Alternative Investments an Introduction to Funds of Hedge Funds 04 Jul 2011 (Credit Suisse)

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New York, 4 July 2011

Research Monthly

Alternative Investment Research

Investment horizon: 6–12+ months

Important disclosures are found in the Disclosure appendix

Choppy markets represent a challenge and an opportu-

nity

Over recent weeks, two major issues have kept hedge fundmanagers holding their breath: the euro zone debt crisis, whichmight lead to the first sovereign default in the euro zone, andfears of a double dip recession in the wake of the slowdown inthe US economy.

The current uncertain macroeconomic outlook character-ized by a lack of clear trends makes asset allocation for hedgefund managers difficult. Volatility has shot up as a result ofEuropean debt woes, the US slowdown, the end of the USFederal Reserve’s (Fed’s) second quantitative easing program(QE2) and potential rate hikes. While we expect global macrobe the best-performing strategy within this environment, man-agers so far have failed to exploit high probability scenarios toestablish their positions. A range of high-profile global macromanagers booked a disappointing performance in May. This isthe third year in a row after the crisis that global macro fundshave been struggling to satisfy investor expectations. How-ever, we are still optimistic that global macro managers arebest positioned to take advantage of the uncertain environ-ment.

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 inves-tors in the flexibility of hedge funds to adapt to a fast-changingmarket environment. A rising interest of investors for absolutereturn strategies could thus be observed. New hedge fundlaunches continued to increase in first quarter 2011, with boththe first quarter and trailing fourth quarter launch totals reach-ing their highest levels since 2007, according to data releasedby Hedge Fund Research (HFR).

Another positive is that our alpha estimation model indi-cates a further increase of alpha generation during 2011 (seeFigure 1). Both multi-factor regressions run on Dow JonesCredit Suisse (DJ CS) and HFR figures confirmed the struc-tural decline in alpha following the recent financial crisis. Thehedge fund industry reached a trough in terms of alpha poten-

tial with the liquidation of a large number of hedge funds in2008–10 and the reduced proprietary trading activity of in-vestment banks (see Figure 2). The higher estimate of alphabased on the asset-weighted DJ CS Hedge Fund Index sug-

Research Monthly US

Alternative Investments An introduction to funds of hedge funds

Private Banking

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).

Figure 1

Our estimate of uncorrelated returns (alpha) for the Dow Jones Credit Suisse and HFR hedge fund indices indicates afurther recovery of alpha generation.

-5

0

5

10

15

20

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




Research Monthly 2

gests that medium-sized and smaller hedge funds have gener-ated less alpha over the past two years (a suggestion that isunderpinned by the latest hedge fund industry report fromHedgeindex), though this assertion would be subject to further investigation.

Private equity news in June

US buyouts: The US buyout market is buoyant and seeingmultibillion-dollar deals. Six out of the ten largest deals in2011 YTD have taken place in the USA, according to Preqin.

European buyouts: Compared to the USA, the Europeanprivate equity (PE) market remains subdued. AlthoughEurope's funding climate is more difficult than that of the USA,conditions for buyout funding have improved, and PE fundsare generally flush with cash. According to the Wall Street

Journal, it is likely that PE funds will take advantage of thecurrent favorable funding climate, as it may be temporary.

Resurgence of PE in Russia? With an improving economicoutlook, an expanding pool of mature fund managers and im-proved availability of exit information, Russia's PE climate isbecoming more appealing to investors. Appropriate regulatoryadjustments should provide further support. According to Em-

pea, Russia might see some very successful exits in 2011.

PE in Africa: Fundraising activity in Africa is still very low butincreasing. While efforts are being made to increase PE activ-ity, Africa is facing headwinds from its often unpredictablepolitics, difficulties in enforcing legal rights and a shortage ofskilled managers. However, conditions are improving, and PEactivity is likely to increase in the future. For this year, Preqin expects fundraising to hit USD 8–10 billion.

PE secondaries: According to the Financial Times, discountsto net asset value (NAV) have decreased to 5% compared toa maximum discount of 35% during the crisis. Because PEfunds are under pressure to invest their piles of committedcapital, valuations are being pushed up. However, current val-uation is 18% above the 10-year average and thus can beseen as a premium.

Table 1: Model portfolio for alternative investments anddeviations from benchmark

Model

portfolio

Hedge funds – Directional 17.1%

Hedge funds – Tactical trading 12.9%

Hedge funds – Event driven 12.4%

Hedge funds – Relative value 5.2%

Real Estate 23.8%

Commodities 14.3%

Gold 14.3%

Source: Credit Suisse

Figure 2

The high number of hedge fund liquidations between 2008

and 2010 partially reduced the competition between hedgefunds regarding their return sources.

507 261 450 348 328673

1087 1094

1435

2073

1518

1197

659784

935

(296)

(176)(162)(92)(71)(57)(115)(52)(109)

(848)

(717) (563)

(1471)

(1023)

(743)

-2'000

-1'500

-1'000

-500

0

500

1'000

1'500

2'000

2'500

1996 1 997 19 98 199 9 200 0 200 1 2 002 2 003 20 04 20 05 200 6 2007 2 008 2 009 20 10

Launches Liquidations

Number of Funds

Source: Credit Suisse, HFR

Figure 3

Model alternative investment portfolio with recommendedmedium-term asset allocations (6M–12M horizon; Table 1).

14%

13%

12%

5%

24%17%

14% Gold

Commodities

Real estate

Directional

Tactical trading

Event driven

Relative value


For the alternative investment portfolio including private equity and emerging alterna-

tives, please see page 12. Considering the lack of liquidity in the alternative invest-

ment 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 2: Hedge fund style performance and recommendations

20111 May Weight Our recommen-

dation

DJ CS Indices 3.1% –1.0%

Equity long short D 2.3% –1.7% 16.0% Neutral

Multi strategy D 5.1% 0.0% 11.0% Neutral

Dedicated short bias D –6.4% 2.2% 0.0% Underperform

Emerging markets D 2.9% –1.1% 9.0% Neutral

Global macro TT 2.5% –0.6% 20.0% Outperform

Managed futures (CTA) TT –0.3% –4.4% 7.0% Neutral

Merger arbitrage ED 3.0% –1.1% 9.0% Neutral

Distressed debt ED 3.8% 0.0% 17.0% Neutral

Convertible arbitrage RV 4.6% 0.0% 4.0% Outperform

Equity market neutral RV 5.8% –1.0% 2.0% Underperform

Fixed income arbitrage RV 3.5% 0.2% 5.0% Neutral

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




Research Monthly 3

The hedge fund barometer is still positive, but systemic

risks remain above average.

Our hedge fund barometer continues to indicate a moderatelyfavorable environment for hedge fund investment (see FigureH1 on page 6). Systemic risk on an aggregate basis remainsmoderately high and should be monitored closely due to thefact that two of four indicators continue to emit a warning sig-

nal (see Figure H2 on page 6).Our volatility forecast model indicates a lower volatility re-gime until mid-2011 (see Figure H3 on page 6). Volatilityshould trough by end-2011 and increase again in the begin-ning of 2012 as indicated by our fundamental volatility model.Within this volatility regime tactical trading strategies are mostlikely to outperform (see Figure H5 on page 6).

Liquidity conditions remain positive (see Figures H4 onpage 6). However the ongoing high liquidity conditions areuncertain as QE2 comes to an end. An adverse impact onmarket liquidity is likely. Discounts to NAV remain at comfort-able levels (see Figure 5).

Our CS cycle clock still indicates that the economy is in a

recovery phase, which historically has constituted a good envi-ronment for tactical trading and event driven strategies.

Hedge fund manager leverage and market exposure

According to Credit Suisse Prime Services, equity long shortmanagers 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 indi-cate 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 from142% to 98% and to emerging markets from 182% to147%.

According to Credit Suisse Prime Services, all strategiesreported a decrease in gross leverage with the biggest dropobserved 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 inbias compared to the previous month.

Hedge funds

Hedge funds struggled to deliver positive returns in May(DJ CS: –1.0%; HFR: –1.2%).

Investors prefer absolute return strategies in this volatileenvironment.

Large funds tended to outperform small and mid-sizedfunds in first quarter 2011.

Figure 4

Asset class betas – 36 months and 52 weeks.

-0.5

0.0

0.5

1.0

1.5

Real estate

Commodities

Gold

Oil

FX strategies

Swiss Re Cat bond Index

DJ CS Index

Directional

Equity long short

Dedicated short bias

Emerging markets

Multi strategy

Tactical trading

Global macro

Managed futures (CTA)

Event driven

Relative value

Convertible arbitrage

Equity market neutral

Fixed income arbitrage36- month beta

52- week beta

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

Table 3: Hedge fund market dynamics

52-week

correl.1

13-week

correl.

13—52

week Δ

52-week

volatility

DJ CS Index –0.05 –0.20 –0.15 3.8%

Directional –0.12 –0.18 –0.06 4.6%

Tactical trading –0.07 –0.15 –0.08 7.9%

Event driven 0.07 –0.15 –0.22 8.0%

Relative value –0.09 –0.13 –0.04 2.4%

1 Correlation is measured to the MSCI World Price Index; mid-term correlation, Figure S3

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Figure 5

Discounts to NAV on closed-end funds remained unchangedin May 2011.

-24

-18

-12

-6

0

6

92 94 96 98 00 02 04 06 08 10

400

800

1'200

1'600

2'000

discount / premium to NAV

S&P 500 price index

% Performance


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

Discount / premium to

NAV

Average over

12M

Average

over 3M

Current value

Debt closed-end funds 0.9 0.3 –0.5

Equity closed-end funds –8.4 –8.6 –8.0

All closed-end funds –3.0 –3.4 –3.7

1 Our universe includes 57 closed-end funds

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse




Research Monthly 4

Investors prefer absolute return strategies in this vola-

tile 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 byhigh volatility and a lack of trends. However, investor demandfor absolute return strategies is rising: directional strategies(long only) suffer larger losses in such an environment sincethey are not as flexible in adjusting to an uncertain marketenvironment.

In first quarter 2011, funds with over USD 500 millionhave attracted the lion’s share of asset inflows, according toHedgeindex. The inflows to Global Macro (USD 3.3 billion),Fixed Income Arbitrage (USD 2.9 billion) and Managed Fu-tures (USD 2.8 billion) amounted to 90% of total inflows. Inthe same period, these funds outperformed their smaller peers

with a cumulated performance of 2.2% for large funds com-pared to 2% for small funds.

Historically, large hedge funds have attracted the mostnew capital. However, a survey by Citigroup finds that re-cently, the focus of pension and sovereign wealth funds(SWFs) has shifted to small and mid-sized hedge funds withUSD 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 toattract new investors, their smaller peers often limit new in-vestment by closing their funds and focusing on a more carefulselection of their investor base. In general, investors have be-

come more risk averse. Besides size, investors are more care-ful about their investments and are paying particular attentionto operational risk, i.e. how the business is run. As a result ofincreased experience in hedge fund investment, investors aremore confident in their hedge fund selection skills – as re-flected by an increased percentage of assets allocated to al-ternative solutions like hedge funds – and are thus shiftingfrom fund of hedge funds investment to direct investment insingle hedge funds.

Number crunching: A look at hedge fund positioning

Equity Market Futures: Hedge funds moved into June with adampened outlook on equities. They added to their net shortposition in the S&P 500 future, maintained their short position

on the Russell 200 future and reduced their net long positionon the Nasdaq 100 to neutral during the month.

Bond Futures: The bleak outlook for equities was reflected inthe long position in Treasury bond futures. Long positions intwo-year and five-year T-note futures prevailed, while the netshort position in the ten-year future for May was broughtdown.Commodity Futures: Net long positions in oil futures contin-ued to decline after their peak in March 2011. Long positionsin copper futures were maintained while the rising demand for gold as an inflation hedge worldwide caused the funds to in-crease their long positions.

Currency Futures: In June, speculative longs of hedge fundsin the EUR, USD and JPY/USD saw substantial build-upsover 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 macroeconomicnews that gave rise to uncertainty and large swings in the vola-tility index (range: 14.6 to 18.4). Weaker European economies(Greece, Portugal) yet again saw an uptick in their sovereigncredit default swap (CDS) spreads and yields after further

rating downgrades. This situation led to losses for macro fundsat the start of the month. However, these funds were able torecover some losses after a mid-month rebound. Broadly,managers with a long bias on commodity and currency mar-kets ended on the losing side. We maintain our outperformrecommendation.

Managed futures – CTA (neutral)

In May, managed futures gave back most of their April gainsand ended up being the worst performers for the month (DJ

Figure 6 Figure 7

Commodity markets posted substantial losses in May 2011. Major emerging markets lost further ground in May 2011.

200

220

240

260

280

300

320

340

360

380

400

Jun 09 Oct 09 Feb 10 Jun 10 Oct 10 Feb 11 Jun 113'000

4'200

5'400

6'600

7'800

9'000

Dow Jones UBS Commodity Index S&P GSCI Commodity Index (rhs)

Index Index

70

80

90

100

110

120

130

140

150

Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11

MSC I E M Fr ee USD MSCI Br azi l MSCI Russia MSCI Indi a MSCI Ch ina

Source: Credit Suisse / IDC Source: Credit Suisse / IDC




Research Monthly 5

CS: –4.4%; HFRI: –3.6%). After their good run in April, theS&P 500 (–1.1%) and the DJ UBS Commodities Index (–5.1%) were down sharply for the month (see Figure 6). Trendreversals over April were also seen across major currencies, oiland precious metals. For instance, silver shed 31% from its

high reached in April. Range bound market movements andfrequent trend reversals such as we have seen in the last fewmonths are not particularly conducive to the strategy’s per-formance. We maintain our neutral stance.

Convertible arbitrage (outperform)

On average convertible arbitrage funds were flat in May (DJCS: +0.02%; Barclay Hedge: +0.1%). Even though the con-vertible bond market posted a loss of 2% (BoA ML G300Convertible Index) managers were somewhat hedged on thedownside. With valuations trending into the rich zone and deltaexposures 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. Wemaintain 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-baseddeclines in May (MSCI World –2.5%), particularly after con-cerns about the European sovereign debt came to the foreonce again and weaker than expected US economic data fu-eled 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 neu-tral stance.

Emerging markets (neutral)

Emerging markets ended the month with a loss of 1.1% (DJCS; Barclay hedge: -1.7%). The BRIC nations (Brazil, Russia,India, China), which have been correcting over the last fewmonths, lost an additional –5.0% on average in May (see Fig-ure 7). With inflation being the major concern in the emerging

economies, Brazil’s Bovespa (–4.3%), Russian RTS (–7.0%),India’s Nifty (–3.9%), and the Shanghai composite (–5.0%) allunderperformed their developed peers. We maintain our neu-tral stance.

Event driven – merger arbitrage (neutral)Merger arbitrage ended the month with a loss of –1.1% (DJCS; HFRI: -0.1%). Corporate America's balance sheets boastsome of the highest cash balances in recent history, and mer-ger 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 high-yield market was very active over the month, posting its high-est volumes in a year and USD 40 billion worth of new issues

(see Figure 9). The high-yield segment continues to remain infavor. 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 strat-egy until April. We maintain our underperform stance.

Fixed income arbitrage (neutral)

With +0.2% (DJ CS; Barclay Hedge: +0.5%), fixed incomearbitrage 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 thatsecurity selection remains profitable considering the uncertainenvironment. Also, interest-only security exposure did well over the month. We retain our neutral rating.

Figure 8 Figure 9

Since January 2010 defensive stocks have tended to outper-form cyclicals.

US domestic high-yield corporate bond issuance has increasedin 2011.

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11

Defensive to Cyclical ratio

Defensives Outperforming

0

500

1'000

1'500

2'000

2'500

Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

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

USD mn

Source: Credit Suisse / IDC Source: Credit Suisse / IDC




Research Monthly 6

Hedge fund barometer

Figure H1 Figure H2

Our hedge fund barometer continues to signal positive condi-tions for hedge fund investments.

Systemic risks indicated by our systemic risk map remainabove average for hedge funds.

1

2

3

4

94 96 98 00 02 04 06 08 10

Hedge fund barometer Smoothed 13W

Dangerous conditions

Favorab le conditions

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

Aggregate

Top - bottom

quartiledifference

Style

dispersion

Pairwise stylecorrelation

Beta

sensitivity

Source: Credit Suisse Source: Credit Suisse

Figure H3 Figure H4

Our volatility forecast model indicates a lower volatility regime.Bank and sovereign debt issues may at times cause spikes involatility that are not built into our quantitative model.

Liquidity conditions eased in 2010 and are generally in positiveterritory.

0

10

20

30

40

50

60

70

1986 1991 1996 2001 2006 2011

Volatility forecast - upper band

Volatility forecast - lower band

S&P 100 - implied option volatility

%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

93 95 97 99 01 03 05 07 09 11

0

300

600

900

1200

1500

1800

Liquidity composite13W MA V compositeS&P 500 (r.h.s.)

Liquidity tight

Liquidity plentiful

Percentile rank value Index

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

Credit Suisse

Figure H5 Figure H6

Average annualized hedge fund returns across volatilityregimes (December 1993 – April 2011).

Average annualized hedge fund returns based on CS cycleclock (December 1993 – April 2011).

10%

-4% -5%

-9%

20%18%

13%

8%

21%

17%14%

9%

13% 13%10% 10%

T a c t i

c a l t r a d i n g

R e l a t i v e v a l u e

E v

e n t d r i v e n

D i r e c t i o n a

l i n v e s t i n g

D i r e c t i o n a

l i n v e s t i n g

E v

e n t d r i v e n


T a c t i c a l t r a d i n g

D i r e c t i o n a

l i n v e s t i n g

E v

e n t d r i v e n




E v

e n t d r i v e n

D i r e c t i o n a

l i n v e s t i n g


igh volat ility Low vola tility

A B C D

13% 13%

8% 9%

4%

1% 0%

14% 14%

11%10%

12%10%

6%

3%

18%

D i r e c t i o n a l

T a c t i c a l

t r a d i n g

E v e n t

d r i v e n

R e l a t i v e

v a l u e

T a c t i c a l

t r a d i n g

E v e n t

d r i v e n


R e l a t i v e

v a l u e


E v e n t

d r i v e n

T a c t i c a l

t r a d i n g

R e l a t i v e

v a l u e

T a c t i c a l

t r a d i n g

E v e n t

d r i v e n

R e l a t i v e

v a l u e


Current stage

ContractionSlowdownOverheating Recovery

Source: Credit Suisse Source: Credit Suisse




Research Monthly 7

Figure P5: FX overlays (Barclay Currency Traders Index) Figure P6: Art market (Art 100 top 25%)

2000

3000

4000

5000

6000

1993 1995 1997 1999 2001 2003 2005 2007 2009

-3%

0%

3%

6%

9%

Monthly returns (r.h.s.) Barclay Currency Traders Index

Index Monthly returns in %

2000

4000

6000

8000

10000

12000

1994 1996 1998 2000 2002 2004 2006 2008 2010

-10

-5

0

5

10

15

Monthly returns (r.h.s.) AMR Index


Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Figure P3: Commodities (DJ-UBS Total Return Index) Figure P4: Listed real estate (GPR REIT World Index)

0

100

200

300

400

500

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

-14

-7

0

7

14

21

Monthly returns (r.h.s.) DJUBS Commodity Total Return Index


0

200

400

600

800

1000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

-30

-20

-10

0

10

20

Monthly returns (r.h.s.) GPR REIT World Index



Figure P1: Hedge funds (DJ CS index) Figure P2: Private equity (Cambridge Associates)

80

160

240

320

400

480

560

Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10

-12

-8

-4

0

4

8

12

Monthly returns (r.h.s.) DJ CS Index


0

500

1'000

1'500

2'000

2'500

1986 1990 1994 1998 2002 2006 2010

-24

-12

0

12

24

36

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

Index Quarterly returns in %

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Cambridge Associates, Credit Suisse




Research Monthly 8

Precious metals: PGMs should perform best

Since the beginning of the year, platinum and palladium havebeen the laggards among precious metals. From January to June, platinum prices lost about 3% whereas palladium pricesfell by about 7.5%. Much of the weak performance of theplatinum group metals (PGMs) is attributable to the closure of Japanese car factories following the March earthquake. The

moderation of leading global economic indicators also weighedon investor appetite, as PGMs are usually considered the morecyclical precious metals. In our view, the current weakness is abuying opportunity. From a valuation perspective, both plati-num and palladium are still attractive. Momentum and trendtechnical indicators are still neutral but should improve soon.The supply / demand outlook for 2011 for both markets alsospeaks 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, whichaccounts for about 75% of the world's platinum supply, con-

tinues to underperform amid structural constraints in the do-mestic mining industry. The recent strong South African cur-rency combined with rising input costs has put additional pres-sure on producer margins, thus limiting the incentive to in-crease production. According to a recent report by JohnsonMatthey (JM) – the world's leading platinum distributor – globalplatinum supply should increase only modestly in 2011. Inpalladium, with a market share of more than 50%, Russia isthe most important producer. Russia's palladium supplies tothe world not only come from new mining production but alsofrom existing stockpiles. Recently, these stocks have been

declining, prompting many market participants to believe thatthey are close to depletion. JM's latest report confirms theseconcerns, and the company expects 2011 Russian state stocksales to reach their lowest level in three years. Given thatthese 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. Themain demand driver for PGMs is the car industry, as bothplatinum and palladium are heavily used in the production ofauto-catalysts. Recent data shows that global vehicle saleshave continued to grow robustly, although automotive supplychains have been disrupted, particularly in Japan (see Figure10). We think this situation is a sign that car manufacturersare currently drawing down their inventories, and these inven-tories will have to be rebuilt at some point in time. Such re-building should ultimately translate into a significant pick up inPGM demand, which we expect to happen in second half2011. Meanwhile, after showing some improvement in April,investment demand weakened again in May amid deleveragingpressures. Both PGM holdings in ETFs and futures registeredsignificant outflows. However, we would argue that the combi-nation of attractive valuations, a positive fundamental backdropand an end to excessive positioning should attract renewedinvestment demand for both metals in the next few months.

What to do?

Overall, market balances for both platinum and palladium arelikely to tighten further in 2011, as supply expansions are un-

likely to keep up with growing demand. Platinum should re-main close to balance while the deficit in palladium should widen further. Our preferred exposure is platinum, as the mar-ket is more stable and transparent. Palladium is a smaller mar-ket and considerably more volatile than platinum. While it canoutperform platinum, we think it is more suitable for investors with a high risk tolerance.

Commodities

Platinum and palladium prices have underperformed follow-ing the earthquake in Japan in March and resurfacing eco-nomic growth concerns.

Fundamentals in both markets, however, point to further

price appreciation. With the technical picture becoming nowmore positive, we think platinum group metals (PGMs)should outperform the rest of precious metals.

Figure 10 Figure 11

Global car sales have continued to grow while production hasbeen disrupted.

Momentum and trend indicators for platinum are neutral for now but should improve when investor interest picks up.

0

5

10

15

20

25

30

35

40

45

50

Jul 98 Jul 00 Jul 02 Jul 04 Jul 06 Jul 08 Jul 10

EU 25 USA Japan China Brazil India

Units (in mn, 12-month rolling)

-100

-50

0

50

100

Jun 09 Oct 09 Feb 10 Jun 10 Oct 10 Feb 11

MT-MOM LT-MOM

1'000

1'100

1'200

1'300

1'400

1'500

1'600

1'700

1'800

1'900

PLATINUM MT-MAV LT-MAV

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




Research Monthly 9

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 firstthree months of the year to USD 14.4 billion but are stillrobustly above long-term average levels according to the prop-erty broker CB Richard Ellis (CBRE). Transactions in Asia ex-Pacific witnessed a rise of about 8% while sales in the Pacificregion were down about 70% in a quarterly comparison. Ja-

pan 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 notyet fully reflect the impact of the Japanese earthquake inMarch.

Richer valuations but recovering rental markets

Richer valuations – as indicated by low property yields in manycities – ongoing monetary tightening by a number of centralbanks and decelerating economic momentum are undoubtedlythe reasons behind this moderate slowdown in commercialproperty transaction volume. Especially in Hong Kong, Chinaand Singapore, initial real estate yields have fallen to histori-

cally low levels. However, even in markets where bond yieldsare higher, office yields still exceed them by a significant mar-gin with only a few exceptions (see Figure 12). Since theglobal monetary environment should remain generally accom-modative for the time being, we expect little upward pressureon Asian property yields in the next few months. However, inthe medium term, property yields are likely to shift upwardagain.

Positively, commercial real estate rents are rising in many Asian cities (see Figure 13) and are increasingly becoming themain driver of property returns. The Asia ex-Japan region is well-positioned to benefit from expanding rental markets in thecoming quarters as well. According to our main economic sce-

nario, the loss of growth momentum is only a temporary phe-nomenon, not unusual at this point in the recovery. The globaleconomic expansion should reaccelerate later in the year with Asia being one of the leading regions. This situation shouldtranslate into increased commercial space take-up, therebysupporting rental markets. Moreover, the current commercialbuilding activity in developed Asian commercial property mar-kets is relatively low in a historical comparison.

Further upside in many Asian commercial property mar-

kets

Overall, we expect the commercial real estate sector to out-perform the residential sector in Asia in the coming quarters.While valuation risks have increased in the commercial realestate sector as well, we remain positive fundamentally due toexpanding rental markets. Within Asia, we currently prefer theSingaporean and the Australian commercial property markets.

Real Estate

The macroeconomic environment should remain supportivefor Asian occupier markets despite the recent moderateslowdown.

Rental growth should drive commercial real estate returns in

the coming quarters, especially in developed markets.

Figure 12 Figure 13

Valuations in Hong Kong, China and Singapore are relativelyrich.

Commercial real estate rents are on the rise in most markets.

-3

0

3

6

9

12

M u m b a i

M a n i l a

A u c k l a n d

S y d n e y

M e l b o u r n e

K u a l a L u m p u r

B a n g k o k

S e o u l

B e i j i n g

S h a n g h a i

T o k y o

S i n g a p o r e

H o n g K o n g

-150

0

150

300

450

600

Average prime office yield

Spread to 10-year government bond yields (r.h.s.)

% Bp

-30

0

30

60

90

120

150

T o k y o

M u m b a i

H

o n g K o n g

S i n g a p o r e

S y d n e y

B e i j i n g

S h a n g h a i

S e o u l

M e l b o u r n e

K u a

l a L u m p u r

A u c k l a n d

B a n g k o k

M a n i l a

-2

0

2

4

6

8

10

Prime office rents, Q1 2011 QoQ rental growth (r.h.s.)

USD/sf p.a. %

Source: CBRE, Credit Suisse Source: CBRE, Credit Suisse




Research Monthly 10

A primer on fund of hedge funds

We would like to finish our series of primers on hedge fundstrategies 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 col-lection of hedge funds (HFs). FoHFs aim to achieve an attrac-tive return while at the same time minimizing risk through di-versification. This strategy should result in a return profile thatis similar to equity markets but is achieved at a lower risk. Al-though FoHF managers do not invest in the markets them-selves, they can create value by allocating capital to the hedgefunds that they consider most promising. In fact, the selectionof the best managers by the FoHF manager is crucial. A re-cent study by HF Analytics concludes that manager selectionhas a far higher impact on FoHF performance than strategic or

tactical asset allocation.

Industry trends

Assets under management (AUM): After a sharp drop intotal AUM during the recent financial crisis, the industry isgrowing again (see Figure 14). However, the FoHF share oftotal HF AUM has decreased from 31% in 2006 to 25% in2010. The Madoff fraud was one factor that caused FoHFinvestors to lose trust in the strategy, as a number of FoHFhave 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 reportednet outflows of AUM. However, the trend has now reversed

and more than 50% of FoHFs experienced net inflows in firstquarter 2011, according to Preqin (see Figure 15).

Number of FoHF: After a slight decrease in the number ofFoHF, the number rose again in first quarter 2011 – it is esti-mated that the number of FoHFs has surpassed 2000 (versusover 7000 single manager HFs). However, while single man-ager HFs have shown clear growth in terms of number of

funds since the drop after the crisis, the number of FoHF isstill below 2009 levels.

Size: According to data from Preqin, a trend towards smaller-sized hedge funds could be observed from 2010 to 2011. Inparticular, 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 man-ager location with around 30% of the total FoHF market. TheUK is the second most attractive place with a share of 25%,followed by Switzerland, France and Hong Kong. The majorityof public listings are on the London and Zurich exchanges.Onshore, offshore: Both onshore as well as offshore hedgefunds AUM have been increasing since the drop in 2009.There has not been a clear trend in the relation of offshore toonshore hedge funds. On average, there are 2.2 times moreoffshore funds than onshore funds.FoHF landscape: Two types of FoHF are increasingly fa-

vored by investors: experienced investors find niche playersappealing, whereas less experienced investors seem moreattracted to large FoHF companies with a multi-strategy focus.

Performance analysis

A comparison of single HFs to FoHFs shows that single HFsoutperformed FoHFs on average by 2.7% from 2000 until2010 (see Figure 16). The FoHF underperformance may beexplained by the additional fee layer that undermines FoHFperformance and the overstatement of single HF performance. As HFs usually exclude underperforming side pockets whenthey 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 alevel of 9.3%.

Average monthly return is lower in up months and higher indown months when compared to single HF returns, reflectingthe lower volatility in returns for FoHFs (see Figure 17). Incomparison to the S&P 500, the outcome is even more ex-treme with the S&P 500 showing much higher variance ofreturns than FoHFs.

Figure 14 Figure 15

Total assets under management (AUM) are increasing againand recently surpassed the USD 2 trillion threshold, whereascurrent FoHF AUM are still below 2006 levels.

Net inflows into the FoHF industry are exceeding outflowsagain; total FoHF assets under management increased againin Q1 2011.

0

500

1,000

1,500

2,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Funds of hedge funds Single manager hedge funds

in USD bn

23%

43% 42%

20%

55%

17%

40%

34%

17%

24%

28%

57%

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 Q1 2011

Decrease No change Increase

Source: HFR, Credit Suisse Source: Preqin, Credit Suisse




Research Monthly 11

However, it is controversial whether FoHFs really create valueby lowering risk and potential draw-downs. Other researchconcludes that FoHF return distributions are marked by anegative skew and excess kurtosis, which means large down-side risk, similar to the return profile when investing in high-

yield bonds. Hence, it is doubtful whether FoHF managers canskillfully 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 hedgefunds (MSHF). FoHF strategies can be further subdivideddepending on the aim of the FoHF strategy. Conservativestrategies aim at achieving consistent returns and at a rela-tively low standard deviation while opportunistic strategies fo-cus on superior returns (e.g. through exposure to emergingmarkets) and are willing to take higher risks. Riskier strategies

tend to outperform in up-markets and underperform in down-markets, while more conservative strategies tend to have amore even return pattern. The FoHF set-up should allow in-vestors to diversify their assets and lower their risk at a lower cost than investment in single hedge fund managers wouldrequire.

The matrix – Classification of hedge fund strategies

The different hedge fund strategies can be categorized alongtheir return profile and level of diversification (see Figure 18).Single strategy hedge funds (top left) exhibit the highest levelof return at a low diversification. FoHFs that invest in multi-strategy single hedge funds are at the other end of the scale.

They offer a maximum of diversification at lower expectedreturns. Multi-strategy hedge funds and single strategy FoHFsare located somewhere in-between. Diversification can beachieved by investing in different hedge fund strategies (i.e.reducing unsystematic risk), but also by investing with multiplehedge funds (which reduces manager risk). As single strategyFoHFs tend to be more opportunistic, the risk that the strategy will fail is higher.

Alternatives to FoHF investing

The Madoff fraud had a huge impact on the industry, contrib-uting 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 haveled to higher costs and caused several smaller FoHFs to closedown. While USD 250 million was an adequate fund size be-fore the crisis, USD 500–600 million is now considered as thelower threshold.

Besides stricter regulation within the FoHF industry, thefraud led to a search for possible alternatives. In response,major Wall Street banks have created various hedge fund rep-lication strategies and hedge fund ETFs, both closely trackingthe collective performance of the hedge fund universe. Theseproducts address risks arising out of illiquidity, lack of trans-parency 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 fundsare now more accessible to a wider range of investors. More-over, while listed hedge fund ETFs can be traded at very lowdealing costs, the regulated nature of UCITS funds and a wider distribution on offer tend to keep investor insecurities atbay. However, even though an influx of sophisticated productsenhances the scope for price discovery in a maturing industry,it tends to reduce the excess alpha, bringing returns to singledigits 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 ofcontrol and level of confidence are factors that should betaken into account when deciding on a suitable investmentstrategy. FoHFs are designed to achieve a satisfying return while at the same time keeping risk at the lowest possible leveland are thus a suitable investment for risk-adverse investors

Figure 16 Figure 17

Single hedge funds reported an average return of 7.3% in theperiod from 2000 to 2010, outperforming FoHF on averageby 2.7% (average FoHF performance: 3.6%).

In the past ten years, FoHF have reported a lower return vola-tility than single manager hedge funds with lower returns in upmonths and higher returns in down months.

-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 %

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

up months down months

HFRI FOF Compos ite Index HFRI Fund Weighted Compos ite Index

Barclays Govt/Credt. Agg Bond S&P 500

Source: HFR, Credit Suisse Source: HFR, Credit Suisse




Research Monthly 12

with low return requirements.2. Portfolio size: The available capital that can be allocated

to hedge funds is a determinant for strategy selection. Entrylevels in terms of investment sums are lower for FoHF invest-ing. Entry levels are generally around CHF 250’000 while

there are certain structures with much lower entry levels de-pending on the country. Entering a single hedge fund usuallyrequires a higher minimum investment (often CHF 1 millionand more). Furthermore, FoHFs might offer access to fundsthat are closed.

3. Investor sophistication/knowledge is another factor toconsider. The selection of single hedge funds out of a universeof thousands of funds consumes resources (time, knowledge,data) that might not be available to the investor. Hedge fundmanager selection and due diligence requires expertise and ismore complicated than for long-only funds. For investors withlimited resources, FoHFs can be a welcome alternative.

In sum, FoHFs can be a suitable investment for risk ad-verse investors that aim to diversify their portfolio by investingin hedge funds, but who lack the resources to build a portfolioof single hedge funds.

Risks and disadvantages of FoHF investing

Like hedge funds, FoHF investments bear market risk, opera-tional risk and liquidity risk. Although FoHFs aim at loweringvolatility and draw-downs, the recent Madoff case has shownthat FoHF investing is not always less risky and it has raisedthe general question whether the strategy lowers downsiderisk at all.

The double layer fee structure (usually composed of a 1%

management fee and a 10% performance fee), is consideredas a disadvantage when investing in FoHFs but should beseen as a payment for the manager’s expertise in fund selec-tion. Fees like retrocessions and trailing fees often come ontop of that, without even being disclosed to investors. Some-times, fees can be negotiated with the FoHF manager.

For some investors, the lack of control when investing inFoHFs might be an argument against them. The investor doesnot have control over the investments in underlying hedge

funds or even the underlying assets, and a double layer ofmanagers makes the strategy an opaque investment. How-ever, the investor has some limited influence by choosing theright FoHF strategy.

The question whether the FoHF structure adds value re-

mains to be answered. As the quality of a FoHF strongly de-pends on the FoHF manager, this should be in focus whenselecting a suitable FoHF.

Conclusion and outlook

Although FoHF target a risk / return profile that is attractive tonon-institutional clients, we remain cautious about FoHF in-vesting. FoHFs can be a good choice for investors that seek amore stable performance than single hedge funds or equitymarkets offer, and it can be a welcome means of diversifica-tion. However, the target investor has to bear in mind that thestrategy still comes with risk and a double layer of fees. Fur-

thermore, the performance depends strongly on the FoHFmanager, and thus FoHF selection is crucial since risk / returnprofiles differ strongly among funds.

Time will tell whether investors will eventually regain confi-dence in the FoHF strategy or whether alternatives like hedgefund replication strategies or UCITS funds will win over FoHFinvestors. If the trend of institutional investors increasing their allocations to FoHF continues, the industry's AuM could sur-pass USD 700 billion by end of 2011 from current levels ofUSD 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 diversifi-cation comes at the cost of a lower return. However, the return profiles vary strongly among different funds.

FoHF focus Risk return charac teristics

Opportunistic

Emerging markets Higher volatility

Sector specifics Superior returns

Equity market neutral Conservative

Fixed income arbitrage Lower historical S.D

Convertible arbitrage Consistent performance

Multiple strategies Diversified

Mult iple managers Risk/return maps indices

Diversification

R e t u r n

Multi

Strategy

FoHF

Single

Strategy

Manager

Multi

Strategy

HFSingle

Strategy

FoHF

HighLow

L o

w

H i g h

Source: HFR, Credit Suisse




Research Monthly 13

CS Stress Monitor

Figure S1: Risk premiums in equity and credit markets Figure S2: AI Allocation including private equity

Risk premiums in equity markets have moved sideways since

mid-2010, while premiums in credit markets have declinedfurther.

Model alternative investment portfolio with recommended me-

dium-term asset allocations (6M–12M horizon).

-2

0

2

4

6

8

10

12

Jun 93 Jun 95 Jun 97 Jun 99 Jun 01 Jun 03 Jun 05 Jun 07 Jun 09 Jun 11

200

400

600

800

1'000

1'200

1'400

1'600

1'800

2'000

Global equity risk premium CS High Yield Index (r.h.s.)

in % Spread to worst in bp

11%

9%

4%

20%

5%11%

13%

18%

10%

Gold

Commodities

Real estate

Directional

Tactical trading

Event driven

Relative value

Private Equity

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 Figure S4: Real annualized returns on private equity

investments

Short-term correlations of hedge funds with bonds have de-creased sharply since January 2011.

The average 5Y real return on private equity investmentsbottomed in mid-2009 and moved sideways in 2010.

-0.40

-0.20

-

0.20

0.40

0.60

0.80

1.00

10.10.2008 10.04.2009 10.10.2009 10.04.2010 10.10.2010 10.04.2011

DJ CS AllHedge Index - MSCI World

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

26W rolling correlations

-20

-10

0

10

20

30

40

1994 1997 2000 2003 2006 2009

Cambridge Associates US LBO Index LPX 50 Private Equity Index

5Y annualized real returns in %

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

Figure S5: Quarterly hedge fund inflows Figure S6: Transaction flow of private equity fundsTotal assets increased to all-time-high in 2010. The transaction flow of private equity funds reached record

lows in 2009. A constrained debt supply and drop in risk appe-tite ushered in a more prudent attitude.

0

250

500

750

100 0

125 0

150 0

175 0

200 0

19 90 19 93 1996 1999 2002 2005 2008 Q1 2011

0

1000

2000

3000

4000

5000

6000

7000

8000

Estimated assets managed by hedge funds T otal number of hedge funds

USD bn Number of funds

0

100

200

300

400

500

600

700

800

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q1

2011

0

100

200

300

400

500

600

U S LBO vol um e ( USD) EU LB O vol ume (U SD ) EU + U S deal count

USD bn no. deals

Source: Hedge Fund Research Source: S&P LCD Europe & US leveraged buyout reviews




Research Monthly 14

CS Stress Monitor

Figure S7: Global heat map Figure S8: Emerging market heat map

Systemic risks across asset classes have declined substantiallysince 2007.

Systemic risks across emerging markets are currently low. Allrisk indicators are back to low-risk levels.

Jun-11Oct-10Feb-10May-09Sep-08Jan-08

Bank index

HG corp.

credit

CMBS

Municipal

bonds

High Yield

FX

Aggregate

RMBS

G7 CDS

Jun-11Jun-10Jun-09Jun-08Jun-07

EM Corp.

bonds

ELMI

EMBI

Currencie

s

MSCI EM

Aggregat

e

Source: the BLOOMBERG PROFESSIONAL™ service, Thomson Reuters DataStream,

Credit Suisse


Credit Suisse

Figure S9: Real annualized returns on commodities Figure S10: Real annualized returns on REITs

Average 5Y real returns on agriculture and energy commodi-ties significantly decreased in May 2011.

Average 5Y real returns on REITs rebounded in 2009 butstagnated in 2010. We are generally cautious on markets thathave gone through a period of excess (UK, Spain, USA).

-20

-10

0

10

20

30

40

92 94 96 98 00 02 04 06 08 10

GSCI Industrial Metals GSCI Precious Metals

GSCI Agriculture GSCI Energy

5Y real annualized price returns

-20%

-10%

0%

10%

20%

30%

40%

01 02 03 04 05 06 07 08 09 10 11

EU Asia Japan USA

5Y annualized real price return in %


Credit Suisse


Credit Suisse

Figure S11: Open interest on commodity futures Figure S12: Risk premiums on REITs

The notional value of open interest on commodity futures has

recovered in line with commodity prices.

Risk premiums (difference between dividend yield and real

bond yield) on REITs stagnated in 2010.

0

20

40

60

80

100

1995 1997 1999 2001 2003 2005 2007 2009 2011

0

100

200

300

400

500

Aggregate DJ-UBS value-weighted open-interest of most traded commodities

DJ-UBS Total Return Index (r.h.s.)

IndexUSD in bn

-2

0

2

4

6

8

10

12

01 02 03 04 05 06 07 08 09 10 11EU UK Japan USA

REIT risk premia in %

Source: the BLOOMBERG PROFESSIONAL™ service, Credit SuisseSource: the BLOOMBERG PROFESSIONAL™ service, Thomson Reuters DataStream,

Credit Suisse




Research Monthly 15

Appendix A: Performance figures

Unless otherwise stated, all performance figures quoted in thispublication are the total returns of indices in USD. EUR or CHF-based investors must consider the additional risk of cur-rency movements and might consider hedging USD exposure.

Unless otherwise stated, hedge fund performance figures

used are the Dow Jones Credit Suisse indices. We benchmarkthese performance figures with the hedge fund index familiesof HFR and Barclay for consistency of analysis.

Appendix B: Understanding relative recommendations

Our “outperform”, “neutral” and “underperform” recommenda-tions express performance expectations relative to our Alterna-tive Investment (AI) composite benchmark (Table 5). An out-perform recommendation means that we expect the assetclass to outperform the AI benchmark over a 12M horizon andvice versa for an underperform recommendation. Investorsshould bear in mind that tactical shifts in the alternative in-vestment category are constrained due to limited liquidity and

the necessity to customize our standardized model portfolio tofit their personal needs and circumstances.

References

Handbook of Hedge Funds, Lhabitant, François-Serge. WileyFinance, 2008Handbook of Alternative Assets, Anson, Marc. Wiley Finance,2006

Hedge Fund Spotlight. Preqin, May 2011

Table 5: Performance table May 2011 (in %)

2009 2010 2011 YTD Last May 2011

EUR USD EUR USD EUR USD 3M

MSCI World 31.8 35.4 21.4 13.2 –0.8 6.6 1.9 –2.1

S&P 500 23.1 26.5 23.4 15.1 0.3 7.8 1.8 –1.1

MSCI Emerging Markets 73.5 79.0 27.5 19.2 –4.3 2.6 6.4 –2.6

Citigroup G7 Government Bonds –1.6 1.6 14.6 7.2 –3.7 3.2 3.2 0.1

GSCI Commodity TR Index 10.5 13.5 16.9 9.0 0.9 8.5 1.4 –6.9

DJ UBS Commodity Index TR 15.8 18.9 25.3 16.8 –4.6 2.6 0.3 –5.1

NAREIT 24.7 27.8 36.5 27.6 5.4 13.2 4.3 0.9

GPR 250 REIT World 13.4 31.5 5.2 22.5 –0.5 13.4 6.0 0.7

Cambridge Associates Private Equity1 9.4 10.5 NA 18 NA NA NA NA

NCREIF Timberland Index2 –7.1 –4.8 NA 0.0 NA 0.8 NA NA

Swiss Re Cat Bond TR 11.5 14.0 19.9 11.4 –8.5 –2.3 –3.5 0.3

Barclay Currency Traders Index3 –4.2 0.5 12.8 2.6 –8.0 2.0 2.7 1.7

DJ CS Index 14.9 18.6 18.7 10.9 –3.8 3.1 1.0 –1.0

Equity long short 15.7 19.5 16.9 9.3 –4.6 2.3 0.3 –1.7

Dedicated short bias –27.4 –25.0 –17.1 –22.5 –12.6 –6.4 –2.3 2.2

Emerging markets 26.0 30.0 19.1 11.3 –4.0 2.9 3.3 –1.1

Global macro 8.1 11.6 21.4 13.5 –4.4 2.5 2.0 –0.6

Managed futures (CTA) –9.5 –6.6 20.0 12.2 –7.0 –0.3 –2.1 –4.4

Multi strategy 20.7 24.6 16.9 9.3 –2.0 5.1 1.6 0.0

Event driven 16.6 20.4 20.5 12.6 –3.4 3.5 0.3 –0.6

Merger arbitrage 8.5 12.0 10.3 3.2 –3.9 3.0 1.3 –1.1

Distressed debt 17.2 20.9 17.9 10.3 –3.1 3.8 1.0 0.0

Convertible arbitrage 42.8 47.3 18.7 11.0 –2.4 4.6 –0.5 0.0

Equity market neutral 0.8 4.1 6.0 –0.8 –1.2 5.8 3.4 –1.0

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




Research Monthly 16

Definitions for Figures A1–A4:

Hedge fund universe: We use the DJ CS Index seriesfor monthly calculations and the DJ CS Sector Invest Indexseries for weekly calculations.

MAR ratio: The MAR ratio is a performance measure andis calculated by dividing annualized historical returns by themaximum drawdown over the same period. A MAR ratioabove one indicates an attractive risk / return payoff. Weuse 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 re-

turn over cash divided by volatility. Real estate: We use the GPR 250 Property Index as thebenchmark for global real estate, due to the lack of directglobal real estate benchmarks.

Figure A1 Figure A2

Asset class Sharpe ratios Asset class MAR and Calmar ratios

-4.0

-2.0

0.0

2.0

4.0

6.0

MSCI World price index

Real estate

Commodities

Gold

Oil

FX strategies


DJ CS Index

Directional

Equity long short

Dedicated short biasEmerging markets

Multi strategy

Tactical trading

Global macro


Event driven

Relative value



Fixed income arbitrage36 month Sharpe Ratio

52 week Sharpe Ratio

-0.5

0

0.5

1.0

1.5

2.0

2.5


Real estate

Commodities


DJ CS Index

Directional

Equity long short


Emerging markets

Multi strategy

Tactical trading

Global macro


Event driven

Merger arbitrage

Distressed debt

Relative value



Fixed income arbitrage

36 month Calmar ratio

Mar ratio


Figure A3 Figure A4

Asset class volatilities Asset class correlations

0

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45


Real estate

Commodities

Gold

Oil


DJ CS Index

Directional

Equity long short


Emerging markets

Multi strategy

Tactical trading

Global macro


Event driven

Merger arbitrage

Distressed debt

Relative value



Fixed income arbitrage36 month volatility

52 weeks volatility

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Real estate

Commodities

Gold

Oil

FX strategies


DJ CS Index

Directional

Equity long short

Emerging marketsMulti strategy

Tactical trading

Global macro


Merger arbitrage

Relative value



Fixed income arbitrage

36 month correlation

52 week correlation





Research Monthly 17

Imprint

This publication has been authored by Private

Banking Global Research

US Contact InformationInvestment Strategy and Advisory:

Philipp E. Lisibach, Director

Tel. +1 212 538 0311

E-mail: [email protected]

Jimmy James, Vice President

Tel. +1 212 538 5944


Ryan Sullivan

Tel. +1 212 538 2194


Samuel Baumann, Assistant Vice-President

Tel. +1 212 538 5194


Scott Rosenblatt, Assistant Vice-President

Tel. +1 212 325 4458





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