New York, 4 July 2011 Research Monthly Alternative Investment Research Investment horizon: 612+ months

Research Monthly US

Alternative Investments An introduction to funds of hedge funds

Private Banking

Choppy markets represent a challenge and an opportunity Over recent weeks, two major issues have kept hedge fund managers holding their breath: the euro zone debt crisis, which might lead to the first sovereign default in the euro zone, and fears of a double dip recession in the wake of the slowdown in the US economy. The current uncertain macroeconomic outlook characterized by a lack of clear trends makes asset allocation for hedge fund managers difficult. Volatility has shot up as a result of European debt woes, the US slowdown, the end of the US Federal Reserves (Feds) second quantitative easing program (QE2) and potential rate hikes. While we expect global macro be the best-performing strategy within this environment, managers so far have failed to exploit high probability scenarios to establish their positions. A range of high-profile global macro managers booked a disappointing performance in May. This is the third year in a row after the crisis that global macro funds have been struggling to satisfy investor expectations. However, we are still optimistic that global macro managers are best positioned to take advantage of the uncertain environment. Figure 1 Our estimate of uncorrelated returns (alpha) for the Dow Jones Credit Suisse and HFR hedge fund indices indicates a further recovery of alpha generation.
20

Highlights

Hedge Funds: The climate of decelerating macroeconomic leading indicators posed difficulties for hedge funds. Commodities: Fundamentals in the markets point to further price appreciation. We think that platinum group metals (PGMs) should outperform the rest of the precious metals (page 8). Real estate: Positive outlook for most Asian-Pacific commercial property markets due to expanding rental markets (page 9). Analyst's corner: An introduction to fund of hedge funds (page 10).

15

10

-5 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 DJ CS model - 12M average of annualized alpha HFR model - 12M average of annualized alpha

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse / IDC

Despite the difficult environment, or precisely because of it, investor appetite for hedge funds has increased (see page 4). This development underpins the strengthening faith of investors in the flexibility of hedge funds to adapt to a fast-changing market environment. A rising interest of investors for absolute return strategies could thus be observed. New hedge fund launches continued to increase in first quarter 2011, with both the first quarter and trailing fourth quarter launch totals reaching their highest levels since 2007, according to data released by Hedge Fund Research (HFR). Another positive is that our alpha estimation model indicates a further increase of alpha generation during 2011 (see Figure 1). Both multi-factor regressions run on Dow Jones Credit Suisse (DJ CS) and HFR figures confirmed the structural decline in alpha following the recent financial crisis. The hedge fund industry reached a trough in terms of alpha potential with the liquidation of a large number of hedge funds in 200810 and the reduced proprietary trading activity of investment banks (see Figure 2). The higher estimate of alpha based on the asset-weighted DJ CS Hedge Fund Index sug-

Important disclosures are found in the Disclosure appendix

New York, 4 July 2011

gests that medium-sized and smaller hedge funds have generated less alpha over the past two years (a suggestion that is underpinned by the latest hedge fund industry report from Hedgeindex), though this assertion would be subject to further investigation. Private equity news in June US buyouts: The US buyout market is buoyant and seeing multibillion-dollar deals. Six out of the ten largest deals in 2011 YTD have taken place in the USA, according to Preqin. European buyouts: Compared to the USA, the European private equity (PE) market remains subdued. Although Europe's funding climate is more difficult than that of the USA, conditions for buyout funding have improved, and PE funds are generally flush with cash. According to the Wall Street Journal, it is likely that PE funds will take advantage of the current favorable funding climate, as it may be temporary. Resurgence of PE in Russia? With an improving economic outlook, an expanding pool of mature fund managers and improved availability of exit information, Russia's PE climate is becoming more appealing to investors. Appropriate regulatory adjustments should provide further support. According to Empea, Russia might see some very successful exits in 2011. PE in Africa: Fundraising activity in Africa is still very low but increasing. While efforts are being made to increase PE activity, Africa is facing headwinds from its often unpredictable politics, difficulties in enforcing legal rights and a shortage of skilled managers. However, conditions are improving, and PE activity is likely to increase in the future. For this year, Preqin expects fundraising to hit USD 810 billion. PE secondaries: According to the Financial Times, discounts to net asset value (NAV) have decreased to 5% compared to a maximum discount of 35% during the crisis. Because PE funds are under pressure to invest their piles of committed capital, valuations are being pushed up. However, current valuation is 18% above the 10-year average and thus can be seen as a premium.

Figure 3 Model alternative investment portfolio with recommended medium-term asset allocations (6M12M horizon; Table 1).
5% 12% 1 4%

Gold Commodities
14%

Real estate Directional Tactical trading Ev ent driven

1 3%

17%

24%

Relative value

Source: Credit Suisse

For the alternative investment portfolio including private equity and emerging alternatives, please see page 12. Considering the lack of liquidity in the alternative investment world, our tactical recommendations are primarily intended as guidance to investors in the allocation of new money to alternative assets. We currently advise allocating 100% of emerging alternatives to cat bonds & ILS, as we see little value in art and timber.

Table 1: Model portfolio for alternative investments and deviations from benchmark
Model portfolio
Hedge funds Directional Hedge funds Tactical trading Hedge funds Event driven Hedge funds Relative value Real Estate Commodities Gold
Source: Credit Suisse

17.1% 12.9% 12.4% 5.2% 23.8% 14.3% 14.3%

Figure 2 The high number of hedge fund liquidations between 2008 and 2010 partially reduced the competition between hedge funds regarding their return sources.
Number of Funds 2'500 2'000 1435 1'500 1'000 507 500 0 -500 -1'000 -1'500 -2'000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Launches Liquidations (109) (52) (115) (57) (71) (92) (162) (176) (296) (848) (1471) (717) (563) (1023) (743) 261 450 348 328 673 1087 1094 1518 1197 659 784 935 2073

Table 2: Hedge fund style performance and recommendations

20111 DJ CS Indices Equity long short Multi strategy Dedicated short bias Emerging markets Global macro Merger arbitrage Distressed debt Convertible arbitrage Equity market neutral Fixed income arbitrage D D D D TT ED ED RV RV RV 3.1% 2.3% 5.1% 6.4% 2.9% 2.5% 0.3% 3.0% 3.8% 4.6% 5.8% 3.5% May 1.0% 1.7% 0.0% 2.2% 1.1% 0.6% 4.4% 1.1% 0.0% 0.0% 1.0% 0.2% 16.0% 11.0% 0.0% 9.0% 20.0% 7.0% 9.0% 17.0% 4.0% 2.0% 5.0% Neutral Neutral Underperform Neutral Outperform Neutral Neutral Neutral Outperform Underperform Neutral Weight Our recommendation

Managed futures (CTA) TT

We define four hedge fund sub-categories: D: Directional, TT: Tactical trading, ED: Event driven, RV: Relative value Source: Thomson Reuters DataStream, the BLOOMBERG PROFESSIONAL service 1 Performance to May 2011

Source: Credit Suisse, HFR

Research Monthly

New York, 4 July 2011

Hedge funds

Hedge funds struggled to deliver positive returns in May

(DJ CS: 1.0%; HFR: 1.2%).

Figure 4 Asset class betas 36 months and 52 weeks.

Real estate Fixed income arbitrage Equity market neutral
1.0 1.5

Investors prefer absolute return strategies in this volatile

environment.

Commodities Gold Oil

36- month beta 52- week beta

Large funds tended to outperform small and mid-sized

funds in first quarter 2011. The hedge fund barometer is still positive, but systemic risks remain above average. Our hedge fund barometer continues to indicate a moderately favorable environment for hedge fund investment (see Figure H1 on page 6). Systemic risk on an aggregate basis remains moderately high and should be monitored closely due to the fact that two of four indicators continue to emit a warning signal (see Figure H2 on page 6). Our volatility forecast model indicates a lower volatility regime until mid-2011 (see Figure H3 on page 6). Volatility should trough by end-2011 and increase again in the beginning of 2012 as indicated by our fundamental volatility model. Within this volatility regime tactical trading strategies are most likely to outperform (see Figure H5 on page 6). Liquidity conditions remain positive (see Figures H4 on page 6). However the ongoing high liquidity conditions are uncertain as QE2 comes to an end. An adverse impact on market liquidity is likely. Discounts to NAV remain at comfortable levels (see Figure 5). Our CS cycle clock still indicates that the economy is in a recovery phase, which historically has constituted a good environment for tactical trading and event driven strategies. Hedge fund manager leverage and market exposure According to Credit Suisse Prime Services, equity long short managers slightly increased their net long exposure from 60% to 61% during May. They decreased their gross leverage slightly to 2.67x (from 2.74x in April). Both measures still indicate elevated risk tolerance. Long short managers increased their long exposure to North America from 30% to 37% and to Europe from 71% to 76%. They sharply decreased their exposure to Asia from 142% to 98% and to emerging markets from 182% to 147%. According to Credit Suisse Prime Services, all strategies reported a decrease in gross leverage with the biggest drop observed for the relative value strategy (from 6.6 to 5.47). Sector wise, consumer staples (19%), telecoms (19%), utilities (14%) and IT (9%) booked the largest decreases in bias compared to the previous month.

Convertible arbitrage
0.5

Relative value

0.0

FX strategies

Event driven

-0.5

Swiss Re Cat bond Index

Managed futures (CTA)

DJ CS Index

Global macro Tactical trading Multi strategy Emerging markets

Directional Equity long short Dedicated short bias

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Table 3: Hedge fund market dynamics

52-week correl.1
DJ CS Index Directional Tactical trading Event driven Relative value 0.05 0.12 0.07 0.07 0.09

13-week 1352 correl. week

0.20 0.18 0.15 0.15 0.13 0.15 0.06 0.08 0.22 0.04

52-week volatility
3.8% 4.6% 7.9% 8.0% 2.4%

1 Correlation is measured to the MSCI World Price Index; mid-term correlation, Figure S3 Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Table 4: Discount / premium to NAV of closed-end funds1

Discount / premium to NAV
Debt closed-end funds Equity closed-end funds All closed-end funds

Average over 12M

0.9 8.4 3.0

Average over 3M
0.3 8.6 3.4

Current value
0.5 8.0 3.7

1 Our universe includes 57 closed-end funds Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Figure 5 Discounts to NAV on closed-end funds remained unchanged in May 2011.

6 % d iscount / premium to NAV S &P 500 price index 0 1'600 Perform ance 2'000

-6 1'200 -1 2 80 0

-1 8

-2 4 92 94 96 98 00 02 04 06 08 10

40 0

Source: Credit Suisse

Research Monthly

New York, 4 July 2011

Investors prefer absolute return strategies in this volatile environment Hedge funds posted average losses of 1.0% (DJ CS; HFR 1.2%) in May. After a strong April, hedge funds suffered from the difficult macroeconomic environment characterized by high volatility and a lack of trends. However, investor demand for absolute return strategies is rising: directional strategies (long only) suffer larger losses in such an environment since they are not as flexible in adjusting to an uncertain market environment. In first quarter 2011, funds with over USD 500 million have attracted the lions share of asset inflows, according to Hedgeindex. The inflows to Global Macro (USD 3.3 billion), Fixed Income Arbitrage (USD 2.9 billion) and Managed Futures (USD 2.8 billion) amounted to 90% of total inflows. In the same period, these funds outperformed their smaller peers with a cumulated performance of 2.2% for large funds compared to 2% for small funds. Historically, large hedge funds have attracted the most new capital. However, a survey by Citigroup finds that recently, the focus of pension and sovereign wealth funds (SWFs) has shifted to small and mid-sized hedge funds with USD 1 billion to USD 5 billion in assets under management. Smaller hedge funds are often run in a more efficient way. While larger funds usually undertake major marketing efforts to attract new investors, their smaller peers often limit new investment by closing their funds and focusing on a more careful selection of their investor base. In general, investors have become more risk averse. Besides size, investors are more careful about their investments and are paying particular attention to operational risk, i.e. how the business is run. As a result of increased experience in hedge fund investment, investors are more confident in their hedge fund selection skills as reflected by an increased percentage of assets allocated to alternative solutions like hedge funds and are thus shifting from fund of hedge funds investment to direct investment in single hedge funds.

Number crunching: A look at hedge fund positioning Equity Market Futures: Hedge funds moved into June with a dampened outlook on equities. They added to their net short position in the S&P 500 future, maintained their short position on the Russell 200 future and reduced their net long position on the Nasdaq 100 to neutral during the month. Bond Futures: The bleak outlook for equities was reflected in the long position in Treasury bond futures. Long positions in two-year and five-year T-note futures prevailed, while the net short position in the ten-year future for May was brought down. Commodity Futures: Net long positions in oil futures continued to decline after their peak in March 2011. Long positions in copper futures were maintained while the rising demand for gold as an inflation hedge worldwide caused the funds to increase their long positions. Currency Futures: In June, speculative longs of hedge funds in the EUR, USD and JPY/USD saw substantial build-ups over May. Hedge fund strategy performance Global macro (outperform) Global macro returned 0.6% in May (DJ CS; Barclay Hedge: 1.2%). The month was punctuated with macroeconomic news that gave rise to uncertainty and large swings in the volatility index (range: 14.6 to 18.4). Weaker European economies (Greece, Portugal) yet again saw an uptick in their sovereign credit default swap (CDS) spreads and yields after further rating downgrades. This situation led to losses for macro funds at the start of the month. However, these funds were able to recover some losses after a mid-month rebound. Broadly, managers with a long bias on commodity and currency markets ended on the losing side. We maintain our outperform recommendation. Managed futures CTA (neutral) In May, managed futures gave back most of their April gains and ended up being the worst performers for the month (DJ Figure 7 Major emerging markets lost further ground in May 2011.
150 140

Figure 6 Commodity markets posted substantial losses in May 2011.

Index 400 380 360 340 320 300 280 260 240 220 200 Jun 09 3'000 Jun 11 4'200 5'400 6'600 7'800 Index 9'000

130 120 110 100 90 80 70 Jan 10

Oct 09

Feb 10

Jun 10

Oct 10

Feb 11

Mar 10

May 10

Jul 10

Sep 10

Nov 10 MSCI Russia

Jan 11 MSCI India

Mar 11

May 11

Dow Jones UBS Commodity Index

S&P GSCI Commodi ty Index (rhs)

MSCI EM Free USD

MSCI Brazil

MSCI China

Source: Credit Suisse / IDC

Source: Credit Suisse / IDC

Research Monthly

New York, 4 July 2011

CS: 4.4%; HFRI: 3.6%). After their good run in April, the S&P 500 (1.1%) and the DJ UBS Commodities Index ( 5.1%) were down sharply for the month (see Figure 6). Trend reversals over April were also seen across major currencies, oil and precious metals. For instance, silver shed 31% from its high reached in April. Range bound market movements and frequent trend reversals such as we have seen in the last few months are not particularly conducive to the strategys performance. We maintain our neutral stance. Convertible arbitrage (outperform) On average convertible arbitrage funds were flat in May (DJ CS: +0.02%; Barclay Hedge: +0.1%). Even though the convertible bond market posted a loss of 2% (BoA ML G300 Convertible Index) managers were somewhat hedged on the downside. With valuations trending into the rich zone and delta exposures hovering in the upper range, managers will likely move cautiously and pick wisely, if at all, from the rare issues (USD 2.6 billion) in the primary US convertible market. We maintain our outperform recommendation. Equity long short (neutral) Equity long short managers reported negative results in May (DJ CS: 1.7%; Barclay Hedge: 0.5%). After a strong April (MSCI World +4.0%), equity markets posted broad-based declines in May (MSCI World 2.5%), particularly after concerns about the European sovereign debt came to the fore once again and weaker than expected US economic data fueled slowing global growth expectations. Most long short funds were risk-on with long positions on cyclicals; whereas funds with a defensive bias ended up positive (see Figure 8). Asia (ex-Japan) continued to trend downwards. We retain our neutral stance. Emerging markets (neutral) Emerging markets ended the month with a loss of 1.1% (DJ CS; Barclay hedge: -1.7%). The BRIC nations (Brazil, Russia, India, China), which have been correcting over the last few months, lost an additional 5.0% on average in May (see Figure 7). With inflation being the major concern in the emerging Figure 8 Since January 2010 defensive stocks have tended to outperform cyclicals.
1.80 1.70 1.60 1.50

economies, Brazils Bovespa (4.3%), Russian RTS (7.0%), Indias Nifty (3.9%), and the Shanghai composite (5.0%) all underperformed their developed peers. We maintain our neutral stance. Event driven merger arbitrage (neutral) Merger arbitrage ended the month with a loss of 1.1% (DJ CS; HFRI: -0.1%). Corporate America's balance sheets boast some of the highest cash balances in recent history, and merger activity has been strong so far in 2011. We maintain our neutral stance. Event driven distressed debt (neutral) Distressed debt was flat in May (DJ CS: +0.0%; HFRI: 0.3%). In addition to the opportunities in Europe, the US highyield market was very active over the month, posting its highest volumes in a year and USD 40 billion worth of new issues (see Figure 9). The high-yield segment continues to remain in favor. We maintain our neutral stance. Equity market neutral (underperform) Equity market neutral funds generated positive returns in May (DJ CS: 1.0%; Barclay Hedge: 0.4%). Technical trading, relative value models and style rotation strategies scored over fundamental stock picking, which had been the winning strategy until April. We maintain our underperform stance. Fixed income arbitrage (neutral) With +0.2% (DJ CS; Barclay Hedge: +0.5%), fixed income arbitrage funds posted the second best performance for the month, after bond prices continued the upward trend from April. Managers remain positive for the year, highlighting that security selection remains profitable considering the uncertain environment. Also, interest-only security exposure did well over the month. We retain our neutral rating.

Figure 9 US domestic high-yield corporate bond issuance has increased in 2011.

USD mn 2'500

2'000

1'500
1.40 1.30 1.20

1'000

500
1.10 1.00 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Defensive to Cyclical ratio Defensives Outperforming

0 Jan 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09 Average

Jan 10

Jan 11

US domestic high yield corporate bond issuance (8-week MA)

Source: Credit Suisse / IDC

Source: Credit Suisse / IDC

Research Monthly

New York, 4 July 2011

Hedge fund barometer

Figure H1 Our hedge fund barometer continues to signal positive conditions for hedge fund investments.
4 D angerous conditions

Figure H2 Systemic risks indicated by our systemic risk map remain above average for hedge funds.
Aggregate
St yle dispe rsion

Hedge fund barometer

Sm oothed 13W

Top - bottom quartile differenc e

2

Pairwise style correlation Beta sensitivity

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Ja n 1 0

Favor ab le conditions 1 94 96 98 00 02 04 06 08 10

Source: Credit Suisse

Source: Credit Suisse

Figure H3 Our volatility forecast model indicates a lower volatility regime. Bank and sovereign debt issues may at times cause spikes in volatility that are not built into our quantitative model.
70 60 50 % Volatility forecast - upper band Volatility forecast - lower band S&P 100 - implied option volatility

Figure H4 Liquidity conditions eased in 2010 and are generally in positive territory.

Percen tile ran k value 1.2

Index 1800

Li quidity tight
1.0 0.8 1500 1200 900 600 300

40 30 20 10 0 1986 0.6 0.4 0.2 0.0 1991 1996 2001 2006 2011 93 95 97

Liquidity compos ite 13W MAV composite S&P 500 (r.h.s.) 99 01 03 05

Liq ui dity p lentiful

0 07 09 11

Source: Thomson Reuters DataStream, Credit Suisse

Source: Thomson Reuters DataStream, the BLOOMBERG PROFESSIONAL service, Credit Suisse

Figure H5 Average annualized hedge fund returns across volatility regimes (December 1993 April 2011).
20% 18% 13% 10% 8% 21% 17% 14% 9% 13% 13% 10% 10%

Figure H6 Average annualized hedge fund returns based on CS cycle clock (December 1993 April 2011).
Ove rh eatin g
18% 13% 13% 8% 9% 4% 14% 14% 11% 10% 12%

Slowdown

Cont ra ction

Recove ry

10% 6% 3%

-4% -5%
D irectiona l R ela tiv e v al ue Ev ent driv en

1%
D irecti ona l

0%
D irect ional R ela tiv e v alue R ela tiv e E vent Tactica l t radi ng Tacti ca l t rading E v ent Di recti onal driv en Rela t ive value driven value

-9% Directi onal investing Directi onal investi ng Tactical trading Tactical tradi ng Tactical tradi ng Event dr iven R elative value Relative val ue Event driven Directional i nvesting Tactical trading Direc tional i nvesting Relative value Relative value Event driven Event driven

Tactica l t radi ng

E vent

driven

D
Cu rren t stage

H igh volat ility

Low vola tility

Source: Credit Suisse

Source: Credit Suisse

Tact ical trading

Research Monthly

New York, 4 July 2011

Figure P1: Hedge funds (DJ CS index)

Figure P2: Private equity (Cambridge Associates)

Index 560 480 400 320 240 160 80 Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06

Monthly returns in % 12 8 4 0

Index 2'500 2'000 1'500 1'000

-4

Quarterly returns in % 36 24 12 0 -12 -24 1990 1994 1998 2002 2006 2010

500
-8 -12 Jan 08 Jan 10 Monthly returns (r.h.s.) DJ CS Index

0 1986 Quarterly returns

US Private Equity Composite Index (80% Buyout, 20% Venture Capital)

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: Cambridge Associates, Credit Suisse

Figure P3: Commodities (DJ-UBS Total Return Index)

Figure P4: Listed real estate (GPR REIT World Index)

Index 500 400 300 200 100 0 1991 1993 1995 1997 1999 2001 2003 2005

Monthly returns in % 21 14 7 0 -7 -14 2007 2009 2011 Monthly returns (r.h.s.) DJUBS Commodity Total Return Index

Index 1000

Monthly returns in % 20

800 600

10 0

400

-10

200 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Monthly returns (r.h.s.) GPR REIT World Index

-20 -30

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Figure P5: FX overlays (Barclay Currency Traders Index)

Figure P6: Art market (Art 100 top 25%)

Index 6000

Monthly returns in % 9%

Index 12000 10000 8000

Monthly returns in % 15 10 5 0 -5 -10 1996 1998 2000 2002 2004 2006 2008 2010

5000

6%

4000

3% 6000

3000

0%

4000 2000 1994

2000 1993 1995 1997 1999 2001 2003 2005 2007 2009

-3%

Monthly returns (r.h.s.)

Barclay Currency Traders Index

Monthly returns (r.h.s.)

AMR Index

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Research Monthly

New York, 4 July 2011

Commodities Platinum and palladium prices have underperformed following the earthquake in Japan in March and resurfacing economic growth concerns. Fundamentals in both markets, however, point to further price appreciation. With the technical picture becoming now more positive, we think platinum group metals (PGMs) should outperform the rest of precious metals. Precious metals: PGMs should perform best Since the beginning of the year, platinum and palladium have been the laggards among precious metals. From January to June, platinum prices lost about 3% whereas palladium prices fell by about 7.5%. Much of the weak performance of the platinum group metals (PGMs) is attributable to the closure of Japanese car factories following the March earthquake. The moderation of leading global economic indicators also weighed on investor appetite, as PGMs are usually considered the more cyclical precious metals. In our view, the current weakness is a buying opportunity. From a valuation perspective, both platinum and palladium are still attractive. Momentum and trend technical indicators are still neutral but should improve soon. The supply / demand outlook for 2011 for both markets also speaks in favor of further price appreciation. PGM supply should remain tight Platinum and palladium are looking at another challenging year in terms of supply. For platinum, South African output, which accounts for about 75% of the world's platinum supply, continues to underperform amid structural constraints in the domestic mining industry. The recent strong South African currency combined with rising input costs has put additional pressure on producer margins, thus limiting the incentive to increase production. According to a recent report by Johnson Matthey (JM) the world's leading platinum distributor global platinum supply should increase only modestly in 2011. In palladium, with a market share of more than 50%, Russia is the most important producer. Russia's palladium supplies to the world not only come from new mining production but also from existing stockpiles. Recently, these stocks have been Figure 10 Global car sales have continued to grow while production has been disrupted.
Units (in mn, 12-month rolling) 50 45 40 35 30 25 20 15 10 5 0 Jul 98 Jul 00 Jul 02 EU 25 USA Jul 04 Japan China Jul 06 Brazil India Jul 08 Jul 10

declining, prompting many market participants to believe that they are close to depletion. JM's latest report confirms these concerns, and the company expects 2011 Russian state stock sales to reach their lowest level in three years. Given that these sales represent the second largest source of palladium, global palladium supply should decline this year. Consumption should pick up strongly On the demand side, the picture looks very constructive. The main demand driver for PGMs is the car industry, as both platinum and palladium are heavily used in the production of auto-catalysts. Recent data shows that global vehicle sales have continued to grow robustly, although automotive supply chains have been disrupted, particularly in Japan (see Figure 10). We think this situation is a sign that car manufacturers are currently drawing down their inventories, and these inventories will have to be rebuilt at some point in time. Such rebuilding should ultimately translate into a significant pick up in PGM demand, which we expect to happen in second half 2011. Meanwhile, after showing some improvement in April, investment demand weakened again in May amid deleveraging pressures. Both PGM holdings in ETFs and futures registered significant outflows. However, we would argue that the combination of attractive valuations, a positive fundamental backdrop and an end to excessive positioning should attract renewed investment demand for both metals in the next few months. What to do? Overall, market balances for both platinum and palladium are likely to tighten further in 2011, as supply expansions are unlikely to keep up with growing demand. Platinum should remain close to balance while the deficit in palladium should widen further. Our preferred exposure is platinum, as the market is more stable and transparent. Palladium is a smaller market and considerably more volatile than platinum. While it can outperform platinum, we think it is more suitable for investors with a high risk tolerance.

Figure 11 Momentum and trend indicators for platinum are neutral for now but should improve when investor interest picks up.
1'900 1'800 1'700 1'600 1'500 1'400 1'300 1'200 1'100 1'000 PLATINUM 100 50 0 -50 -100 Jun 09 Oct 09 Feb 10 Jun 10 MT-MOM LT-MOM Oct 10 Feb 11 MT-MAV LT-MAV

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse / IDC

Source: Thomson Reuters DataStream, Credit Suisse / IDC

Research Monthly

New York, 4 July 2011

Real Estate The macroeconomic environment should remain supportive for Asian occupier markets despite the recent moderate slowdown. Rental growth should drive commercial real estate returns in the coming quarters, especially in developed markets. Positive outlook for most Asian-Pacific commercial property markets due to expanding rental markets Direct commercial real estate investments (ex land sales) in Asia-Pacific decreased slightly quarter-on-quarter in the first three months of the year to USD 14.4 billion but are still robustly above long-term average levels according to the property broker CB Richard Ellis (CBRE). Transactions in Asia exPacific witnessed a rise of about 8% while sales in the Pacific region were down about 70% in a quarterly comparison. Japan recorded the highest transaction volumes in first quarter 2011 (37% of total), followed by Singapore (19%), China (18%) and Hong Kong (9%). However, these numbers do not yet fully reflect the impact of the Japanese earthquake in March. Richer valuations but recovering rental markets Richer valuations as indicated by low property yields in many cities ongoing monetary tightening by a number of central banks and decelerating economic momentum are undoubtedly the reasons behind this moderate slowdown in commercial property transaction volume. Especially in Hong Kong, China and Singapore, initial real estate yields have fallen to historically low levels. However, even in markets where bond yields are higher, office yields still exceed them by a significant margin with only a few exceptions (see Figure 12). Since the global monetary environment should remain generally accommodative for the time being, we expect little upward pressure on Asian property yields in the next few months. However, in the medium term, property yields are likely to shift upward again. Figure 12 Valuations in Hong Kong, China and Singapore are relatively rich.
% 12 9 6 3 0 -3 Kuala Lumpur Beijing Manila Tokyo Hong Kong Melbourne Singapore Auckland Bangkok Mumbai Seoul Shanghai Sydney
Bp

Positively, commercial real estate rents are rising in many Asian cities (see Figure 13) and are increasingly becoming the main driver of property returns. The Asia ex-Japan region is well-positioned to benefit from expanding rental markets in the coming quarters as well. According to our main economic scenario, the loss of growth momentum is only a temporary phenomenon, not unusual at this point in the recovery. The global economic expansion should reaccelerate later in the year with Asia being one of the leading regions. This situation should translate into increased commercial space take-up, thereby supporting rental markets. Moreover, the current commercial building activity in developed Asian commercial property markets is relatively low in a historical comparison. Further upside in many Asian commercial property markets Overall, we expect the commercial real estate sector to outperform the residential sector in Asia in the coming quarters. While valuation risks have increased in the commercial real estate sector as well, we remain positive fundamentally due to expanding rental markets. Within Asia, we currently prefer the Singaporean and the Australian commercial property markets.

Figure 13 Commercial real estate rents are on the rise in most markets.
USD/sf p.a. 150 120 90 60 30 0 -30 Kuala Lumpur Hong Kong Beijing Tokyo Auckland Singapore Melbourne Shanghai Bangkok Mumbai Sydney Manila Seoul % 10 8 6 4 2 0 -2

600 450 300 150 0 -150

Average prime office yield Spread to 10-year government bond yields (r.h.s.)

Prime office rents, Q1 2011

QoQ rental growth (r.h.s.)

Source: CBRE, Credit Suisse

Source: CBRE, Credit Suisse

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A primer on fund of hedge funds We would like to finish our series of primers on hedge fund strategies with an introduction to fund of hedge funds. A brief overview of fund of hedge funds A fund of hedge funds (FoHF) is a fund that invests in a collection of hedge funds (HFs). FoHFs aim to achieve an attractive return while at the same time minimizing risk through diversification. This strategy should result in a return profile that is similar to equity markets but is achieved at a lower risk. Although FoHF managers do not invest in the markets themselves, they can create value by allocating capital to the hedge funds that they consider most promising. In fact, the selection of the best managers by the FoHF manager is crucial. A recent study by HF Analytics concludes that manager selection has a far higher impact on FoHF performance than strategic or tactical asset allocation. Industry trends Assets under management (AUM): After a sharp drop in total AUM during the recent financial crisis, the industry is growing again (see Figure 14). However, the FoHF share of total HF AUM has decreased from 31% in 2006 to 25% in 2010. The Madoff fraud was one factor that caused FoHF investors to lose trust in the strategy, as a number of FoHF have suffered heavily from the Madoff scheme. Consequently, many investors withdrew their assets, and it is not clear yet whether they will eventually come back. Fund flows: In 2009 and 2010, the FoHF industry reported net outflows of AUM. However, the trend has now reversed and more than 50% of FoHFs experienced net inflows in first quarter 2011, according to Preqin (see Figure 15). Number of FoHF: After a slight decrease in the number of FoHF, the number rose again in first quarter 2011 it is estimated that the number of FoHFs has surpassed 2000 (versus over 7000 single manager HFs). However, while single manager HFs have shown clear growth in terms of number of Figure 14 Total assets under management (AUM) are increasing again and recently surpassed the USD 2 trillion threshold, whereas current FoHF AUM are still below 2006 levels.
in USD bn 2,000

funds since the drop after the crisis, the number of FoHF is still below 2009 levels. Size: According to data from Preqin, a trend towards smallersized hedge funds could be observed from 2010 to 2011. In particular, the percentage of smaller funds with less than USD 500 million in AUM grew over this period of time. Domicile/jurisdiction: The USA is the most popular manager location with around 30% of the total FoHF market. The UK is the second most attractive place with a share of 25%, followed by Switzerland, France and Hong Kong. The majority of public listings are on the London and Zurich exchanges. Onshore, offshore: Both onshore as well as offshore hedge funds AUM have been increasing since the drop in 2009. There has not been a clear trend in the relation of offshore to onshore hedge funds. On average, there are 2.2 times more offshore funds than onshore funds. FoHF landscape: Two types of FoHF are increasingly favored by investors: experienced investors find niche players appealing, whereas less experienced investors seem more attracted to large FoHF companies with a multi-strategy focus. Performance analysis A comparison of single HFs to FoHFs shows that single HFs outperformed FoHFs on average by 2.7% from 2000 until 2010 (see Figure 16). The FoHF underperformance may be explained by the additional fee layer that undermines FoHF performance and the overstatement of single HF performance. As HFs usually exclude underperforming side pockets when they report their results to a data base. Over the same period, single HFs reported an average standard deviation of 10.7%, whereas FoHF succeeded in keeping the same figure at a level of 9.3%. Average monthly return is lower in up months and higher in down months when compared to single HF returns, reflecting the lower volatility in returns for FoHFs (see Figure 17). In comparison to the S&P 500, the outcome is even more extreme with the S&P 500 showing much higher variance of returns than FoHFs. Figure 15 Net inflows into the FoHF industry are exceeding outflows again; total FoHF assets under management increased again in Q1 2011.
60% 50% 57% 55%

1,500 40% 1,000 30% 20% 10% 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 0% 2008 Decrease 23% 20%

43%

40%

42% 34% 28% 24%

17%

17%

500

2009 No change

2010

Q1 2011 Increase

Funds of hedge funds

Single manager hedge funds

Source: HFR, Credit Suisse

Source: Preqin, Credit Suisse

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However, it is controversial whether FoHFs really create value by lowering risk and potential draw-downs. Other research concludes that FoHF return distributions are marked by a negative skew and excess kurtosis, which means large downside risk, similar to the return profile when investing in highyield bonds. Hence, it is doubtful whether FoHF managers can skillfully select the right strategies and thus limit downside risk. The strategy An FoHF manager can either allocate funds to single manager hedge funds (SMHF) or to multiple strategy manager hedge funds (MSHF). FoHF strategies can be further subdivided depending on the aim of the FoHF strategy. Conservative strategies aim at achieving consistent returns and at a relatively low standard deviation while opportunistic strategies focus on superior returns (e.g. through exposure to emerging markets) and are willing to take higher risks. Riskier strategies tend to outperform in up-markets and underperform in downmarkets, while more conservative strategies tend to have a more even return pattern. The FoHF set-up should allow investors to diversify their assets and lower their risk at a lower cost than investment in single hedge fund managers would require. The matrix Classification of hedge fund strategies The different hedge fund strategies can be categorized along their return profile and level of diversification (see Figure 18). Single strategy hedge funds (top left) exhibit the highest level of return at a low diversification. FoHFs that invest in multistrategy single hedge funds are at the other end of the scale. They offer a maximum of diversification at lower expected returns. Multi-strategy hedge funds and single strategy FoHFs are located somewhere in-between. Diversification can be achieved by investing in different hedge fund strategies (i.e. reducing unsystematic risk), but also by investing with multiple hedge funds (which reduces manager risk). As single strategy FoHFs tend to be more opportunistic, the risk that the strategy will fail is higher. Figure 16 Single hedge funds reported an average return of 7.3% in the period from 2000 to 2010, outperforming FoHF on average by 2.7% (average FoHF performance: 3.6%).
25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (Ann.) Hedge fund index Funds of funds performance in %

Alternatives to FoHF investing The Madoff fraud had a huge impact on the industry, contributing to the decline in FoHFs initially and leading to higher operational due diligence requirements thereafter. Another consequence is the transition from a qualitative evaluation of risk to a more quantitative measure. These adjustments have led to higher costs and caused several smaller FoHFs to close down. While USD 250 million was an adequate fund size before the crisis, USD 500600 million is now considered as the lower threshold. Besides stricter regulation within the FoHF industry, the fraud led to a search for possible alternatives. In response, major Wall Street banks have created various hedge fund replication strategies and hedge fund ETFs, both closely tracking the collective performance of the hedge fund universe. These products address risks arising out of illiquidity, lack of transparency and the higher costs associated with direct investment in FoHFs. Other alternatives include UCITS funds. With lower or no minimum investment limits, the best performing funds are now more accessible to a wider range of investors. Moreover, while listed hedge fund ETFs can be traded at very low dealing costs, the regulated nature of UCITS funds and a wider distribution on offer tend to keep investor insecurities at bay. However, even though an influx of sophisticated products enhances the scope for price discovery in a maturing industry, it tends to reduce the excess alpha, bringing returns to single digits in the current decade. Targeted investors: Who should invest in FoHFs? The following factors need to be considered when making a decision about FoHF investing: 1. Investor personality: Behavioral elements such as risk aversion, return and liquidity requirements, the desired level of control and level of confidence are factors that should be taken into account when deciding on a suitable investment strategy. FoHFs are designed to achieve a satisfying return while at the same time keeping risk at the lowest possible level and are thus a suitable investment for risk-adverse investors Figure 17 In the past ten years, FoHF have reported a lower return volatility than single manager hedge funds with lower returns in up months and higher returns in down months.
4% 3% 2% 1% 0% -1% -2% -3% -4% -5% up months HFRI FOF Composite Index Barclays Govt/Credt. Agg Bond down months HFRI Fund Weighted Composite Index S&P 500

Source: HFR, Credit Suisse

Source: HFR, Credit Suisse

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with low return requirements. 2. Portfolio size: The available capital that can be allocated to hedge funds is a determinant for strategy selection. Entry levels in terms of investment sums are lower for FoHF investing. Entry levels are generally around CHF 250000 while there are certain structures with much lower entry levels depending on the country. Entering a single hedge fund usually requires a higher minimum investment (often CHF 1 million and more). Furthermore, FoHFs might offer access to funds that are closed. 3. Investor sophistication/knowledge is another factor to consider. The selection of single hedge funds out of a universe of thousands of funds consumes resources (time, knowledge, data) that might not be available to the investor. Hedge fund manager selection and due diligence requires expertise and is more complicated than for long-only funds. For investors with limited resources, FoHFs can be a welcome alternative. In sum, FoHFs can be a suitable investment for risk adverse investors that aim to diversify their portfolio by investing in hedge funds, but who lack the resources to build a portfolio of single hedge funds. Risks and disadvantages of FoHF investing Like hedge funds, FoHF investments bear market risk, operational risk and liquidity risk. Although FoHFs aim at lowering volatility and draw-downs, the recent Madoff case has shown that FoHF investing is not always less risky and it has raised the general question whether the strategy lowers downside risk at all. The double layer fee structure (usually composed of a 1% management fee and a 10% performance fee), is considered as a disadvantage when investing in FoHFs but should be seen as a payment for the managers expertise in fund selection. Fees like retrocessions and trailing fees often come on top of that, without even being disclosed to investors. Sometimes, fees can be negotiated with the FoHF manager. For some investors, the lack of control when investing in FoHFs might be an argument against them. The investor does not have control over the investments in underlying hedge

funds or even the underlying assets, and a double layer of managers makes the strategy an opaque investment. However, the investor has some limited influence by choosing the right FoHF strategy. The question whether the FoHF structure adds value remains to be answered. As the quality of a FoHF strongly depends on the FoHF manager, this should be in focus when selecting a suitable FoHF. Conclusion and outlook Although FoHF target a risk / return profile that is attractive to non-institutional clients, we remain cautious about FoHF investing. FoHFs can be a good choice for investors that seek a more stable performance than single hedge funds or equity markets offer, and it can be a welcome means of diversification. However, the target investor has to bear in mind that the strategy still comes with risk and a double layer of fees. Furthermore, the performance depends strongly on the FoHF manager, and thus FoHF selection is crucial since risk / return profiles differ strongly among funds. Time will tell whether investors will eventually regain confidence in the FoHF strategy or whether alternatives like hedge fund replication strategies or UCITS funds will win over FoHF investors. If the trend of institutional investors increasing their allocations to FoHF continues, the industry's AuM could surpass USD 700 billion by end of 2011 from current levels of USD 670 billion.

Figure 18 The matrix shows the return-diversification profile for different hedge fund styles. As a rule of thumb a higher degree of diversification comes at the cost of a lower return. However, the return profiles vary strongly among different funds.
FoHF focus Risk return characteristics

Single Strategy Manager Multi Strategy HF Single Strategy FoHF Multi Strategy FoHF Low High

High

Emerging markets Sector specifics

Opportunistic Higher volatility Superior returns

Return

Equity market neutral Fixed income arbitrage Convertible arbitrage

Conservative Lower historical S.D Consistent performance

Low

Multiple strategies Multiple managers

Diversified Risk/return maps indices

Diversification
Source: HFR, Credit Suisse

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CS Stress Monitor
Figure S1: Risk premiums in equity and credit markets Risk premiums in equity markets have moved sideways since mid-2010, while premiums in credit markets have declined further.
in % 12 10 8 6 4 2 0 -2 Jun 93 Jun 95 Jun 97 Jun 99 Jun 01 Jun 03 Jun 05 Jun 07 Jun 09 Spread to worst in bp 2'000 1'800 1'600 1'400 1'200 1'000 800 600 400 200 Jun 11

Figure S2: AI Allocation including private equity Model alternative investment portfolio with recommended medium-term asset allocations (6M12M horizon).
5% 1 1%

Gold
11%

20 %

Commodities Real estate Directional

4%

Tactical trading
18%

Event driven Relative value Private Equity

9% 1 0% 13 %

Global equity risk premium

CS High Yield Index (r.h.s.)

Emerging Alternatives

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: the BLOOMBERG PROFESSIONAL service, Thomson Reuters DataStream, Credit Suisse

Figure S3: Market exposure of hedge funds Short-term correlations of hedge funds with bonds have decreased sharply since January 2011.
26W rolling correlations 1.00 0.80 0.60 0.40 0.20 -0.20 -0.40 10.10.2008 10.04.2009 10.10.2009 10.04.2010 10.10.2010 10.04.2011

Figure S4: Real annualized returns on private equity investments The average 5Y real return on private equity investments bottomed in mid-2009 and moved sideways in 2010.
40 30 20 10 0 -10 -20 1994 1997 2000 2003 2006 2009 5Y annu alize d re al re turns in %

DJ CS AllHedge Index - MSCI World DJ CS AllHedge Index - Barclays G7 Global Govt. Bond Index

Cam bridge A ssoc iates US LBO Index

LPX 50 Private E quity In dex

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: Cambridge Associates, Thomson Reuters DataStream

Figure S5: Quarterly hedge fund inflows Total assets increased to all-time-high in 2010.

Figure S6: Transaction flow of private equity funds The transaction flow of private equity funds reached record lows in 2009. A constrained debt supply and drop in risk appetite ushered in a more prudent attitude.
Num be r of fu nds 8000 7000 6000 5000 4000 3000 2000 1000 0

USD bn 200 0 175 0 150 0 125 0 100 0 75 0 50 0 25 0 0 19 90 19 93 1996 1999 2002 2005

USD bn 800 700 600 500 400 300 200 100 0

no. deals 600 500 400 300 200 100 0

2008

Q1 2011

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q1 2011 US LBO volume (USD) EU LBO volume (USD) EU + US deal count

Estima te d asse ts m an aged by h ed ge fu nds

T ota l n umbe r of hedge f unds

Source: Hedge Fund Research

Source: S&P LCD Europe & US leveraged buyout reviews

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CS Stress Monitor
Figure S7: Global heat map Systemic risks across asset classes have declined substantially since 2007.
Aggregate

Figure S8: Emerging market heat map Systemic risks across emerging markets are currently low. All risk indicators are back to low-risk levels.
Aggregat e EM Corp. bonds ELMI

G7 CDS FX Bank index High Yield HG corp. credit RMBS CMBS Municipal bonds Jan-08 Sep-08 May-09 Feb-10 Oct-10 Jun-11

EMBI Currencie s

MSCI EM Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

Source: the BLOOMBERG PROFESSIONAL service, Thomson Reuters DataStream, Credit Suisse

Source: the BLOOMBERG PROFESSIONAL service, Thomson Reuters DataStream, Credit Suisse

Figure S9: Real annualized returns on commodities Average 5Y real returns on agriculture and energy commodities significantly decreased in May 2011.
40 30 20 10 0 -10 -20 92 94 96 98 00 GSCI Industrial Metals GSCI Agriculture 02 04 06 08 GSCI Precious Metals GSCI Energy 10 5Y real annualized price returns

Figure S10: Real annualized returns on REITs Average 5Y real returns on REITs rebounded in 2009 but stagnated in 2010. We are generally cautious on markets that have gone through a period of excess (UK, Spain, USA).
5Y annualized real price return in %
40% 30% 20% 10% 0% -10% -20% 01 02 03 04 05 06 07 08 09 10 11

EU

Asia

Japan

USA

Source: the BLOOMBERG PROFESSIONAL service, Thomson Reuters DataStream, Credit Suisse

Source: the BLOOMBERG PROFESSIONAL service, Thomson Reuters DataStream, Credit Suisse

Figure S11: Open interest on commodity futures The notional value of open interest on commodity futures has recovered in line with commodity prices.
100 80 60 40 20 0 1995 USD in bn Index 500 400 300

Figure S12: Risk premiums on REITs Risk premiums (difference between dividend yield and real bond yield) on REITs stagnated in 2010.
REIT risk premia in %
12 10 8 6

200 100 0 1997 1999 2001 2003 2005 2007 2009 2011 Aggregate DJ-UBS value-weighted open-interest of most traded commodities DJ-UBS Total Return Index (r.h.s.)

4 2 0 -2 01 02 03 04 05 06 07 08 09 10 11

EU

UK

Japan

USA

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: the BLOOMBERG PROFESSIONAL service, Thomson Reuters DataStream, Credit Suisse

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Table 5: Performance table May 2011 (in %)

2009 EUR MSCI World S&P 500 MSCI Emerging Markets Citigroup G7 Government Bonds GSCI Commodity TR Index DJ UBS Commodity Index TR NAREIT GPR 250 REIT World Cambridge Associates Private Equity1 NCREIF Timberland Index2 Swiss Re Cat Bond TR Barclay Currency Traders Index3 DJ CS Index Equity long short Dedicated short bias Emerging markets Global macro Managed futures (CTA) Multi strategy Event driven Merger arbitrage Distressed debt Convertible arbitrage Equity market neutral 31.8 23.1 73.5 1.6 10.5 15.8 24.7 13.4 9.4 7.1 11.5 4.2 14.9 15.7 27.4 26.0 8.1 9.5 20.7 16.6 8.5 17.2 42.8 0.8 USD 35.4 26.5 79.0 1.6 13.5 18.9 27.8 31.5 10.5 4.8 14.0 0.5 18.6 19.5 25.0 30.0 11.6 6.6 24.6 20.4 12.0 20.9 47.3 4.1 2010 EUR 21.4 23.4 27.5 14.6 16.9 25.3 36.5 5.2 NA NA 19.9 12.8 18.7 16.9 17.1 19.1 21.4 20.0 16.9 20.5 10.3 17.9 18.7 6.0 USD 13.2 15.1 19.2 7.2 9.0 16.8 27.6 22.5 18 0.0 11.4 2.6 10.9 9.3 22.5 11.3 13.5 12.2 9.3 12.6 3.2 10.3 11.0 0.8 2011 YTD EUR 0.8 0.3 4.3 3.7 0.9 4.6 5.4 0.5 NA NA 8.5 8.0 3.8 4.6 12.6 4.0 4.4 7.0 2.0 3.4 3.9 3.1 2.4 1.2 USD 6.6 7.8 2.6 3.2 8.5 2.6 13.2 13.4 NA 0.8 2.3 2.0 3.1 2.3 6.4 2.9 2.5 0.3 5.1 3.5 3.0 3.8 4.6 5.8 Last 3M 1.9 1.8 6.4 3.2 1.4 0.3 4.3 6.0 NA NA 3.5 2.7 1.0 0.3 2.3 3.3 2.0 2.1 1.6 0.3 1.3 1.0 0.5 3.4 2.1 1.1 2.6 0.1 6.9 5.1 0.9 0.7 NA NA 0.3 1.7 1.0 1.7 2.2 1.1 0.6 4.4 0.0 0.6 1.1 0.0 0.0 1.0 May 2011

Fixed income arbitrage 23.4 27.4 20.3 12.5 3.4 3.5 0.8 0.2 1 For private equity we combine the Cambridge Associates Buyout Index and the Cambridge Associates Venture Capital Index by weighting buyouts at 80% and venture capital at 20%. Both indices report performance with a three-to-four-month lag. 2 The NCREIF Timberland Index reports performance with a three-to-four-month lag. 3 The Barclay Currency Traders Index is an equally weighted composite of currency managers that trade currency futures and/or cash forwards on the interbank market. The index currently contains 124 currency programs (source: Barclay).
Source: the BLOOMBERG PROFESSIONAL service, Thomson Reuters DataStream, Cambridge Associates, Credit Suisse

Appendix A: Performance figures Unless otherwise stated, all performance figures quoted in this publication are the total returns of indices in USD. EUR or CHF-based investors must consider the additional risk of currency movements and might consider hedging USD exposure. Unless otherwise stated, hedge fund performance figures used are the Dow Jones Credit Suisse indices. We benchmark these performance figures with the hedge fund index families of HFR and Barclay for consistency of analysis. Appendix B: Understanding relative recommendations Our outperform, neutral and underperform recommendations express performance expectations relative to our Alternative Investment (AI) composite benchmark (Table 5). An outperform recommendation means that we expect the asset class to outperform the AI benchmark over a 12M horizon and vice versa for an underperform recommendation. Investors should bear in mind that tactical shifts in the alternative investment category are constrained due to limited liquidity and the necessity to customize our standardized model portfolio to fit their personal needs and circumstances.

References Handbook of Hedge Funds, Lhabitant, Franois-Serge. Wiley Finance, 2008 Handbook of Alternative Assets, Anson, Marc. Wiley Finance, 2006 Hedge Fund Spotlight. Preqin, May 2011

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Figure A1 Asset class Sharpe ratios

MSCI World price index Fixed income arbitrage Equity market neutral Convertible arbitrage
6.0 4.0 2.0 0.0 -2.0

Figure A2 Asset class MAR and Calmar ratios

36 month Sharpe Ratio 52 week Sharpe Ratio Commodities Gold Equity market neutral Convertible arbitrage Oil MSCI World price index Fixed income arbitrage
2.5 2.0 1.5 1.0

36 month Calmar ratio Mar ratio Commodities Swiss Re Cat bond Index

Real estate

Real estate

Relative value

Relative value

0.5 0

DJ CS Index

Event driven

-4.0

FX strategies

Distressed debt

-0.5

Directional

Managed futures (CTA)

Swiss Re Cat bond Index Merger arbitrage Equity long short

Global macro Tactical trading Multi strategy Emerging markets

DJ CS Index Event driven Directional Equity long short Dedicated short bias Managed futures (CTA) Global macro Tactical trading Dedicated short bias Emerging markets Multi strategy

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Figure A3 Asset class volatilities

MSCI World price index Fixed income arbitrage Equity market neutral Convertible arbitrage Relative value
0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0

Figure A4 Asset class correlations

36 month volatility 52 weeks volatility Fixed income arbitrage Equity market neutral Convertible arbitrage Oil Relative value Swiss Re Cat bond Index Merger arbitrage Commodities Gold Real estate
1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4

36 month correlation Commodities Gold Oil 52 week correlation

Real estate

FX strategies

Distressed debt

Merger arbitrage

DJ CS Index

Swiss Re Cat bond Index

Event driven Managed futures (CTA) Global macro Tactical trading Multi strategy

Directional Equity long short Dedicated short bias Emerging markets

Managed futures (CTA)

DJ CS Index

Global macro Tactical trading Multi strategy

Directional Equity long short Emerging markets

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Definitions for Figures A1A4:

Hedge fund universe: We use the DJ CS Index series

for monthly calculations and the DJ CS Sector Invest Index series for weekly calculations. MAR ratio: The MAR ratio is a performance measure and is calculated by dividing annualized historical returns by the maximum drawdown over the same period. A MAR ratio above one indicates an attractive risk / return payoff. We use month-to-date data back to 31.12.1993. The Calmar ratio is a rolling 36-month MAR ratio. Sharpe ratio: The Sharpe ratio is defined as excess return over cash divided by volatility. Real estate: We use the GPR 250 Property Index as the benchmark for global real estate, due to the lack of direct global real estate benchmarks.

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Imprint
This publication has been authored by Private Banking Global Research US Contact Information Investment Strategy and Advisory: Philipp E. Lisibach, Director Tel. +1 212 538 0311 E-mail: philipp.lisibach@credit-suisse.com Jimmy James, Vice President Tel. +1 212 538 5944 E-mail: jimmy.james@credit-suisse.com Ryan Sullivan Tel. +1 212 538 2194 E-mail: ryan.sullivan@credit-suisse.com Samuel Baumann, Assistant Vice-President Tel. +1 212 538 5194 E-mail: samuel.baumann@credit-suisse.com Scott Rosenblatt, Assistant Vice-President Tel. +1 212 325 4458 E-mail: scott.rosenblatt@credit-suisse.com

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Disclaimer
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