold Short^a		—		5,422,676		—		5,422,676
Futures Contracts		13,042		—		—		13,042
Forward Exchange Contracts		—		34,366		—		34,366
Swap Contracts		—		175,998		—		175,998
Total Other Financial Instruments	$	23,685	$	5,633,040	$	—	$	5,656,725

^aFor detailed categories, see the accompanying Statement of Investments.

A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the period.

11. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.


Abbreviations
Counterparty/Exchange		Currency		Selected Portfolio
GSCO	The Goldman Sachs Group, Inc.	EUR	Euro	ARM	Adjustable Rate Mortgage
ICE	Intercontinental Exchange, Inc.	GBP	British Pound	CLO	Collateralized Loan Obligation
JPHQ	JP Morgan Chase & Co.	JPY	Japanese Yen	FHLMC	Federal Home Loan Mortgage Corp.
MLCO	Merrill Lynch & Co., Inc.	USD	United States Dollar	FRN	Floating Rate Note
MSCO	Morgan Stanley			LIBOR	London InterBank Offered Rate
MSCS	Morgan Stanley Capital Services			PIK	Payment In-Kind
				REIT	Real Estate Investment Trust

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of Franklin Alternative Strategies Funds and Shareholders of Franklin K2 Long Short Credit Fund:

We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Franklin K2 Long Short Credit Fund (the “Fund”) (one of the funds constituting the Franklin Alternative Strategies Funds), as of May 31, 2016, and the related statement of operations, the statement of changes in net assets and the financial highlights for the period from September 8, 2015 (commencement of operations) through May 31, 2016. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2016, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from the brokers were not received. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Franklin K2 Long Short Credit Fund (one of the funds constituting the Franklin Alternative Strategies Funds) at May 31, 2016, the results of its operations, the changes in its net assets and the financial highlights for the period from September 8, 2015 (commencement of operations) through May 31, 2016, in conformity with U.S. generally accepted accounting principles.

Boston, Massachusetts
July 26, 2016

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Tax Information (unaudited)

Under Section 871(k)(1)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no
less than $423,472 as interest related dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the fis-
cal year ended May 31, 2016.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS


Board Members and Officers


The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust,
principal occupations during at least the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton
Investments fund complex, are shown below. Generally, each board member serves until that person’s successor is elected
and qualified.


Independent Board Members

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years

Edward I. Altman, Ph.D. (1941)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Max L. Heine Professor of Finance, Emeritus and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School
of Business, New York University; editor and author of numerous financial publications; financial consultant; an adviser to numerous financial
and publishing organizations; and formerly, Vice Director, Salomon Center, Stern School of Business, New York University.

Ann Torre Bates (1958)	Trustee	Since 2011	39	Navient Corporation (loan
c/o Franklin Mutual Advisers, LLC				management, servicing and asset
101 John F. Kennedy Parkway				recovery) (2014-present), Ares Capital
Short Hills, NJ 07078-2789				Corporation (specialty finance
				company) (2010-present), United
				Natural Foods, Inc. (distributor of
				natural, organic and specialty foods)
				(2013-present), Allied Capital
				Corporation (financial services) (2003-
				2010) and SLM Corporation (Sallie
				Mae) (1997-2014).
Principal Occupation During at Least the Past 5 Years:
Director of various companies; and formerly, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily
housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).

Burton J. Greenwald (1929)	Trustee	Trustee since	15	Franklin Templeton Emerging Markets
c/o Franklin Mutual Advisers, LLC	and Vice	2011 and Vice		Debt Opportunities Fund PLC and
101 John F. Kennedy Parkway	Chairman of	Chairman since		Fiduciary International Ireland Limited
Short Hills, NJ 07078-2789	the Board	2015		(1999-2015).
Principal Occupation During at Least the Past 5 Years:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and formerly, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F. Rothschild Fund Management, Inc.; President and Director, Merit Mutual
Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment Company Institute;
and Chairman, ICI Public Information Committee.

Keith E. Mitchell (1954)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Director of various boards of asset management firms; and formerly, Managing Member, Mitchell, Hartley & Bechtel Advisers, LLC (formerly,
Mitchell Advisers, LLC) (advisory firm) (2003-2015) and Managing Director, Putman Lovell NBF.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS


Independent Board Members (continued)

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years

David W. Niemiec (1949)	Trustee	Since 2015	39	Emeritus Corporation (assisted living)
c/o Franklin Mutual Advisers, LLC				(1999-2010) and OSI Pharmaceuticals,
101 John F. Kennedy Parkway				Inc. (pharmaceutical products)
Short Hills, NJ 07078-2789				(2006-2010).
Principal Occupation During at Least the Past 5 Years:
Advisor, Saratoga Partners (private equity fund); and formerly, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon
Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial
Officer, Dillon, Read & Co. Inc. (1982-1997).

Charles Rubens II (1930)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Private investor and president of non-profit organizations; and formerly, an executive of Time, Inc.; and Trustee of Colorado College.

Jan Hopkins Trachtman (1947)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
President and Founder, The Jan Hopkins Group (communications consulting firm); serves on Advisory Board of Knight Bagehot Fellowship;
and formerly, President, Economic Club of New York (2001-2015); Anchor/Correspondent, CNN Financial News (until 2003); Managing
Director and Head of Client Communications, Citigroup Private Bank (until 2005); Off-Air Reporter, ABC News’ World News Tonight; and
Editor, CBS Network News.

Robert E. Wade (1946)	Trustee and	Trustee and	39	El Oro Ltd (investments)
c/o Franklin Mutual Advisers, LLC	Chairman of	Chairman of the		(2003-present).
101 John F. Kennedy Parkway	the Board	Board since
Short Hills, NJ 07078-2789		2011
Principal Occupation During at Least the Past 5 Years:
Attorney at law engaged in private practice (1972-2008) and member of various boards.

Gregory H. Williams (1943)	Trustee	Since 2015	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Private investor; Consultant; and formerly, President, University of Cincinnati (2009-2012); President, The City College of New York (2001-
2009); Dean, College of Law, Ohio State University (1993-2001); and Associate Vice President, Academic Affairs and Professor of Law,
University of Iowa (1977-1993).

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Interested Board Members and Officers

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years

**Gregory E. Johnson (1961)	Trustee	Since 2011	160	None
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Chairman of the Board, Member – Office of the Chairman, Director and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director
or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin
Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015).

**Jennifer M. Johnson (1964)	Trustee	Since 2015	12	None
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Co-President, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of four of the investment companies in Franklin Templeton Investments; and formerly, Chief Operating Officer and
Executive Vice President, Franklin Resources, Inc. (1994-2015); Executive Vice President of Operations and Technology, Franklin Resources,
Inc. (2005-2010); and Senior Vice President, Franklin Resources, Inc. (2003-2005).

Alison E. Baur (1964)	Vice	Since 2012	Not Applicable	Not Applicable
One Franklin Parkway	President
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45
of the investment companies in Franklin Templeton Investments.

Laura F. Fergerson (1962)	Chief	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway	Executive
San Mateo, CA 94403-1906	Officer –
	Finance and
	Administration
Principal Occupation During at Least the Past 5 Years:
Senior Vice President, Franklin Templeton Services, LLC; Vice President, Franklin Advisers, Inc. and Franklin Templeton Institutional, LLC;
and officer of 45 of the investment companies in Franklin Templeton Investments.

Aliya S. Gordon (1973)	Vice	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway	President
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.

Steven J. Gray (1955)	Secretary	Secretary and	Not Applicable	Not Applicable
One Franklin Parkway	and Vice	Vice President
San Mateo, CA 94403-1906	President	since 2011
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and Franklin
Alternative Strategies Advisers, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.

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Interested Board Members and Officers (continued)

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years

Robert G. Kubilis (1973)	Treasurer,	Since 2015	Not Applicable	Not Applicable
300 S.E. 2nd Street	Chief
Fort Lauderdale, FL 33301-1923	Financial
	Officer and
	Chief
	Accounting
	Officer
Principal Occupation During at Least the Past 5 Years:
Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of four of the investment companies in Franklin
Templeton Investments.

Robert Lim (1948)	Vice	Since May 2016	Not Applicable	Not Applicable
One Franklin Parkway	President –
San Mateo, CA 94403-1906	AML
	Compliance
Principal Occupation During at Least the Past 5 Years:
Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton
Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments

Kimberly H. Novotny (1972)	Vice	Since 2013	Not Applicable	Not Applicable
300 S.E. 2nd Street	President
Fort Lauderdale, FL 33301-1923
Principal Occupation During at Least the Past 5 Years:
Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the
South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment
companies in Franklin Templeton Investments.

Robert C. Rosselot (1960)	Chief	Since 2013	Not Applicable	Not Applicable
300 S.E. 2nd Street	Compliance
Fort Lauderdale, FL 33301-1923	Officer
Principal Occupation During at Least the Past 5 Years:
Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the
investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments
(2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013).

Karen L. Skidmore (1952)	Vice	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway	President
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.

Navid Tofigh (1972)	Vice	Since	Not Applicable	Not Applicable
One Franklin Parkway	President	November 2015
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.

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Interested Board Members and Officers (continued)

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held During
and Address	Position	Time Served	by Board Member*	at Least the Past 5 Years

Craig S. Tyle (1960)	Vice	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway	President
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources,
Inc. and of 45 of the investment companies in Franklin Templeton Investments.

Lori A. Weber (1964)	Vice	Since 2011	Not Applicable	Not Applicable
300 S.E. 2nd Street	President
Fort Lauderdale, FL 33301-1923
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.

William Y. Yun (1959)	President	Since 2011	Not Applicable	Not Applicable
600 Fifth Avenue	and Chief
New York, NY 10020	Executive
	Officer –
	Investment
	Management
Principal Occupation During at Least the Past 5 Years:
Executive Vice President, Franklin Advisers, Inc. and Franklin Templeton Institutional, LLC; Chief Executive Officer, Franklin Alternative
Strategies Advisers, LLC; Director, Fiduciary Investments Corporation and K2 Advisors Holdings, LLC; officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of one of the investment companies in Franklin Templeton
Investments; and formerly, Executive Vice President – Alternative Strategies, Franklin Resources, Inc. (2005-2015).

*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These
portfolios have a common investment manager or affiliated investment managers.
**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin
Resources, Inc., which is the parent company of the Fund’s investment manager and distributor. Jennifer M. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to her position as officer and director of Resources.
Note 1: Gregory E. Johnson and Jennifer M. Johnson are siblings.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.

The Fund’s Board has determined that certain of the members of the Audit Committee, including Ann Torre Bates, are audit committee financial experts, and
“independent,” under those provisions of the Sarbanes-Oxley Act of 2002, and the rules and form amendments adopted by the Securities and Exchange
Commission, relating to audit committee financial experts.

The Statement of Information (SAI) include additional information about board members and is available, without charge, upon request. Shareholders may call
(800) DIAL BEN/342-5236 to request the SAI.

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FRANKLIN K2 LONG SHORT CREDIT FUND

Shareholder Information

Proxy Voting Policies and Procedures

The Fund’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.

Quarterly Statement of Investments

The Trust, on behalf of the Fund, files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.

Householding of Reports and Prospectuses

You will receive the Fund’s financial reports every six months as well as an annual updated summary prospectus (prospectus available upon request). To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and summary prospectus. This process, called “householding,” will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at (800) 632-2301. At any time you may view current prospectuses/summary prospectuses and financial reports on our website. If you choose, you may receive these documents through electronic delivery.

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Annual Report and Shareholder Letter
Franklin K2 Long Short Credit Fund

Investment Manager
K2/D&S Management Co., L.L.C.

Distributor
Franklin Templeton Distributors, Inc.
(800) DIAL BEN^®/ 342-5236
franklintempleton.com

Shareholder Services
(800) 632-2301

To help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.


© 2016 Franklin Templeton Investments. All rights reserved.	948 A 07/16

Annual Report
and Shareholder Letter
May 31, 2016

Franklin Pelagos Commodities Strategy Fund

A SERIES OF FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Sign up for electronic delivery at franklintempleton.com/edelivery


Contents

Annual Report
Franklin Pelagos Commodities Strategy Fund	3
Performance Summary	7
Your Fund’s Expenses	12
Consolidated Financial Highlights and Consolidated
Statement of Investments	14
Consolidated Financial Statements	21
Notes to Consolidated Financial Statements	25
Report of Independent Registered
Public Accounting Firm	36
Board Members and Officers	37
Shareholder Information	42

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Franklin Pelagos Commodities Strategy Fund

This annual report for Franklin Pelagos Commodities Strategy Fund covers the fiscal year ended May 31, 2016.

Your Fund’s Goal and Main Investments

The Fund seeks long-term total return. It invests mainly in commodity-linked derivative instruments and securities of the U.S. government, its agencies and instrumentalities and other fixed income securities.

Performance Overview

The Fund’s Class A shares had a -9.13% cumulative total return for the 12 months under review. In comparison, the benchmark Bloomberg Commodity Index, which measures performance of exchange-traded futures contracts on physical commodities, had a -15.32% total return for the same period.¹You can find more of the Fund’s performance data in the Performance Summary beginning on page 7.

What is a futures contract?

A futures contract is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an underlying instrument or asset at a specific priceonafuturedate.

Economic and Market Overview

The U.S. economy moderated during the 12 months under review. After strengthening in 2015’s second quarter, the economy moderated in the third and fourth quarters. Growth slowed further in 2016’s first quarter as non-residential

investments, private inventory investments and federal government spending declined. The manufacturing sector expanded in May for the third consecutive month, while the services sector expanded throughout the 12-month period. Growth in services contributed to new jobs and helped the unemployment rate decrease from 5.5% in May 2015 to 4.7% at period-end.²Home sales and prices rose amid relatively low mortgage rates. Monthly retail sales grew during most of the review period and rose to the highest level in April in more than a year, due to a broad-based increase across most retail categories, particularly in motor vehicle sales and non-store retail. Inflation, as measured by the Consumer Price Index, remained subdued due to low energy prices but recorded its strongest monthly reading in three years in April, mainly led by a rebound in energy prices and a higher cost of rent.

After maintaining a near-zero interest rate for seven years to support the U.S. economy’s recovery, the U.S. Federal Reserve (Fed) raised its target range for the federal funds rate to 0.25%–0.50% at its December meeting maintaining the rate through period-end. At its April meeting, the Fed indicated that its monetary policy remained accommodative, thus supporting further labor market improvement and progress toward its 2.0% inflation objective.

U.S. stock markets experienced sell-offs during the period under review, resulting from investor concerns about the timing of the Fed’s interest rate increases, global economic growth, China’s slowing economy and tumbling stock market and the geopolitical tensions in certain regions. Investors generally remained confident as the European Central Bank expanded its quantitative easing measures and cut its benchmark interest rate to zero, the People’s Bank of China introduced further easing measures and the Bank of Japan adopted a negative interest rate policy. The rally in crude oil prices toward period-end also boosted investor sentiment. Despite periods of volatility, the broad U.S. stock market ended the 12-month period with

1. Source: Morningstar.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an
index, and an index is not representative of the Fund’s portfolio.
2. Source: Bureau of Labor Statistics.
See www.franklintempletondatasources.com for additional data provider information.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Consolidated Statement of
Investments (SOI). The Consolidated SOI begins on page 19.

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FRANKLIN PELAGOS COMMODITIES STRATEGY FUND

marginal gains, as measured by the Standard & Poor’s^®500 Index. Commodity prices, as measured by the Bloomberg Commodity Index, were sharply lower for the 12-month period despite a gain toward period-end. Oil prices fell sharply for most of the review period, largely due to strong global supply and ended lower overall, despite a recovery during period-end. In addition, gold and metal prices also fell in the beginning of the review period but recovered in the second half. Among agricultural commodities, sugar, cotton and soybeans rose in value, while wheat declined.

Investment Strategy

We utilize an actively managed fundamental and quantitative investment process to provide exposure to the commodities markets by investing in commodity-linked derivative instruments including commodity-linked total return swaps, commodity futures, commodity index futures and options on commodity futures and commodity index futures, which may provide exposure to foreign and emerging markets. By investing in these derivative instruments, we seek to gain exposure to the returns of real assets that trade in the commodities markets without direct investment in physical commodities. Real assets include such things as industrial and precious metals, gas, oil, livestock, agricultural or meat products and other items.

What is a swap agreement?

A swap agreement, such as a commodity-linked total return
swap, is a contract between the Fund and a counterparty to
exchange on a future date the returns, or differentials in return,
that would have been earned or realized if a notional amount
were invested in specific instruments.

What is an option?

An option is a contract to buy or sell a specific financial product
known as the option’s underlying instrument at a specific price.
The buyer of an option has the right, but not the obligation, to
buy or sell the underlying instrument at or until a specified
expiration date. Conversely, the seller (“writer”) of an option
who opens a transaction is obligated to buy or sell the
underlying instrument should the option holder exercise that
right.

Manager’s Discussion

During its fiscal year, the Fund obtained its commodities exposure through swaps on commodities indexes and through


Portfolio Breakdown*
5/31/16
% of Consolidated
	Net Assets
U.S. Treasury Bill	64.6	%
U.S. Treasury Note	16.8	%
FFCB	13.2	%
FHLB	3.3	%
Institutional Fiduciary Trust Money Market Portfolio	0.6	%
Other Assets, less Liabilities**	1.5	%

See Abbreviations on page 35.
*Portfolio breakdown figures are stated as a percentage of total and may not equal
100% or may be negative due to rounding, use of any derivatives, unsettled trades
or other factors.
**Includes unrealized appreciation/depreciation on open futures and swap
contracts, as well as other assets and liabilities. See supplementary commodity
exposure tables on page 5 for additional information related to the Fund’s economic
exposure to commodities.

commodities futures and options on commodities futures. These exposures were supported with U.S. Treasury bills and other fixed income securities.

During the period, commodity sector returns were mixed. For the first two thirds of the period, commodities had negative performance as global oversupply ran rampant across commodity sectors. However, commodities markets rebounded in the final third of the period as the outlook for production declines in oil and some industrial metals gained momentum and weather anomalies in key agricultural regions supported agriculture price levels. Overall contributors to Fund returns over the period came from precious metals, agriculture and livestock. The energy and industrial metals sectors, however, detracted. Within the commodity sectors, there were divergences in return that allowed the Fund’s active management to perform better than its benchmark. We believe active management helped the Fund perform better on a relative basis in all commodity sectors except agriculture.

During the period, a decline in U.S. production, oil outages in Nigeria and a disruption in a key Middle East pipeline supported crude oil prices as they rebounded from February lows. Back and forth discussions about a freeze in production levels dominated headlines. However, underneath the headlines, global refinery outputs and Chinese imports of crude oil remained strong. Within petroleum, gasoline had the strongest relative returns during the period as supply of gasoline blending components were tight and demand was robust. However, in the latter third of the period, refineries in the U.S. shifted to produce more gasoline and lowered their

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FRANKLIN PELAGOS COMMODITIES STRATEGY FUND

production of middle distillates (such as kerosene, jet fuel and diesel). Although natural gas production declined, mild winter weather led to below average demand for heating and an ensuing lackluster pace of inventory withdrawals. U.S. natural gas inventory levels reached a seasonal high at the end of March. The Fund sought to capitalize on a petroleum price recovery during the first five months of 2016, while managing the impact of natural gas price weakness.

Precious metals experienced renewed investor interest at the start of 2016, as evidenced by the pickup of exchange-traded product inflows after three years of outflows. In our opinion, investor uncertainty about central banks and currencies fueled a precious metals rally that pushed the ratio of gold to silver to levels not seen since 2008. Industrial metals felt the brunt of lowered Chinese economic growth prospects and a consumption growth decline across major industrial metals in non-Chinese markets. Suppliers responded in the form of commitments within China to manage metal production overcapacity. Elsewhere, major production companies announced curtailments as London Metal Exchange inventories fell and price levels stabilized later in the period. During the period, gold, silver and nickel contributed to Fund returns, while copper, aluminum and zinc detracted.

Although global grain stockpiles were ample during the period, global weather patterns supported corn and soybean price levels due to a strong El Niño pattern that challenged South American grain production. Asia also felt the influence of El Niño as investor expectations for a record Brazilian sugar crop were offset by dryer weather in Thailand and India, boosting price levels. Over the period, the agriculture sector’s contribution to Fund returns came from our positions in soybeans, soymeal, soybean oil and sugar. Livestock contributed to Fund returns as the positive effect of our positioning in lean hogs more than offset the negative effect of our positioning in live cattle.

Fund Exposure to Commodities

The following table summarizes the Fund’s economic exposure to commodities derived through its investment in commodity-linked total return swap contracts. At May 31, 2016, the Fund’s exposure based on notional value represented 79.7% of consolidated net assets.

Commodity-Linked Total Return Swap Exposure*


	% of Consolidated Net Assets
Gold	10.8	%
Brent Crude Oil	9.3	%
Copper	8.5	%
Soybeans	8.3	%
Sugar	5.0	%
Live Cattle	4.9	%
Heating Oil	4.5	%
Unleaded Gasoline	4.4	%
Aluminum	4.1	%
Kansas Wheat	3.9	%
Soybean Meal	3.7	%
Corn	3.6	%
Zinc	2.7	%
Soybean Oil	2.6	%
Coffee	2.0	%
Natural Gas	1.4	%

*Figures are stated as a percentage of total and may not equal 100% or may be
negative due to rounding, use of any derivatives, unsettled trades or other factors.
The Fund’s exposure was calculated using the commodity sector weightings of the
FP Custom Master Index multiplied by the Fund’s percentage notional exposure.

The following table summarizes the Fund’s economic exposure
to commodities derived through its investment in futures
contracts. At May 31, 2016, the Fund’s exposure based on
notional value represented 19.2% of consolidated net assets.


Commodity Futures Exposure*
	% of Consolidated Net Assets
	Long
WTI Crude Oil	8.6	%
Natural Gas	5.4	%
Gold	3.9	%
Soybeans	1.3	%

*Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors.

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FRANKLIN PELAGOS COMMODITIES STRATEGY FUND

As fellow shareholders, we were disappointed with the Fund’s absolute performance in the recent challenging environment for commodities. However, we remain committed to our active investment process and long-term perspective, keeping in mind that volatility is not uncommon for commodities markets. Thank you for your continued participation in Franklin Pelagos Commodities Strategy Fund. We look forward to continuing to serve your financial needs.

Stephen P. Burke

John C. Pickart, CFA

Wayne D. Ryan, CAIA

Portfolio Management Team

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Performance Summary as of May 31, 2016


Net Asset Value
Share Class (Symbol)		5/31/16		5/31/15		Change
A (FLSQX)	$	6.47	$	7.12	-$	0.65
C (FLSVX)	$	6.36	$	7.05	-$	0.69
R (FLSWX)	$	6.44	$	7.10	-$	0.66
R6 (FPELX)	$	6.53	$	7.16	-$	0.63
Advisor (FSLPX)	$	6.60	$	7.25	-$	0.65

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FRANKLIN PELAGOS COMMODITIES STRATEGY FUND
PERFORMANCE SUMMARY

Performance as of 5/31/16¹

Cumulative total return excludes sales charges. Average annual total returns and value of $10,000 investment include maximum sales
charges. Class A: 5.75% maximum initial sales charge; Class C: 1% contingent deferred sales charge in first year only;
Class R/R6/Advisor Class: no sales charges.


						Value of	Average Annual		Total Annual Operating Expenses⁶
	Cumulative		Average Annual		$	10,000	Total Return
Share Class	Total Return²		Total Return³			Investment⁴	(6/30/16	)⁵	(with waiver)		(without waiver)
A									1.20	%	2.19	%
1-Year	-9.13	%	-14.30	%	$	8,570	-11.90	%
Since Inception (1/10/14)	-27.14	%	-14.57	%	$	6,868	-12.68	%
C									1.95	%	2.94	%
1-Year	-9.79	%	-10.56	%	$	8,944	-8.08	%
Since Inception (1/10/14)	-28.38	%	-13.05	%	$	7,162	-11.22	%
R									1.45	%	2.44	%
1-Year	-9.30	%	-9.30	%	$	9,070	-6.68	%
Since Inception (1/10/14)	-27.48	%	-12.60	%	$	7,252	-10.73	%
R6									0.73	%	1.72	%
1-Year	-8.80	%	-8.80	%	$	9,120	-6.07	%
Since Inception (1/10/14)	-26.46	%	-12.09	%	$	7,354	-10.19	%
Advisor									0.95	%	1.94	%
1-Year	-8.97	%	-8.97	%	$	9,103	-6.27	%
3-Year	-30.01	%	-11.21	%	$	6,999	-8.39	%
Since Inception (12/7/11)	-34.00	%	-8.85	%	$	6,600	-7.87	%

See page 11 for Performance Summary footnotes.

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PERFORMANCE SUMMARY

Total Return Index Comparison for a Hypothetical $10,000 Investment¹

Total return represents the change in value of an investment over the periods shown. It includes any applicable maximum sales charge, Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvestment of any income or distributions. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index.

See page 11 for Performance Summary footnotes.

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FRANKLIN PELAGOS COMMODITIES STRATEGY FUND
PERFORMANCE SUMMARY

Total Return Index Comparison for a Hypothetical $10,000 Investment¹(continued)

Class R (1/10/14–5/31/16)

Average Annual Total Return

Franklin Pelagos Commodities Strategy Fund

Bloomberg Commodity Index⁷

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FRANKLIN PELAGOS COMMODITIES STRATEGY FUND
PERFORMANCE SUMMARY

All investments involve risks, including possible loss of principal. Investing in physical commodities, either directly or through derivative instruments such as commodity-linked total return swaps, commodity futures, commodity index futures and options on commodity futures and commodities index futures, presents unique risks, is speculative and can be extremely volatile. Market prices of commodities may fluctuate rapidly based on numerous factors, including: changes in supply and demand relationships; weather; agriculture; trade; domestic and foreign political and economic events and policies; diseases; pestilence; technological developments; currency exchange rate fluctuations; and monetary and other governmental policies, action and inaction. Derivative instruments involve costs and can create 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. The Fund may not achieve the anticipated benefits and may realize losses, which could be significant. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Foreign investing carries additional risks such as currency and market volatility and political, social and economic instability, risks which are heightened in less developed or emerging market countries. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.


Class C:	These shares have higher annual fees and expenses than Class A shares.
Class R:	Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares.
Class R6:	Shares are available to certain eligible investors as described in the prospectus.
Advisor Class:	Shares are available to certain eligible investors as described in the prospectus.

1. The Fund has an expense reduction contractually guaranteed through at least 9/30/16, a fee waiver related to the management fee paid by a subsidiary, and a fee waiver
associated with any investment in a Franklin Templeton money fund and/or other Franklin Templeton fund, as applicable, contractually guaranteed through at least the Fund’s
current fiscal year-end. Fund investment results reflect the expense reduction and fee waivers, to the extent applicable; without these reductions, the results would have been
lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, ifany,hasnotbeen
annualized.
4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
6. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Consolidated Financial Highlights in this report. In periods of
market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
7. Source: Morningstar. The Bloomberg Commodity Index comprises exchange-traded futures on physical commodities, which are weighted to account for economic
significance and market liquidity.
See www.franklintempletondatasources.com for additional data provider information.

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FRANKLIN PELAGOS COMMODITIES STRATEGY FUND

Your Fund’s Expenses

As a Fund shareholder, you can incur two types of costs:

Transaction costs, including sales charges (loads) on Fund purchases; and
Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses.

Actual Fund Expenses

You can estimate the expenses you paid during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

1.	Divide your account value by $1,000.
	If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
2.	Multiply the result by the number under the heading “Expenses Paid During Period.”
	If Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50.

In this illustration, the estimated expenses paid this period are $64.50.

Hypothetical Example for Comparison with Other Funds

Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.

12 Annual Report

franklintempleton.com

FRANKLIN PELAGOS COMMODITIES STRATEGY FUND
YOUR FUND’S EXPENSES


		Beginning Account		Ending Account		Expenses Paid During
Share Class		Value 12/1/15		Value 5/31/16		*Period 12/1/15–5/31/16**
A
Actual	$	1,000	$	1,100.30	$	6.35
Hypothetical (5% return before expenses)	$	1,000	$	1,018.95	$	6.11
C
Actual	$	1,000	$	1,096.60	$	10.22
Hypothetical (5% return before expenses)	$	1,000	$	1,015.25	$	9.82
R
Actual	$	1,000	$	1,099.00	$	7.50
Hypothetical (5% return before expenses)	$	1,000	$	1,017.85	$	7.21
R6
Actual	$	1,000	$	1,101.20	$	3.83
Hypothetical (5% return before expenses)	$	1,000	$	1,021.35	$	3.69
Advisor
Actual	$	1,000	$	1,100.00	$	4.99
Hypothetical (5% return before expenses)	$	1,000	$	1,020.25	$	4.80

*Expenses are calculated using the most recent six-month expense ratio, net of expense waivers, annualized for each class (A: 1.21%;
C: 1.95%; R: 1.43%; R6: 0.73%; and Advisor: 0.95%), multiplied by the average account value over the period, multiplied by 183/366 to reflect
the one-half year period.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS


Consolidated Financial Highlights
Franklin Pelagos Commodities Strategy Fund
		Year Ended May 31,
		2016			2015			2014	^a
Class A
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	7.12		$	9.44		$	8.88
Income from investment operations^b:
Net investment income (loss)^c		(0.08	)		(0.09	)		(0.08	)
Net realized and unrealized gains (losses)		(0.57	)		(2.23	)		0.64
Total from investment operations.		(0.65	)		(2.32	)		0.56
Net asset value, end of year	$	6.47		$	7.12		$	9.44

Total return^d		(9.13	)%		(24.58	)%		6.31	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction		2.14	%		2.05	%		3.38	%
Expenses net of waiver, payments by affiliates and expense reduction^f		1.21	%		1.25	%		1.25	%
Net investment income (loss)		(0.79	)%		(0.94	)%		(0.94	)%

Supplemental data
Net assets, end of year (000’s)	$	3,814		$	2,080		$	601
Portfolio turnover rate		28.03	%		62.10	%		34.28	%

^aFor the period January 10, 2014 (commencement of operations) to May 31, 2014.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales
and repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fBenefit of expense reduction rounds to less than 0.01%.

14 Annual Report | The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL HIGHLIGHTS


Franklin Pelagos Commodities Strategy Fund (continued)
		Year Ended May 31,
		2016			2015			2014	^a
Class C
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	7.05		$	9.41		$	8.88
Income from investment operations^b:
Net investment income (loss)^c		(0.16	)		(0.15	)		(0.09	)
Net realized and unrealized gains (losses)		(0.53	)		(2.21	)		0.62
Total from investment operations.		(0.69	)		(2.36	)		0.53
Net asset value, end of year	$	6.36		$	7.05		$	9.41

Total return^d		(9.79	)%		(25.08	)%		5.97	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction		2.88	%		2.75	%		4.08	%
Expenses net of waiver, payments by affiliates and expense reduction^f		1.95	%		1.95	%		1.95	%
Net investment income (loss)		(1.53	)%		(1.64	)%		(1.64	)%

Supplemental data
Net assets, end of year (000’s)	$	862		$	377		$	60
Portfolio turnover rate		28.03	%		62.10	%		34.28	%

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL HIGHLIGHTS


Franklin Pelagos Commodities Strategy Fund (continued)
		Year Ended May 31,
		2016			2015			2014	^a
Class R
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	7.10		$	9.44		$	8.88
Income from investment operations^b:
Net investment income (loss)^c		(0.06	)		(0.10	)		(0.06	)
Net realized and unrealized gains (losses)		(0.60	)		(2.24	)		0.62
Total from investment operations.		(0.66	)		(2.34	)		0.56
Net asset value, end of year	$	6.44		$	7.10		$	9.44

Total return^d		(9.30	)%		(24.79	)%		6.31	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction		2.34	%		2.27	%		3.58	%
Expenses net of waiver, payments by affiliates and expense reduction^f		1.41	%		1.47	%		1.45	%
Net investment income (loss)		(0.99	)%		(1.16	)%		(1.14	)%

Supplemental data
Net assets, end of year (000’s)	$	9		$	4		$	5
Portfolio turnover rate		28.03	%		62.10	%		34.28	%

^aFor the period January 10, 2014 (commencement of operations) to May 31, 2014.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales
and repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fBenefit of expense reduction rounds to less than 0.01%.

16 Annual Report | The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL HIGHLIGHTS


Franklin Pelagos Commodities Strategy Fund (continued)
		Year Ended May 31,
		2016			2015			2014	^a
Class R6
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	7.16		$	9.46		$	8.88
Income from investment operations^b:
Net investment income (loss)^c		(0.02	)		(0.04	)		(0.03	)
Net realized and unrealized gains (losses)		(0.61	)		(2.26	)		0.61
Total from investment operations.		(0.63	)		(2.30	)		0.58
Net asset value, end of year	$	6.53		$	7.16		$	9.46

Total return^d		(8.80	)%		(24.31	)%		6.53	%

Ratios to average net assets^e
Expenses before waiver, payments by affiliates and expense reduction		1.10	%		1.53	%		1.58	%
Expenses net of waiver, payments by affiliates and expense reduction^f		0.76	%		0.86	%		0.86	%
Net investment income (loss)		(0.34	)%		(0.55	)%		(0.55	)%

Supplemental data
Net assets, end of year (000’s)	$	131,500		$	53,068		$	67,732
Portfolio turnover rate		28.03	%		62.10	%		34.28	%

^aFor the period January 10, 2014 (commencement of operations) to May 31, 2014.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales
and repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dTotal return is not annualized for periods less than one year.
^eRatios are annualized for periods less than one year.
^fBenefit of expense reduction rounds to less than 0.01%.

franklintempleton.com The accompanying notes are an integral part of these consolidated financial statements. | Annual Report 17

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL HIGHLIGHTS


Franklin Pelagos Commodities Strategy Fund (continued)
					Year Ended May 31,
		2016			2015			2014			2013			2012	^a
Advisor Class
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year	$	7.25		$	9.58		$	9.43		$	9.15		$	10.00
Income from investment operations^b:
Net investment income (loss)^c		(0.09	)		(0.07	)		(0.05	)		(0.08	)		(0.05	)
Net realized and unrealized gains (losses)		(0.56	)		(2.26	)		0.20			0.36			(0.80	)
Total from investment operations		(0.65	)		(2.33	)		0.15			0.28			(0.85	)
Less distributions from net investment income		—			—			—			(—)^d			—
Net asset value, end of year.	$	6.60		$	7.25		$	9.58		$	9.43		$	9.15

Total return^e		(8.97	)%		(24.32	)%		1.59	%		3.06	%		(8.50	)%

Ratios to average net assets^f
Expenses before waiver, payments by affiliates and expense
reduction		1.88	%		1.75	%		1.88	%		1.14	%		5.08	%
Expenses net of waiver, payments by affiliates and expense
reduction		0.95	%^g		0.95	%^g		1.04	%^g		1.10	%		1.10	%
Net investment income (loss)		(0.53	)%		(0.64	)%		(0.70	)%		(0.76	)%		(1.07	)%

Supplemental data
Net assets, end of year (000’s)	$	675		$	248		$	126		$	107,853		$	14,374
Portfolio turnover rate		28.03	%		62.10	%		34.28	%		21.47	%		—%^h

^aFor the period December 7, 2011 (commencement of operations) to May 31, 2012.
^bThe amount shown for a share outstanding throughout the period may not correlate with the Consolidated Statement of Operations for the period due to the timing of sales
and repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
^cBased on average daily shares outstanding.
^dAmount rounds to less than $0.01 per share.
^eTotal return is not annualized for periods less than one year.
^fRatios are annualized for periods less than one year.
^gBenefit of expense reduction rounds to less than 0.01%.
^hFor the period there were no purchases or sales of investments (other than short term securities).

18 Annual Report | The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS


Consolidated Statement of Investments, May 31, 2016
Franklin Pelagos Commodities Strategy Fund
		Principal
		Amount		Value
U.S. Government and Agency Securities 30.0%
FFCB, 0.89%, 10/23/17	$	18,000,000	$	17,980,560
U.S. Treasury Note, 0.75%, 10/31/17		23,000,000		22,980,242
Total U.S. Government and Agency Securities (Cost $41,033,311)				40,960,802

Short Term Investments 68.5%
U.S. Government and Agency Securities 67.9%
^aFHLB, 6/01/16		4,564,000		4,564,000
^bU.S. Treasury Bill,
^a6/23/16		11,650,000		11,648,730
7/21/16		25,000,000		24,991,500
^a,c10/13/16		36,900,000		36,839,604
5/25/17		15,000,000		14,900,850
Total U.S. Government and Agency Securities (Cost $92,972,487)				92,944,684
Total Investments before Money Market Funds
(Cost $134,005,798)				133,905,486


		Shares
Money Market Funds (Cost $836,916) 0.6%
^d,eInstitutional Fiduciary Trust Money Market Portfolio		836,916		836,916
Total Investments (Cost $134,842,714) 98.5%				134,742,402
^fOther Assets, less Liabilities 1.5%				2,116,703
Net Assets 100.0%			$	136,859,105

^aA portion or all of the security is owned by FPC Holdings Corp., a wholly-owned subsidiary of the Fund. See Note 1(d).
^bThe security is traded on a discount basis with no stated coupon rate.
^cA portion or all of the security has been segregated as collateral for open futures contracts. At May 31, 2016, the value of this security and/or cash pledged amounted to
$2,416,310, representing 1.77% of net assets.
^dNon-income producing.
^eSee Note 3(f) regarding investments in affiliated management investment companies.
^fIncludes unrealized appreciation/depreciation on open commodity futures and swap contracts, as well as other assets and liabilities.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED STATEMENT OF INVESTMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

At May 31, 2016, the Fund had the following futures contracts outstanding. See Note 1(b).


Futures Contracts^a
				Number of		Notional	Expiration		Unrealized				Unrealized
Description			Type	Contracts		Value	Date		Appreciation				Depreciation
Commodity Contracts
Gold			Long	44	$	5,357,000	8/29/16		$		—	$	(75	)
Natural Gas			Long	303		7,387,140	8/29/16				303,760		—
Soybeans.			Long	34		1,794,775	11/14/16				—		(734	)
WTI Crude Oil			Long	236		11,783,480	8/22/16				—		(53,383	)
Total Futures Contracts					$	26,322,395		$	303,760			$	(54,192	)
Net unrealized appreciation (depreciation)								$	249,568


At May 31, 2016, the Fund had the following commodity-linked total return swap contracts outstanding. See Note 1(b).

Commodity-Linked Total Return Swap Contracts^a
	Pays					Notional	Expiration		Unrealized				Unrealized
Underlying Instruments	Fixed Rate		Counterparty			Value	Date		Appreciation				Depreciation
OTC Swap Contracts
Long
FP Custom Master Index^b	0.22	%	MSCS		$	109,053,102	7/06/16			$	—	$	(346,898	)
Net unrealized appreciation (depreciation)												$	(346,898	)

^aA portion or all of the contract is owned by FPC Holdings Corp., a wholly-owned subsidiary of the Fund. See Note 1(d).
^bRepresents a custom index comprised of a basket of underlying instruments. Additional information regarding the custom basket’s underlying instruments and their
respective values and fees are as follows:


				Unrealized		Unrealized
Underlying Instruments		Notional Value^c		Appreciation		Depreciation
Bloomberg Commodity Aluminum Subindex 3 Month Forward	$	5,670,761	$	—	$	(1,043	)
Bloomberg Commodity Brent Crude Oil Subindex.		12,759,213		—		(13,023	)
Bloomberg Commodity Coffee Subindex		2,726,327		5,575		—
Bloomberg Commodity Copper Subindex		11,668,682		—		(102,718	)
Bloomberg Commodity Corn Subindex 3 Month Forward		4,907,390		—		(59,652	)
Bloomberg Commodity Gold Subindex		14,831,222		9,432		—
Bloomberg Commodity Heating Oil Subindex		6,106,974		—		(18,102	)
Bloomberg Commodity Kansas Wheat Subindex 3 Month Forward		5,343,602		—		(121,105	)
Bloomberg Commodity Live Cattle Subindex		6,761,292		94,498		—
Bloomberg Commodity Natural Gas Subindex 3 Month Forward		1,962,956		38,305		—
Bloomberg Commodity Soybean Meal Subindex		5,016,443		—		(75,120	)
Bloomberg Commodity Soybean Oil Subindex		3,489,699		37,728		—
Bloomberg Commodity Soybeans Subindex		11,341,523		—		(84,052	)
Bloomberg Commodity Sugar Subindex		6,870,345		—		(11,966	)
Bloomberg Commodity Unleaded Gasoline Subindex		5,997,921		—		(89,787	)
Bloomberg Commodity Zinc Subindex.		3,598,752		44,132		—
Total custom index	$	109,053,102	$	229,670	$	(576,568	)
Net unrealized appreciation (depreciation)					$	(346,898	)

^cNotional value represents the fair value of each underlying instrument (including the financing rate fee which is calculated based on the custom swap contract’s original
notional value of $109,400,000, allocated to each underlying instrument on a pro-rata basis).

See Abbreviations on page 35.

20 Annual Report | The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Consolidated Financial Statements

Consolidated Statement of Assets and Liabilities
May 31, 2016


Franklin Pelagos Commodities Strategy Fund

Assets:
Investments in securities:
Cost - Unaffiliated issuers	$	134,005,798
Cost - Non-controlled affiliates (Note 3f)		836,916
Total cost of investments	$	134,842,714
Value - Unaffiliated issuers	$	133,905,486
Value - Non-controlled affiliates (Note 3f)		836,916
Total value of investments		134,742,402
Cash		1,760,239
Restricted Cash (Note 1c)		460,000
Receivables:
Capital shares sold		4,422
Interest.		30,996
Affiliates		6,638
Due from brokers.		568,014
Variation margin		237,332
Other assets		47
Total assets		137,810,090
Liabilities:
Payables:
Capital shares redeemed		8,962
Management fees		75,713
Distribution fees		1,345
Professional fees		49,481
Due to brokers		460,000
Unrealized depreciation on OTC swap contracts		346,898
Accrued expenses and other liabilities		8,586
Total liabilities		950,985
Net assets, at value	$	136,859,105
Net assets consist of:
Paid-in capital	$	137,386,430
Accumulated net investment loss		(153,903	)
Net unrealized appreciation (depreciation)		(197,642	)
Accumulated net realized gain (loss)		(175,780	)
Net assets, at value	$	136,859,105

franklintempleton.com The accompanying notes are an integral part of these consolidated financial statements. | Annual Report 21

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Assets and Liabilities (continued) May 31, 2016


Franklin Pelagos Commodities Strategy Fund

Class A:
Net assets, at value	$	3,813,665
Shares outstanding		589,136
Net asset value per share^a	$	6.47
Maximum offering price per share (net asset value per share ÷ 94.25%)	$	6.86
Class C:
Net assets, at value	$	862,499
Shares outstanding		135,697
Net asset value and maximum offering price per share^a	$	6.36
Class R:
Net assets, at value	$	8,724
Shares outstanding		1,355
Net asset value and maximum offering price per share	$	6.44
Class R6:
Net assets, at value	$	131,499,710
Shares outstanding		20,124,142
Net asset value and maximum offering price per share	$	6.53
Advisor Class:
Net assets, at value	$	674,507
Shares outstanding		102,144
Net asset value and maximum offering price per share	$	6.60

^aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.

22 Annual Report | The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Operations
for the year ended May 31, 2016


Franklin Pelagos Commodities Strategy Fund

Investment income:
Interest	$	417,399
Expenses:
Management fees (Note 3a)		843,284
Distribution fees: (Note 3c)
Class A		6,016
Class C		4,849
Class R		22
Transfer agent fees: (Note 3e)
Class A		18,315
Class C		3,804
Class R		38
Class R6		102
Advisor Class.		3,126
Custodian fees (Note 4)		1,019
Reports to shareholders		11,004
Registration and filing fees		80,907
Professional fees		101,878
Trustees’ fees and expenses		48,391
Other		4,311
Total expenses.		1,127,066
Expense reductions (Note 4)		(134	)
Expenses waived/paid by affiliates (Note 3f and 3g)		(362,409	)
Net expenses.		764,523
Net investment income (loss)		(347,124	)
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments		(169,797	)
Written options		46,715
Futures contracts		(771,972	)
Swap contracts		(108,794	)
Net realized gain (loss)		(1,003,848	)
Net change in unrealized appreciation (depreciation) on:
Investments		59,810
Futures contracts		254,152
Swap contracts		(960,591	)
Net change in unrealized appreciation (depreciation)		(646,629	)
Net realized and unrealized gain (loss)		(1,650,477	)
Net increase (decrease) in net assets resulting from operations	$	(1,997,601	)

franklintempleton.com The accompanying notes are an integral part of these consolidated financial statements. | Annual Report 23

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Statements of Changes in Net Assets

Franklin Pelagos Commodities Strategy Fund

		Year Ended May 31,
		2016			2015
Increase (decrease) in net assets:
Operations:
Net investment income (loss)	$	(347,124	)	$	(347,647	)
Net realized gain (loss)		(1,003,848	)		(17,829,683	)
Net change in unrealized appreciation (depreciation)		(646,629	)		902,653
Net increase (decrease) in net assets resulting from operations		(1,997,601	)		(17,274,677	)
Capital share transactions: (Note 2)
Class A		1,805,061			1,790,679
Class C		495,022			355,889
Class R		4,615			—
Class R6		80,347,873			2,216,679
Advisor Class.		427,868			163,257
Total capital share transactions		83,080,439			4,526,504
Net increase (decrease) in net assets		81,082,838			(12,748,173	)
Net assets:
Beginning of year		55,776,267			68,524,440
End of year	$	136,859,105		$	55,776,267
Accumulated net investment loss included in net assets:
End of year	$	(153,903	)	$	(98,308	)

24 Annual Report | The accompanying notes are an integral part of these consolidated financial statements. franklintempleton.com

FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Notes to Consolidated Financial Statements

Franklin Pelagos Commodities Strategy Fund

1. Organization and Significant Accounting Policies

Franklin Alternative Strategies Funds (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of three separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Pelagos Commodities Strategy Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund offers five classes of shares: Class A, Class C, Class R, Class R6 and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

Debt securities generally trade in the over-the-counter (OTC) market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary

valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value.

Investments in open-end mutual funds are valued at the closing NAV.

Derivative financial instruments (derivatives) listed on an exchange are valued at the official closing price of the day. Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

b. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

b. Derivative Financial Instruments (continued)

amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown in the Consolidated Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Consolidated Statement of Operations.

Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counter-parties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.

collateral is required by either the Fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of Fund business each day and any additional collateral required due to changes in derivative values may be delivered by the Fund or the counterparty within a few business days. Collateral pledged and/or received by the Fund for OTC derivatives, if any, is held in segregated accounts with the Fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.

The Fund entered into exchange traded futures contracts primarily to gain exposure to commodity price risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable in the Consolidated Statement of Assets and Liabilities.

The Fund entered into OTC commodity-linked total return swap contracts primarily to gain exposure to commodity price risk of an underlying instrument such as a stock, bond, index or basket of securities or indices. A total return swap is an agreement between the Fund and a counterparty to exchange a return linked to an underlying instrument for a floating or fixed rate payment, both based upon a notional amount. Over the term of the contract, contractually required payments to be paid or received are accrued daily and recorded as unrealized appreciation or depreciation until the payments are made, at which time they are recognized as realized gain or loss.

The Fund purchased or wrote exchange traded option contracts primarily to manage and/or gain exposure to commodity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. When an option is purchased or written, an amount equal to the premium paid or received is recorded as an asset or liability, respectively. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any

26 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium received or paid and the cost to close the position is recorded as a realized gain or loss.

See Notes 6 and 7 regarding investment transactions and other derivative information, respectively.

c. Restricted Cash

At May 31, 2016, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Consolidated Statement of Assets and Liabilities.

d. Investments in FPC Holdings Corp. (FP Subsidiary)

The Fund invests in certain financial instruments and commodity-linked derivative investments through its investment in the FP Subsidiary. The FP Subsidiary is a Cayman Islands exempted company with limited liability, is a wholly-owned subsidiary of the Fund, and is able to invest in certain financial instruments and commodity-linked derivative investments consistent with the investment objective of the Fund. At May 31, 2016, the FP Subsidiary’s investments, as well as any other assets and liabilities of the FP Subsidiary are reflected in the Fund’s Consolidated Statement of Investments and Consolidated Statement of Assets and Liabilities. The financial statements have been consolidated and include the accounts of the Fund and the FP Subsidiary. All intercompany transactions and balances have been eliminated. At May 31, 2016, the net assets of the FP Subsidiary were $31,379,451 representing 22.93% of the Fund’s consolidated net assets. The Fund’s investment in the FP Subsidiary is limited to 25% of consolidated assets.

e. Income Taxes

f. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

g. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

1. Organization and Significant Accounting
Policies (continued)

g. Accounting Estimates (continued)

liabilities at the date of the financial statements and the amounts
of income and expenses during the reporting period. Actual
results could differ from those estimates.

h. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and
trustees are indemnified by the Trust against certain liabilities
arising out of the performance of their duties to the Trust.

2. Shares of Beneficial Interest

Additionally, in the normal course of business, the Trust, on
behalf of the Fund, enters into contracts with service providers
that contain general indemnification clauses. The Trust’s
maximum exposure under these arrangements is unknown as
this would involve future claims that may be made against the
Trust that have not yet occurred. Currently, the Trust expects
the risk of loss to be remote.

At May 31, 2016, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:


				Year Ended May 31,
	2016								2015
	Shares			Amount		Shares			Amount
Class A Shares:
Shares sold	410,630		$	2,517,563		320,203		$	2,539,217
Shares redeemed.	(113,450	)		(712,502	)	(91,847	)		(748,538	)
Net increase (decrease)	297,180		$	1,805,061		228,356		$	1,790,679
Class C Shares:
Shares sold	97,440		$	584,239		50,914		$	386,347
Shares redeemed.	(15,208	)		(89,217	)	(3,870	)		(30,458	)
Net increase (decrease)	82,232		$	495,022		47,044		$	355,889
Class R Shares:
Shares sold	792		$	4,615		—		$	—
Class R6 Shares:
Shares sold	14,259,716		$	89,857,489		394,647		$	3,320,920
Shares redeemed.	(1,547,056	)		(9,509,616	)	(145,850	)		(1,104,241	)
Net increase (decrease)	12,712,660		$	80,347,873		248,797		$	2,216,679
Advisor Class Shares:
Shares sold	75,153		$	475,789		34,562		$	277,151
Shares redeemed.	(7,203	)		(47,921	)	(13,531	)		(113,894	)
Net increase (decrease)	67,950		$	427,868		21,031		$	163,257

28 Annual Report

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

3. Transactions with Affiliates


Subsidiary	Affiliation
Franklin Alternative Strategies Advisers, LLC (FASA)
(formerly Pelagos Capital Management, LLC)	Investment manager
Franklin Templeton Services, LLC (FT Services)	Administrative manager
Franklin Templeton Distributors, Inc. (Distributors)	Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services)	Transfer agent

a. Management Fees

The Fund and FP Subsidiary pay an investment management fee to FASA of 0.85% per year of the average daily net assets of the Fund and FP Subsidiary. Management fees paid by the Fund are reduced on assets invested in the FP Subsidiary, in an amount not to exceed the management fees paid by the FP Subsidiary.

b. Administrative Fees

Under an agreement with FASA, FT Services provides administrative services to the Fund and FP Subsidiary. The fee is paid by FASA based on the Fund and FP Subsidiary average daily net assets, and is not an additional expense of the Fund or FP Subsidiary.

c. Distribution Fees

The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:


Class A	0.30	%
Class C	1.00	%
Class R	0.50	%

Effective August 1, 2015, the Board has set the current rate at 0.25% per year for Class A shares until further notice and approval by the Board.

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

3. Transactions with Affiliates (continued)

d. Sales Charges/Underwriting Agreements


Sales charges retained net of commissions paid to unaffiliated
broker/dealers.	$	5,804
CDSC retained	$	109

e. Transfer Agent Fees

Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.

For the year ended May 31, 2016, the Fund paid transfer agent fees of $25,385, of which $12,154 was retained by Investor Services.

f. Investments in Affiliated Management Investment Companies

The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Consolidated Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. Prior to June 1, 2013, the waiver was accounted for as a reduction to management fees.


										% of
										Affiliated
	Number of				Number of					Fund Shares
	Shares Held				Shares		Value			Outstanding
	at Beginning	Gross	Gross		Held at End		at End	Investment	Realized	Held at End
	of Year	Additions	Reductions		of Year		of Year	Income	Gain (Loss)	of Year

Non-Controlled Affiliates
Institutional Fiduciary Trust Money Market
Portfolio	787,280	57,625,344	(57,575,708	)	836,916	$	836,916	$—	$—	—%^a

^aRounds to less than 0.01%.

g. Waiver and Expense Reimbursements

FASA has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise
payable by the Fund so that the expenses (excluding distribution fees, acquired fund fees and expenses) for each class of the Fund
do not exceed 0.95% and Class R6 does not exceed 0.73% based on the average net assets of each class (other than certain
non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until
September 30, 2016. Total expenses waived or paid are not subject to recapture subsequent to the Fund’s fiscal year end. Prior to
October 1, 2015, expenses for Class R6 were limited to 0.86%.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Franklin Pelagos Commodities Strategy Fund (continued)

h. Other Affiliated Transactions

At May 31, 2016, the shares of the Fund were owned by the following entities:

		Percentage of
	Shares	Outstanding Shares
Franklin Moderate Allocation Fund	8,448,086	40.32	%^a
Franklin Conservative Allocation Fund	5,595,894	26.71	%
Franklin Growth Allocation Fund	4,744,341	22.64	%
Franklin LifeSmart 2025 Retirement Target Fund	416,245	1.99	%
Franklin LifeSmart 2035 Retirement Target Fund	323,621	1.54	%
Franklin LifeSmart 2045 Retirement Target Fund	220,224	1.05	%
Franklin LifeSmart 2020 Retirement Target Fund	112,259	0.54	%
Franklin LifeSmart 2030 Retirement Target Fund	106,801	0.51	%
Franklin LifeSmart 2040 Retirement Target Fund	77,346	0.37	%
Franklin LifeSmart 2050 Retirement Target Fund	71,606	0.34	%
Franklin LifeSmart 2055 Retirement Target Fund	7,719	0.04	%
Franklin Resources, Inc	563	—%^b
	20,124,705	96.05	%
^aInvestment activities of this investment company could have a material impact on the Fund.
^bRounds to less than 0.01%

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are
used to reduce a portion of the Fund’s custodian expenses. During the year ended May 31, 2016, the custodian fees were reduced as
noted in the Consolidated Statement of Operations.

5. Income Taxes

For tax purposes, capital losses may be carried over to offset future capital gains, if any. At May 31, 2016, the Fund had long-term capital loss carryforwards of $175,775.

During the year ended May 31, 2016, the Fund utilized $12,607 of capital loss carryforwards.

For tax purposes, the Fund may elect to defer any portion of a late-year ordinary loss to the first day of the following fiscal year. At May 31, 2016, the Fund deferred late-year ordinary losses of $72,053.

At May 31, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:


Cost of investments	$	134,857,019

Unrealized appreciation	$	4,366
Unrealized depreciation		(118,983	)
Net unrealized appreciation (depreciation)	$	(114,617	)

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing
treatments of bond discounts and premiums, investments in the FP Subsidiary and non-deductible expenses.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended May 31, 2016, aggregated $23,047,617 and $10,999,652, respectively.

Transactions in options written during the year ended May 31, 2016, were as follows:


					Number of
					Contracts			Premiums
Options outstanding at May 31, 2015.					—			$	—
Options written					212				46,715
Options expired.					(212	)			(46,715	)
Options exercised					—				—
Options closed					—				—
Options outstanding at May 31, 2016.					—			$	—

See Notes 1(b) and 7 regarding derivative financial instruments and other derivative information, respectively.


7. Other Derivative Information

At May 31, 2016, the Fund’s investments in derivative contracts are reflected in the Consolidated Statement of Assets and
Liabilities as follows:

	Asset Derivatives				Liability Derivatives
Derivative Contracts
Not Accounted for as	Consolidated Statement of				Consolidated Statement of
Hedging Instruments	Assets and Liabilities Location		Fair Value		Assets and Liabilities Location			Fair Value
Commodity contracts	Variation margin	$	303,760	^a	Variation margin		$	54,192		^a
	Unrealized appreciation on OTC		—		Unrealized depreciation on OTC				346,898
	swap contracts				swap contracts
Totals		$	303,760				$	401,090

^aThis amount reflects the cumulative appreciation (depreciation) of futures contracts as reported in the Consolidated Statement of Investments. Only the variation margin receivable/payable at year end is separately reported within the Consolidated Statement of Assets and Liabilities. Prior variation margin movements were recorded to cash upon receipt or payment.

For the year ended May 31, 2016, the effect of derivative contracts in the Fund’s Consolidated Statement of Operations was as follows:


							Net Change in
							Unrealized
Derivative Contacts	Consolidated		Net Realized		Consolidated		Appreciation
Not Accounted for as	Statement of		Gain (Loss) for the		Statement of		(Depreciation)
Hedging Instruments	Operations Locations		Year		Operations Locations		for the Year
	Net realized gain (loss) from:				Net change in unrealized
					appreciation (depreciation) on:
Commodity contracts	Investments	$	(168,589	)	Investments	$	74,559	^a
	Written options		46,715
	Futures contracts		(771,972	)	Futures contracts		254,152
	Swap contracts		(108,794	)	Swap contracts		(960,591	)
Totals		$	(1,002,640	)		$	(631,880	)

^aPurchased option contracts are included in net change in unrealized appreciation (depreciation) on investments in the Consolidated Statement of Operations.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

For the year ended May 31, 2016, the average month end fair value of derivatives represented 1.62% of average month end net assets. The average month end number of open derivative contracts for the year was 4.

At May 31, 2016, the Fund’s OTC derivative assets and liabilities are as follows:


	Gross and Net Amounts
	of Assets and Liabilities Presented in the
	Consolidated Statement of Assets and Liabilities
	Assets^a		Liabilities^a
Derivatives
Swap contracts	$—	$	346,898

^aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities.

At May 31, 2016, the Fund’s OTC derivative assets, which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, are as follows:


		Amounts Not Offset in the
		Consolidated Statement of Assets and Liabilities
	Gross and
	Net Amounts of	Financial	Financial
	Assets Presented in the	Instruments	Instruments	Cash	Net Amount
	Consolidated Statement of	Available for	Collateral	Collateral	(Not less
	Assets and Liabilities	Offset	Received	Received^a	than zero)

Counterparty
MSCS	$ —	$ —	$ —	$ —	$ —

^aIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit the collateral amounts to avoid the effect of over collateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein.

At May 31, 2016, the Fund’s OTC derivative liabilities, which may be offset against the Fund’s OTC derivative assets and collateral pledged to the counterparty, are as follows:


			Amounts Not Offset in the
			Consolidated Statement of Assets and Liabilities

		Gross and
		Net Amounts of	Financial	Financial
		Liabilities Presented in the	Instruments	Instruments	Cash		Net Amount
		Consolidated Statement of	Available for	Collateral	Collateral		(Not less
		Assets and Liabilities	Offset	Pledged	Pledged		than zero)

Counterparty
MSCS	$	346,898	$ —	$ —	$ —	$	346,898

See Notes 1(b) and 6 regarding derivative financial instruments and investment transactions, respectively.

See Abbreviations on page 35.

8. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin
Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $2 billion (Global Credit
Facility) which matures on February 10, 2017. This Global Credit Facility provides a source of funds to the Borrowers for
temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

8. Credit Facility (continued)

9. Fair Value Measurements

Level 1 – quoted prices in active markets for identical financial instruments
Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of May 31, 2016, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:


		Level 1		Level 2		Level 3		Total
Assets:
Investments in Securities:
U.S. Government and Agency Securities	$	—	$	40,960,802	$	—	$	40,960,802
Short Term Investments		89,217,600		4,564,000		—		93,781,600
Total Investments in Securities	$	89,217,600	$	45,524,802	$	—	$	134,742,402

Other Financial Instruments
Futures Contracts	$	303,760	$	—	$	—	$	303,760

Liabilities:
Other Financial Instruments
Futures Contracts	$	54,192	$	—	$	—	$	54,192
Swap Contracts.		—		346,898		—		346,898
Total Other Financial Instruments	$	54,192	$	346,898	$	—	$	401,090

A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year.

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FRANKLIN ALTERNATIVE STRATEGIES FUNDS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Franklin Pelagos Commodities Strategy Fund (continued)

10. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the consolidated financial statements and determined that no events have occurred that require disclosure.


Abbreviations
Counterparty	Selected Portfolio
MSCS Morgan Stanley Capital Services, LLC	FFCB	Federal Farm Credit Bank
	FHLB	Federal Home Loan Bank

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Annual Report

FRANKLIN ALTERNATIVE STRATEGIES FUNDS

Report of Independent Registered Public Accounting Firm

To the Board of Trustees of Franklin Alternative Strategies Funds and Shareholders of Franklin Pelagos Commodities Strategy Fund:

We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated statement of investments, of Franklin Pelagos Commodities Strategy Fund (the "Fund") (one of the funds constituting the Franklin Alternative Strategies Funds), as of May 31, 2016, and the related consolidated statement of operations for the year then ended, the consolidated statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of May 31, 2016, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the consolidated financial position of Franklin Pelagos Commodities Strategy Fund (one of the funds constituting the Franklin Alternative Strategies Funds) at May 31, 2016, the consolidated results of its operations for the year then ended, the consolidated changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

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Board Members and Officers

The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during at least the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex, are shown below. Generally, each board member serves until that person’s successor is elected and qualified.


Independent Board Members

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held
and Address	Position	Time Served	by Board Member*	During at Least the Past 5 Years

Edward I. Altman, Ph.D. (1941)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Max L. Heine Professor of Finance, Emeritus and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School
of Business, New York University; editor and author of numerous financial publications; financial consultant; an adviser to numerous financial
and publishing organizations; and formerly, Vice Director, Salomon Center, Stern School of Business, New York University.

Ann Torre Bates (1958)	Trustee	Since 2011	39	Navient Corporation (loan
c/o Franklin Mutual Advisers, LLC				management, servicing and asset
101 John F. Kennedy Parkway				recovery) (2014-present), Ares Capital
Short Hills, NJ 07078-2789				Corporation (specialty finance
				company) (2010-present), United
				Natural Foods, Inc. (distributor of
				natural, organic and specialty foods)
				(2013-present), Allied Capital
				Corporation (financial services)
				(2003-2010) and SLM Corporation
				(Sallie Mae) (1997-2014).
Principal Occupation During at Least the Past 5 Years:
Director of various companies; and formerly, Executive Vice President and Chief Financial Officer, NHP Incorporated (manager of multifamily
housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).

Burton J. Greenwald (1929)	Trustee	Since 2011	15	Franklin Templeton Emerging Markets
c/o Franklin Mutual Advisers, LLC				Debt Opportunities Fund PLC and
101 John F. Kennedy Parkway				Fiduciary International Ireland Limited
Short Hills, NJ 07078-2789				(1999-2015).
Principal Occupation During at Least the Past 5 Years:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and formerly, Chairman, Fiduciary
Trust International Funds; Executive Vice President, L.F. Rothschild Fund Management, Inc.; President and Director, Merit Mutual Funds;
President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment Company Institute; and
Chairman, ICI Public Information Committee.

Keith E. Mitchell (1954)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Director of various boards of asset management firms; and formerly, Managing Member, Mitchell, Hartley & Bechtel Advisers, LLC (formerly,
Mitchell Advisers, LLC) (advisory firm) (2003-2015) and Managing Director, Putman Lovell NBF.

David W. Niemiec (1949)	Trustee	Since 2015	39	Emeritus Corporation (assisted living)
c/o Franklin Mutual Advisers, LLC				(1999-2010) and OSI Pharmaceuticals,
101 John F. Kennedy Parkway				Inc. (pharmaceutical products)
Short Hills, NJ 07078-2789				(2006-2010).
Principal Occupation During at Least the Past 5 Years:
Advisor, Saratoga Partners (private equity fund); and formerly, Managing Director, Saratoga Partners (1998-2001) and SBC Warburg Dillon
Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc. (investment banking) (1991-1997); and Chief Financial Officer,
Dillon, Read & Co. Inc. (1982-1997).

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Independent Board Members (continued)



			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held
and Address	Position	Time Served	by Board Member*	During at Least the Past 5 Years

Charles Rubens II (1930)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Private investor and president of non-profit organizations; and formerly, an executive of Time, Inc.; and Trustee of Colorado College.

Jan Hopkins Trachtman (1947)	Trustee	Since 2011	15	None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
President and Founder, The Jan Hopkins Group (communications consulting firm); serves on Advisory Board of Knight Bagehot Fellowship;
and formerly, President, Economic Club of New York (2001-2015); Anchor/Correspondent, CNN Financial News (until 2003); Managing
Director and Head of Client Communications, Citigroup Private Bank (until 2005); Off-Air Reporter, ABC News’ World News Tonight; and Editor,
CBS Network News.

Robert E. Wade (1946)	Trustee and	Trustee and	39	El Oro Ltd (investments)
c/o Franklin Mutual Advisers, LLC	Chairman of	Chairman of the		(2003-present).
101 John F. Kennedy Parkway	the Board	Board since 2011
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Attorney at law engaged in private practice (1972-2008) and member of various boards.

Gregory H. Williams (1943)	Trustee	Since 2015		None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
Principal Occupation During at Least the Past 5 Years:
Private investor; Consultant; and formerly, President, University of Cincinnati (2009-2012); President, The City College of New York
(2001-2009); Dean, College of Law, Ohio State University (1993-2001); and Associate Vice President, Academic Affairs and Professor of Law,
University of Iowa (1977-1993).


Interested Board Members and Officers

			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held
and Address	Position	Time Served	by Board Member*	During at Least the Past 5 Years

**Gregory E. Johnson (1961)	Trustee	Since 2011	160	None
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Chairman of the Board, Member – Office of the Chairman, Director and Chief Executive Officer, Franklin Resources, Inc.; officer and/or
director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in
Franklin Templeton Investments; and Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015).

**Jennifer M. Johnson (1964)	Trustee	Since 2015	12	None
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Co-President, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of four of the investment companies in Franklin Templeton Investments; and formerly, Chief Operating Officer and
Executive Vice President, Franklin Resources, Inc. (1994-2015); Executive Vice President of Operations and Technology, Franklin Resources,
Inc. (2005-2010); and Senior Vice President, Franklin Resources, Inc. (2003-2005).

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Interested Board Members and Officers (continued)



			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held
and Address	Position	Time Served	by Board Member*	During at Least the Past 5 Years

Alison E. Baur (1964)	Vice President	Since 2012	Not Applicable	Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45
of the investment companies in Franklin Templeton Investments.

Laura F. Fergerson (1962)	Chief Executive Since 2011		Not Applicable	Not Applicable
One Franklin Parkway	Officer –
San Mateo, CA 94403-1906	Finance and
	Administration
Principal Occupation During at Least the Past 5 Years:
Senior Vice President, Franklin Templeton Services, LLC; Vice President, Franklin Advisers, Inc. and Franklin Templeton Institutional, LLC; and
officer of 45 of the investment companies in Franklin Templeton Investments.

Aliya S. Gordon (1973)	Vice President	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:and
formerly, Executive Vice President – Alternative Strategies, Franklin
Resources, Inc. (2005-2015).
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton
Investments.

Steven J. Gray (1955)	Secretary and	Secretary and Vice	Not Applicable	Not Applicable
One Franklin Parkway	Vice President	President since
San Mateo, CA 94403-1906		2011
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and Franklin
Alternative Strategies Advisers, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.

Robert G. Kubilis (1973)	Treasurer,	Since 2015	Not Applicable	Not Applicable
300 S.E. 2nd Street	Chief Financial
Fort Lauderdale, FL 33301-1923	Officer and
	Chief
	Accounting
	Officer
Principal Occupation During at Least the Past 5 Years:
Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of four of the investment companies in Franklin
Templeton Investments.

Robert Lim (1948)	Vice	Since May 2016	Not Applicable	Not Applicable
One Franklin Parkway	President –
San Mateo, CA 94403-1906	AML
	Compliance
Principal Occupation During at Least the Past 5 Years:
Portfolio Manager, Franklin Advisers, Inc.; officer of one of the investment companies in Franklin Templeton Investments; and formerly,
Manager of Americas market specialist sales team, Bloomberg LP (1991-2007).

Kimberly H. Novotny (1972)	Vice President	Since 2013	Not Applicable	Not Applicable
300 S.E. 2nd Street
Fort Lauderdale, FL 33301-1923
Principal Occupation During at
Least the Past 5 Years:
Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the
South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment
companies in Franklin Templeton Investments.

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Interested Board Members and Officers (continued)



			Number of Portfolios in
Name, Year of Birth		Length of	Fund Complex Overseen	Other Directorships Held
and Address	Position	Time Served	by Board Member*	During at Least the Past 5 Years

Robert C. Rosselot (1960)	Chief	Since 2013	Not Applicable	Not Applicable
300 S.E. 2nd Street	Compliance
Fort Lauderdale, FL 33301-1923	Officer
Principal Occupation During at Least the Past 5 Years:
Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the
investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments
(2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013).

Karen L. Skidmore (1952)	Vice President	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton
Investments.

Navid Tofigh (1972)	Vice President	Since	Not Applicable	Not Applicable
One Franklin Parkway		November 2015
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments.

Craig S. Tyle (1960)	Vice President	Since 2011	Not Applicable	Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
Principal Occupation During at Least the Past 5 Years:
General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources,
Inc. and of 45 of the investment companies in Franklin Templeton Investments.

Lori A. Weber (1964)	Vice President	Since 2011	Not Applicable	Not Applicable
300 S.E. 2nd Street
Fort Lauderdale, FL 33301-1923
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments.

William Y. Yun (1959)	President and	Since 2011	Not Applicable	Not Applicable
600 Fifth Avenue	Chief
New York, NY 10020	Executive
	Officer –
	Investment
	Management
Principal Occupation During at Least the Past 5 Years:
Executive Vice President, Franklin Advisers, Inc. and Franklin Templeton Institutional, LLC; Chief Executive Officer, Franklin Alternative
Strategies Advisers, LLC; Director, Fiduciary Investments Corporation and K2 Advisors Holdings, LLC; officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of one of the investment companies in Franklin Templeton
Investments; and formerly, Executive Vice President – Alternative Strategies, Franklin Resources, Inc. (2005-2015).

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Interested Board Members and Officers (continued)

Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.

The Fund’s Board has determined that certain of the members of the Audit Committee, including Ann Torre Bates, are audit committee financial experts, and “independent,” under those provisions of the Sarbanes-Oxley Act of 2002, and the rules and form amendments adopted by the Securities and Exchange Commission, relating to audit committee financial experts.

The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request.

Shareholders may call (800) DIAL BEN/342-5236 to request the SAI.

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Shareholder Information

Board Review of Investment Management Agreement

The Board of Trustees (Board), including a majority of trustees that are not “interested persons” as such term is defined in section 2(a)(19) of the Investment Company Act of 1940 (hereinafter referred to as “independent Trustees”), at an in-person meeting held on May 16, 2016, unanimously approved the renewal of the Fund’s investment management agreement. Prior to a meeting of all of the trustees for the purpose of considering such renewal, the independent trustees held two meetings dedicated to the renewal process (those trustees unable to attend in person were present by telephonic conference means). Throughout the process, the independent trustees received assistance and advice from and met separately with independent counsel. The independent trustees met with and interviewed officers of the investment manager (including portfolio managers), the transfer agent and shareholder services group and the distributor. In approving the renewal of the agreement, the Board, including the independent trustees, determined that the existing investment management fee structure was fair and reasonable and that continuance of the agreement was in the best interests of the Fund and its shareholders.

In reaching their decision on the agreement, the trustees took into account information furnished throughout the year at regular Board meetings, as well as information specifically requested and furnished for the renewal process, which culminated in the meetings referred to above for the specific purpose of considering such agreement. Information furnished included, among others, reports on the Fund’s investment performance, expenses, portfolio composition, derivatives, asset segregation, portfolio turnover, Rule 12b-1 plans, distribution, shareholder servicing, legal and compliance matters, pricing of securities, sales and redemptions, and marketing support payments made to financial intermediaries, as well as a third-party survey of transfer agent fees charged to funds within the Franklin Templeton Investments (FTI) complex in comparison with those charged to other fund complexes deemed comparable. Also, related financial statements and other information about the scope and quality of services provided by the investment manager and its affiliates and enhancements to such services over the past year were provided. In addition, the trustees received periodic reports throughout the year and during the renewal process relating to compliance with the Fund’s investment policies and restrictions. During the renewal process, the independent trustees considered the investment manager’s methods of

operation within the Franklin Templeton group and its activities on behalf of other clients. The Board also noted that they received an annual report on all marketing support payments made by FTI to financial intermediaries, as well as a memorandum relating to third-party servicing arrangements in response to a Guidance Update from the U.S. Securities and Exchange Commission (SEC) relating to mutual fund distribution and sub-accounting fees.

The information obtained by the trustees during the renewal process also included a special report prepared by Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party analyst, comparing the Fund’s investment performance and expenses with those of other mutual funds deemed comparable to such Fund as selected by Broadridge (Broadridge Section 15(c) Report). The trustees reviewed the Broadridge Section 15(c) Report and its usefulness in the renewal process with respect to matters such as comparative fees, expenses, expense ratios and performance. They concluded that the report was a reliable resource in the performance of their duties.

In addition, the trustees received a Profitability Study (Profitability Study) prepared by management discussing the profitability to FTI from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Over the past year, the Board and counsel to the independent trustees continued to receive reports on management’s handling of recent regulatory inquiries and pending legal actions against the investment manager and its affiliates. The independent trustees were satisfied with the actions taken to date by management in response to such regulatory and legal matters.

Particular attention was given to the diligent risk management program of the investment manager, including continual monitoring and management of counterparty credit risk and collateral, and attention given to derivatives and other complex instruments that are held and expected to be held by the Fund and how such instruments are used to carry out the Fund’s investment objectives. The Board also took into account, among other things, management’s efforts in establishing a global credit facility for the benefit of the Fund and other accounts managed by FTI to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the investment manager’s parent company and its commitment to the mutual fund business. In addition, the Board received updates from management on the SEC’s progress in implementing the rule-making requirements established by the

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SHAREHOLDER INFORMATION

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was enacted July 21, 2010, and the compliance of the investment manager with rules and regulations already promulgated by the SEC under such act, as well as the compliance of the investment manager with new rules and regulations promulgated by the U.S. Commodity Futures Trading Commission.

In addition to the above and other matters considered by the trustees throughout the course of the year, the following discussion relates to certain primary factors relevant to the Board’s decision. This discussion of the information and factors considered by the Board (including the information and factors discussed above) is not intended to be exhaustive, but rather summarizes certain factors considered by the Board. In view of the wide variety of factors considered, the Board did not, unless otherwise noted, find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual trustees may have assigned different weights to various factors.

NATURE, EXTENT AND QUALITY OF SERVICES. The trustees reviewed the nature, extent and quality of the services provided, and to be provided, by the investment manager. In this regard, they reviewed the Fund’s actively managed fundamental and quantitative investment philosophy and process and the investment manager’s ability to implement such philosophy and process, including, but not limited to, the investment manager’s trading practices and investment decision processes and efforts to ensure compliance with the Fund’s investment goals, policies, and limitations. The Board also considered the investment management services that the investment manager provides to the Cayman Islands-based company, which is wholly owned by the Fund (Cayman Subsidiary).

The trustees reviewed the Fund’s portfolio management team, including its performance, staffing, skills and compensation program. With respect to portfolio manager compensation, management assured the trustees that the Fund’s long-term performance is a significant component of incentive-based compensation and noted that a portion of a portfolio manager’s incentive-based compensation is paid in shares of pre-designated funds from the portfolio manager’s fund management area. The trustees noted that the portfolio manager compensation program aligned the interests of the portfolio managers with that of shareholders of the Fund. The trustees considered various other products, portfolios and entities that are advised by the investment manager and the allocation of

assets and expenses among and within them, as well as their relative fees and reasons for differences with respect thereto and any potential conflicts.

During regular Board meetings and the aforementioned meetings of the independent trustees, the trustees considered periodic reports provided to them showing that the investment manager complied with the investment policies and restrictions of the Fund as well as other reports periodically furnished to the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics covering the investment management personnel, the adherence to fair value pricing procedures established by the Board and the accuracy of net asset value calculations. The Board noted the extent of the benefits provided to Fund shareholders from being part of the Franklin Templeton group, including the right to exchange investments between funds (same class) without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings of other funds to obtain reduced sales charges.

The Board considered the investment manager’s significant efforts in developing and implementing compliance procedures established in accordance with SEC and other requirements. The Board also considered the nature, extent and quality of the services to be provided under the Fund’s other service agreements with affiliates of the investment manager and considered whether, on an overall basis, Fund shareholders were well served. In this connection, the Board also took into account transfer agent and shareholder services provided to Fund shareholders by an affiliate of the investment manager, noting continuing expenditures by management to increase and improve the scope of such services and favorable periodic reports on shareholder services conducted by independent third parties. While such considerations directly affected the trustees’ decision in renewing the Fund’s transfer agent and shareholder services agreement, the Board also considered these commitments as incidental benefits to Fund shareholders deriving from the investment management relationship.

Based on their review, the trustees were satisfied with the nature and quality of the overall services provided, and to be provided, by the investment manager and its affiliates to the Fund and its shareholders and were confident in the abilities of the management team to continue to implement the Fund’s actively managed fundamental and quantitative investment philosophy and process and to provide quality services to the Fund and its shareholders.

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INVESTMENT PERFORMANCE. As the Fund commenced operations in December 2011, the trustees reviewed the investment performance of the Fund for the one-, three- and four-year periods ended December 31, 2015. As part of their review, they inquired of management regarding benchmark and hedging activities. Consideration was also given to performance in the context of available levels of cash, including as affected by net flows, during the periods. The trustees had meetings during the year, including the meetings referred to above held in connection with the renewal process, with the Fund’s portfolio managers to discuss performance and the management of the Fund.

The comparable funds to the Fund, as chosen by Broadridge, included all retail and institutional commodities general funds. The Fund had total returns in the second-highest performing quintile for the one-year period ended December 31, 2015, and had annualized total returns for the three- and four-year periods in the middle and second-highest performing quintiles respectively. The Board found such comparative performance to be acceptable.

COMPARATIVE EXPENSES AND PROFITABILITY.

The trustees considered the cost of the services provided and to be provided and the losses incurred by the investment manager and its affiliates from their respective relationships with the Fund. As part of the approval process, they explored with management the trends in expense ratios over the past three fiscal years and the reasons for any increases in the Fund’s expense ratios (or components thereof). The Board considered the extent to which the investment manager may derive ancillary benefits from Fund operations. In considering the appropriateness of the management fee and other expenses charged to the Fund, the Board took into account various factors including investment performance and matters relating to Fund operations, including, but not limited to, the quality and experience of its portfolio managers and research staff. As part of this discussion, the Board took into account the fee waiver and expense limitation arrangement in effect. The Board also considered the investment management services that the investment manager provides to the Cayman Subsidiary and the related fee waivers that were in place. The Board considered the nature of the services provided by the investment manager

to the other mutual fund it subadvises with similar investment objectives as the Fund, the fees that it charges for such services and any potential conflicts.

Consideration was also given to a comparative analysis in the Broadridge Section 15(c) Report of the investment management fee and total expense ratio of the Fund in comparison with those of a group of other funds selected by Broadridge as its appropriate Broadridge expense group. Broadridge expense data is based upon information taken from the Fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Broadridge to be an appropriate measure of comparative expenses. In reviewing comparative costs, emphasis was given to the Fund’s contractual management fee in comparison with the contractual management fee that would have been charged by other funds within its Broadridge expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Broadridge expense group. The Broadridge contractual management fee analysis includes administrative charges as being part of the management fee, and total expenses, for comparative consistency, are shown by Broadridge for Fund Class A shares. The Fund’s contractual management fee rate was in the least expensive quintile of its Broadridge expense group and its total expenses (including Rule 12b-1 fees) were in the second-least expensive quintile of such group. The Board was satisfied with such comparative fees and expenses.

The trustees also reviewed the Profitability Study addressing profitability of Franklin Resources, Inc., from its overall U.S. fund business, as well as profitability to the Fund’s investment manager and its affiliates, from providing investment management and other services to the Fund during the 12-month period ended September 30, 2015, the most recent fiscal year end of Franklin Resources, Inc. The trustees reviewed the basis on which such reports are prepared and the cost allocation methodology utilized in the Profitability Study, it being recognized that allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the reasonableness of the cost allocation methodologies was reviewed by independent accountants on an every other year basis.

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SHAREHOLDER INFORMATION

The independent trustees met with management to discuss the Profitability Study. This included, among other things, a comparison of investment management income with investment management expenses of the Fund; comparison of underwriting revenues and expenses; the relative relationship of investment management and underwriting expenses; shareholder servicing profitability; economies of scale; and the relative contribution of the Fund to the profitability of the investment manager and its parent. In discussing the Profitability Study with the Board, the investment manager stated its belief that the costs incurred in establishing the infrastructure necessary to operate the type of mutual fund operations conducted by it and its affiliates may not be fully reflected in the expenses allocated to the Fund in determining its profitability. The Board also took into account management’s expenditures in improving shareholder services provided to the Fund, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act, the Dodd-Frank Act and recent SEC and other regulatory requirements. The trustees also considered the extent to which the investment manager may derive ancillary benefits from Fund operations.

ECONOMIES OF SCALE. The Board considered economies of scale realized by the investment manager and its affiliates as the Fund grows larger and the extent to which they are shared with Fund shareholders, as for example, in the level of the investment management fees charged, in the quality and efficiency of services rendered and in increased capital commitments benefiting the Fund directly or indirectly. The Board also considered the fee waiver and expense limitation arrangement in effect, and the amount of Fund expenses that were absorbed since inception of the Fund by the investment manager through such waiver and arrangement. The Board concluded that economies of scale were deemed not to be a significant factor at that time in light of, among other matters, the fee waiver and expense limitation arrangement in effect and the limited size of assets under management.

Proxy Voting Policies and Procedures

at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.

Quarterly Statement of Investments

The Trust, on behalf of the Fund, files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.

Householding of Reports and Prospectuses

You will receive each Fund’s financial reports every six months as well as an annual updated summary prospectus (prospectus available upon request). To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and summary prospectus. This process, called “householding,” will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at (800) 632-2301. At any time you may view current prospectuses/summary prospectuses and financial reports on our website. If you choose, you may receive these documents through electronic delivery.

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Annual Report

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Annual Report and Shareholder Letter
Franklin Pelagos Commodities Strategy Fund

Investment Manager
Franklin Alternative Strategies Advisers, LLC

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© 2016 Franklin Templeton Investments. All rights reserved.	995 A 07/16

Item 2. Code of Ethics.

(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer.

(d) N/A

(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer.

Item 3. Audit Committee Financial Expert.

(a)(1) The Registrant has an audit committee financial expert serving on its audit committee.

(2) The audit committee financial expert is Ann Torre Bates and she is “independent” as defined under the relevant Securities and Exchange Commission Rules and Releases.

Item 4. Principal Accountant Fees and Services.

(a) Audit Fees

The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $221,182 for the fiscal year ended May 31, 2016 and $165,375 for the fiscal year ended May 31, 2015.

(b) Audit-Related Fees

There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4.

There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements.

The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning were $4,299 for the fiscal year ended May 31, 2016 and $3,103 for the fiscal year ended May 31, 2015. The services for which these fees were paid include identifying passive foreign investment companies to manage exposure to tax liabilities.

The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $114,500 for the fiscal year ended May 31, 2016 and $77,000 for the fiscal year ended May 31, 2015. The services for which these fees were paid included technical tax consultation for withholding tax report to foreign governments, application of local country tax laws and tax advice.

(d) All Other Fees

There were no fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4.

There were no fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant other than the services reported in paragraphs (a)-(c) of Item 4.

(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:

(i) pre-approval of all audit and audit related services;

(ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors;

(iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and

(iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.

(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.

(f) No disclosures are required by this Item 4(f).

(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $118,799 for the fiscal year ended May 31, 2016 and $80,103 for the fiscal year ended May 31, 2015.

(h) The registrant’s audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.

Item 5. Audit Committee of Listed Registrants. N/A

Item 6. Schedule of Investments. N/A

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-

End Management Investment Companies. N/A

Item 8. Portfolio Managers of Closed-End Management Investment

Companies. N/A

Item 9. Purchases of Equity Securities by Closed-End Management

Investment Company and Affiliated Purchasers. N/A

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein.

Item 11. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls. There have been no changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR.

Item 12. Exhibits.

(a) (1) Code of Ethics

(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Robert G. Kubilis, Chief Financial Officer and Chief Accounting Officer

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Robert G. Kubilis, Chief Financial Officer and Chief Accounting Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FRANKLIN ALTERATIVE STRATEGIES FUNDS

By /s/ Laura F. Fergerson

Laura F. Fergerson

Chief Executive Officer –

Finance and Administration

Date July 27, 2016

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By /s/ Laura F. Fergerson

Laura F. Fergerson

Chief Executive Officer –

Finance and Administration

Date July 27, 2016

By /s/ Robert G. Kubilis

Robert G. Kubilis

Chief Financial Officer and

Chief Accounting Officer

Date July 27, 2016

Franklin K2 Alternative Strategies Fund (FABZX) N-CSRCertified annual shareholder report (management investment company)