credit suisse tremont, hedge fund indicies

The Attraction of Hedge Fund Indices: Current Trends in the Alternative

Investment Market

November 2007

Copyright 2007, Credit Suisse Group and/or its affiliates. All rights reserved.

The information provided herein is confidential and may not be distributed to others without the consent of Credit Suisse Alternative Capital, Inc. Funds and Alternative Solutions. These materials do not constitute an offer to sell securities or a solicitation of an offer to buy securities; no offer to sell or solicitation of an offer to buy any security may be made without the delivery of a private placement memorandum. The use of risk management tools and models do not guarantee investment performance. Past performance is not indicative of future results. This presentation may not be altered except by members of Funds and Alternative Solutions. Please see additional disclosures on page 2.

This material has been prepared by Credit Suisse Tremont Index, LLC (“Credit Suisse”) on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. Credit Suisse has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. This material is for informational and illustrative purposes only and is intended solely for the information of those to whom it is distributed by Credit Suisse. No part of this material may be reproduced or retransmitted in any manner without the prior written permission of Credit Suisse. Credit Suisse does not represent, warrant or guarantee that this information is suitable for any purpose and it should not be used as a basis for investment decisions. This material does not purport to contain all of the information that a prospective investor may wish to consider. This material is not to be relied upon as such or used in substitution for the exercise of independent judgment. Past performance is no guarantee of future results.

This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy. The reader should not assume that any investments in companies, securities, sectors and/or markets identified or described were or will be profitable. Current and future portfolio compositions may be significantly different from the information shown herein. Investing entails risks, including possible loss of some or all of the investor’s principal.The investment views and market opinions/analyses expressed herein may not reflect those of Credit Suisse Group as a whole and different views may be expressed based on different investment styles, objectives, views or philosophies.

The performances shown herein may not be the experience of other managers within the same sector and may significantly differ in material respects. The performance figures provided herein are estimated and are subject to change.

This informational report does not constitute research or an offer to buy or sell a security or hedge fund and may not be used or relied upon in connection with any offer or sale of a security or hedge fund or fund of hedge funds. Investments in hedge funds are speculative and involve a high degree of risk. Hedge funds may exhibit volatility and investors may lose all or substantially all of their investment. A hedge fund manager typically controls trading of the fund and the use of a single advisor’s trading program may result in a lack of diversification. Hedge funds also may use leverage and trade on foreign markets, which may carry additional risks. Investments in illiquid securities or other illiquid assets and the use of short sales, options, leverage, futures, swaps, and other derivative instruments may create special risks and substantially increase the impact of adverse price movements. Hedge funds charge higher fees than many other types of investments, which can offset trading profits, if any. Interests in hedge funds may be subject to limitations on transferability. Hedge funds are illiquid and no secondary market for interests typically exists or is likely to develop.

The only legally binding terms of this investment product including risk considerations are set forth in the private placement memorandum and subscription documents which are available upon request. This document does not constitute an offer or invitation to enter into any type of financial transaction. The issuer has no obligation to issue this investment product. Before deciding to invest, prospective investors should carefully read the relevant private placement memorandum and subscription documents and pay particular attention to the risk factors contained therein and determine if this investment product suits the investor’s particular circumstances and should independently assess (with the investor’s professional advisers) the specific risks (maximum loss, currency risks, etc.) and the legal, regulatory, credit, tax and accounting consequences. Prospective investors should have the financial ability and willingness to accept the risk characteristics of this investment product. This investment product is intended only for investors who understand and are capable of assuming all risks involved. Credit Suisse makes no representation as to the suitability of this investment product for any particular investor nor as to the future performance of this investment product.

Credit Suisse is part of Credit Suisse Group’s asset management business. The asset management business of Credit Suisse Group is comprised of a network of entities around the world. Each legal entity is subject to distinct regulatory requirements and certain asset management products and services may not be available in all jurisdictions or to all client types. There is no intention to offer products and services in countries or jurisdictions where such offer would be unlawful under the relevant domestic law.

International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risk, and differences in accounting methods; these risks are generally heightened for emerging market investments. Investments in small companies may be more volatile and less liquid than investments in larger companies. The charts, tables and graphs contained in this document are not intended to be used to assist the reader in determining which securities to buy or sell or when to buy or sell securities. Benchmarks are used solely for purposes of comparison and the comparison does not mean that there will necessarily be a correlation between the Fund’s returns and the benchmarks.

The strategies mentioned here may help to decrease the risk of your investments; however, they may also limit the upside potential of your investments. For more information regarding these risks, please contact us.

Important Legal Information

The information provided herein is confidential and may not be distributed to others without the consent of Credit Suisse Alternative Capital, Inc. Funds and Alternative Solutions. These materials do not constitute an offer to sell securities or a solicitation of an offer to buy securities; no offer to sell or solicitation of an offer to buy any security may be made without the delivery of a private placement memorandum. The use of risk management tools and models do not guarantee investment performance. Past performance is not indicative of future results. This presentation may not be altered except by members of Funds and Alternative Solutions. Please see additional disclosures on page 2.

Important Information Regarding Hypothetical Back-Tested Performance

The hypothetical back-tested performance shown is for illustrative purposes only and does not represent actual performance of any client account. Credit Suisse did not manage any accounts using the strategies described herein for the periods shown and does not represent that the hypothetical returns would be similar to actual performance had the firm actually managed accounts in this manner.

Back-Tested, hypothetical or simulated performances have certain inherent limitations: (i) It is designed with the benefit of hindsight and may not reflect the impact that certain economic and market factors might have had on the decision-making process. (ii) It does not reflect actual client asset trading and cannot accurately account for the impact of financial risk or the ability to withstand losses. (iii) The information is based, in part, on hypothetical assumptions made for modeling purposes that may not be realized in the actual management of accounts. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Assumption changes may have a material impact on the model returns presented. This material is not representative of any particular client’s experience. Investors should not assume that they will have an investment experience similar to the hypothetical performance shown. There are frequently material differences between hypothetical performance results and actual results subsequently achieved by any investment strategy. Notwithstanding the foregoing, Credit Suisse believes that the model performance shown is reasonably representative of its management style and is sufficiently relevant for consideration.

Unlike an actual performance record based on trading actual client portfolios, simulated results are achieved by means of the retroactive application of a back-tested model itself designed with the benefit of hindsight. Back-tested performance does not reflect the impact that material economic or market factors might have on an adviser's decision making process if the adviser were actually managing a client’s portfolio. The back-testing of performance differs from actual account performance because the investment strategy may be adjusted at any time, for any reason and can continue to be changed until desired or better performance results are achieved. The back-tested performance includes hypothetical results that do not reflect the reinvestment of dividends and other earnings or the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid. No representation is made that any account will or is likely to achieve profits or losses similar to those shown. Alternative modeling techniques or assumptions might produce significantly different results and prove to be more appropriate. Past hypothetical back-test results are neither an indicator nor guarantee of future returns. Actual results will vary, perhaps materially, from the analysis. As a sophisticated investor, you accept and agree to use such information only for the purpose of discussing with Credit Suisse your preliminary interest in investing in the strategy described herein.

Copyright 2007, Credit Suisse Group and/or its affiliates. All rights reserved.

Important Legal Information

The information provided herein is confidential and may not be distributed to others without the prior written consent of Credit Suisse. These materials do not constitute an offer to sell securities or a solicitation of an offer to buy securities. This presentation may not be altered except by Credit Suisse. Past performance is no guarantee of future results. Please see “Important Legal Information” on slides 2 through 3 for important disclosures regarding the data and information contained and the views and opinions expressed in this material.

Agenda

� Alpha Benchmarking

� Industry Trends

� Indexation to Replication

� Replication Techniques

Alpha Benchmarking


� Alpha: Returns only available to a handful of investors by extracting performance over and above the market norm that cannot be simplified by a systematic process.

� Traditional Beta: Returns that can be extracted by traditional processes using long-only investing techniques.

� Alternative Beta: Returns that can be extracted by specific processes using “hedge fund techniques”such as short-selling, leverage and derivatives.

Alternative Beta through ReplicationHedge Fund Industry Definitions


Credit Suisse/TremontHedge Fund Index Platform

CTHI*

Credit Suisse/TremontHedge Fund Index

“Broad Index Benchmark”

HEDG*

� Representative Index of the Hedge Fund Industry

� Asset weighted

� 486 Hedge Funds included

Credit Suisse/Tremont Blue Chip Investable Hedge Fund Index

“Blue Chip Investable Index”

INVX*

� The 6 largest open funds in each of the 10 sectors**

� Asset weighted

� 60 Hedge Funds included

Credit Suisse/TremontSector Invest Indices

“Sector Invest Indices”

SECT*

� 10 Indices representative of each of the 10 sectors

� Asset weighted

� 10-25 Hedge Funds included per sector***

Platform Overview

*Bloomberg ticker symbols **If any sectors do not have six eligible funds, the remaining funds are chosen in order of size as the largest remaining eligible funds by AUM in the other sectors until a total of 60 member funds is determined, but on the basis that once a fund is chosen from a particular sector, a further member fund is not chosen from that sector until all other sectors with remaining eligible funds have contributed to the selection process. Please refer to the Index Rules.***The minimum number of funds can be below the above mentioned minimum if there are fewer eligible funds in the sector.

� Hedge Index Tracker Portfolio � Index Linked Products � Index Linked Products


Alternative Beta through ReplicationReturn Comparison to Multi-Strategy FOFs

October 2002 through September 2007

Source: Credit Suisse/Tremont Index LLC, Bloomberg, as of 9/30/2007. Data since October 2002.

0%

2%

4%

6%

8%

10%

12%

14%

16%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

Annualized Standard Deviation

An

nu

alize

d R

etu

rn

Man-Glenwood Multi-Strategy Fund Ltd RMF Investment Strategies Ltd - Class N - RMF Four Seasons Strategy RMF Investment Strategies Ltd - Class VV : RMF Top Twenty II

Permal Multi-Manager Funds - Permal Investment Holdings NV HSBC Portfolio Selection Fund - HSBC GH Fund GAM Trading Inc

GAM Diversity II Inc GAM Composite Absolute Return USD Inc GAM Strategic Funds Inc - GAM Strategic Diversity USD

GAM Trading III Inc GAM Diversity Inc GAM Trading II Inc

Green Way Ltd DBC Vision International Ltd Alternative Capital Enhancement - Ace Multi Strategy Fund USD

Morgan Stanley Select Investment Strategies - Global Diversified Pictet Alternative Funds - MOSAIC 1 Pictet Alternative Funds - MOSAIC 2

Tremont Opportunity Fund Ltd Leveraged Capital Holdings NV LODH Alternative Strategies USD

La Fayette Holdings Ltd La Fayette Regular Growth Fund Ltd Ivy Rising Stars Fund LP

Haussmann Holdings NV Absolute Alpha Fund PCC Ltd - Diversified Series Share Cell Credit Suisse/Tremont Hedge Fund Index

Coast Diversified Fund Ltd Comas Strategy Fund Ltd RMF Absolute Return Strategies II Ltd (Class B)

Aurora Limited Partnership Aurora Global Opportunities LP Baloise Alternative Investment Strategies Ltd

Ivy Rising Stars Offshore Fund Ltd RMF Absolute Return Strategies I Ltd Quantum Endowment Fund NV

HSBC Alternative Portfolio - Hedge Investments Fund

Credit Suisse/Tremont

Hedge Fund Index


What is Alpha?

� Hedge (fund of) funds intend to generate alpha not beta!

– Alpha only exists in presence of beta (beta source must be identified)

– Alpha is misused as a substitute for total return

– Standard benchmarking choice is often equity, bond indices or cash

� If hedge funds are uncorrelated this can hardly be the right benchmark

– Should alpha be measured against a hedge fund index?

� Alpha = Risk Adjusted Returns / Standard Deviation

– Hedge funds measure alpha by the risk adjusted excess return of the fund relative to the return of the individual hedge fund sector

– Fund of funds measure alpha by the risk adjusted excess return of the fund relative to the return of a Broad Hedge Fund Index


Hedge Fund Alpha- Where Is It?

� If Benchmark is S&P 500: Index

– CS/Tremont Hedge Fund Index delivered statistically significant positive alpha

– HFRI FOF Composite Index delivered statistically significant positive alpha

Source: Credit Suisse Tremont Hedge Fund Index LLC, Lipper/TASS, Bloomberg, HFR. All performance data shown above was taken from publicly available sources. Credit Suisse Tremont Index LLC does not guarantee the

accuracy of such data. Performance data from January 2000 through September 2007.

� If Benchmark is HFRI FOF Index:

– CS/Tremont Hedge Fund Index delivered statistically significant positive alpha

– S&P 500 Index produced statistically significant negative alpha

CS/Tremont Hedge

Fund Index

HFRI FOF

Composite Index

Beta 0.14 (3.95, 0) 0.15 (4.95, 0)

Alpha 0.68% (4.93, 0) 0.51% (4.32, 0)

Correlation 0.38 0.46

Compared to

S&P 500 Total

Return Index

CS/Tremont Hedge

Fund Index

S&P 500 Total

Return Index

Beta 1.05 (25.16, 0) 1.45 (4.95, 0)

Alpha 0.14% (2.45, 0.02) -0.54% (-1.32, 0.19)

Correlation 0.94 0.46

Compared to

HFRI FOF

Composite

Index


First asset weighted hedge fund index to follow the construction characteristics of equity and bond indices as closely as practical

� Representative

– Database with over 5,000 hedge funds representing $1.1 trillion in assets

– Constructed as a “real” index including closed and illiquid funds

– Asset-weighted index as are all other market leading traditional indices

– Comprehensive compilation of data continually maintained and expanded

– Embedded in Credit Suisse and Tremont infrastructures with over 200 dedicated hedge fund professionals

– Full historical calculation back to 1994 including funds that ceased to exist

� Objective

– Employ rules-based construction process to maintain objectivity

– Adhere to strict reporting guidelines

� Transparent

– Credit Suisse/Tremont Hedge Fund Index discloses its constituent funds, sector-weights and methodology

– High level of transparency through a comprehensive web site, including up-to-date and historical information

Credit Suisse/Tremont Hedge Fund IndexAiming for the Standard of Traditional Indices


Construction Overview

� Unrestricted

Index Universe

Approximately 900 hedge fund managers, 1,900 member funds

� Audited financials

� Minimum $50MM in assets

� Minimum 1 year track record

� Consistent reporting to database

� Fund document review (PPM, audited financials, marketing materials)

� Completed questionnaire

� Strategy assignment by Credit Suisse/Tremont

� Ranking by AUM

� Number of funds to represent 85% of sector AUM

� Return calculated monthly

� Quarterly rebalancing

� Inclusion of closed funds

Credit Suisse / Tremont Database

Approximately 5,000 funds

Credit Suisse / Tremont Hedge Fund Index

10 style-based sectors – approximately 400 hedge fund managers, 900 member funds

Funds representing the top 85% of assets in each sector are included

Fixed Income Arbitrage

Long / ShortEquity

Convertible Arbitrage

Dedicated Short Bias

Emerging Markets

Managed Futures

Global Macro

Equity Market Neutral

Multi-Strategy

Event Driven


Rationale of Index Investing

� Belief in the market average as a long term efficient investment solution

� Traditional asset classes have powerfully demonstrated the benefits of index investing for decades

� Easy access to diversified Hedge Fund exposure minimizing individual fund risk

� Access to many closed funds

� Rules-based index construction leads to increased transparency

� Cost efficient because there is no performance fee

Industry Trends


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-9

3

Jun-9

4

Dec-9

4

Jun-9

5

Dec-9

5

Jun-9

6

Dec-9

6

Jun-9

7

Dec-9

7

Jun-9

8

Dec-9

8

Jun-9

9

Dec-9

9

Jun-0

0

Dec-0

0

Jun-0

1

Dec-0

1

Jun-0

2

Dec-0

2

Jun-0

3

Dec-0

3

Jun-0

4

Dec-0

4

Jun-0

5

Dec-0

5

Jun-0

6

Dec-0

6

Jun-0

7

Convertible

Arbitrage


Emerging Markets

Equity Market

Neutral

Event Driven

Fixed Income

Arbitrage

Global Macro

Long/Short Equity

Managed Futures

Multi-Strategy

The asset allocation of the most recent month is based on estimated assets.

Index investing follows dynamically the asset flows of the industry “market consensus”

Index Asset Flows

Source: Credit Suisse Tremont Index LLC as of 09/28/07.


Source: Credit Suisse Tremont Index LLC

Sector Performances are Highly Variable Ranking 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1Dedicated Short

15%

Global M acro

31%

Emerging

M arkets

34%

Global M acro

37%

M anaged

Futures

21%

Long/Short

Equity

47%

Convertible

Arbit rage

26%

Global M acro

18%

M anaged

Futures

18%

Emerging

M arkets

29%

Event Driven

14%

Emerging

M arkets

17%

Emerging

M arkets

20%

2

Emerging

M arkets

13%

Long/Short

Equity

23%

Global M acro

26%

Emerging

M arkets

27%

Long/Short

Equity

17%

Emerging

M arkets

45%

Dedicated Short

16%

Convertible

Arbitrage

15%

Dedicated Short

18%

Event Driven

20%

Emerging

M arkets

12%

Dedicated Short

17%

Event Driven

16%

3

M anaged

Futures

12%

Event Driven

18%

Event Driven

23%

Long/Short

Equity

21%

Equity M arket

Neutral

13%

Event Driven

22%

Equity M arket

Neutral

15%

Event Driven

11%

Global M acro

15%

Global M acro

18%

Long/Short

Equity

12%

Long/Short

Equity

10%

M ulti-Strategy

15%

4Event Driven

1%

Convert ible

Arbit rage

17%

Convert ible

Arbit rage

18%

Event Driven

20%

M ulti-St rategy

8%

Convert ible

Arbit rage

16%

Global M acro

12%

Equity M arket

Neutral

9%

Equity M arket

Neutral

7%

Long/Short

Equity

17%

Global M acro

8%

Global M acro

9%

Long/Short

Equity

14%

5

Fixed Income

Arbit rage

0%

Fixed Income

Arbitrage

12%

Long/Short

Equity

17%

M ulti-St rategy

18%

Global M acro

-4%

Equity M arket

Neutral

15%

M ult i-St rategy

11%

Fixed Income

Arbit rage

8%

Emerging

M arkets

7%

M ult i-Strategy

15%

M ult i-St rategy

8%

Event Driven

9%

Convertible

Arbitrage

14%

6

Equity M arket

Neutral

-2%

M ult i-Strategy

12%

Equity M arket

Neutral

17%

Equity M arket

Neutral

15%

Convert ible

Arbit rage

-4%

Fixed Income

Arbitrage

12%

Event Driven

7%

Emerging

M arkets

6%

M ulti-Strategy

6%

M anaged

Futures

14%

Fixed Income

Arbit rage

7%

M ulti-St rategy

8%

Global M acro

14%

7M ulti-St rategy

-3%

Equity M arket

Neutral

11%

Fixed Income

Arbitrage

16%

Convertible

Arbitrage

14%

Event Driven

-5%

M ult i-Strategy

9%

Fixed Income

Arbit rage

6%

M ulti-St rategy

6%

Fixed Income

Arbitrage

6%

Convert ible

Arbit rage

13%

Equity M arket

Neutral

7%

Equity M arket

Neutral

6%

Equity M arket

Neutral

11%

8Global M acro

-6%

M anaged

Futures

-7%

M ult i-Strategy

14%

Fixed Income

Arbit rage

9%

Dedicated Short

-6%

Global M acro

6%

M anaged

Futures

4%

M anaged

Futures

2%

Convert ible

Arbit rage

4%

Fixed Income

Arbitrage

8%

M anaged

Futures

6%

Fixed Income

Arbit rage

1%

Fixed Income

Arbitrage

9%

9

Convertible

Arbitrage

-8%

Dedicated Short

-7%

M anaged

Futures

12%

M anaged

Futures

3%

Fixed Income

Arbit rage

-8%

M anaged

Futures

-5%

Long/Short

Equity

2%

Dedicated Short

-4%

Event Driven

0%

Equity M arket

Neutral

7%

Convertible

Arbitrage

2%

M anaged

Futures

0%

M anaged

Futures

8%

10

Long/Short

Equity

-8%

Emerging

M arkets

-17%

Dedicated Short

-5%

Dedicated Short

0%

Emerging

M arkets

-38%

Dedicated Short

-14%

Emerging

M arkets

-6%

Long/Short

Equity

-4%

Long/Short

Equity

-2%

Dedicated Short

-33%

Dedicated Short

-8%

Convertible

Arbitrage

-3%

Dedicated Short

-7%


Analysis performed on the Credit Suisse/Tremont database for funds which had a full year of returns in 2006. Data Windsorized to remove outliers at a 2 standard deviation level. The net performance numbers for the Hedge Index Tracker are estimates and are net of 1% management fee and expenses.Source: Credit Suisse Tremont Index LLC.

The Fund Performance in 2006 was Highly Variable

4%

8%

54%

27%

31%

19%

29%

38%

31%

37%

26%

(15%)

(19%)

(11%)

(12%)

(17%)

(4%)

(4%)

(9%)

(15%)

Multi Strategy

Managed Futures

Long/Short Equity

Global macro

Fixed Income

Arbitrage

Event Driven

Equity Market

Neutral

Emerging Markets

Dedicated Short

Convertible

Arbitrage

Dispersion Between Funds Is High Top Quartile Funds Are Rare

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CVARB

124 Funds

DEDSH

33 Funds

EMMKT

168 Funds

EQNTR

159 Funds

EVDRV

302 Funds

FIARB

140 Funds

GLMAC

149 Funds

LOSHO

890 Funds

MGFUT

210 Funds

MULTI

118 Funds

% o

f F

un

ds in

Ea

ch

Qu

art

ile

% of Funds in the 4th Quarter % of Funds in the 3rd Quarter% of Funds in the 2nd Quarter % of Funds in the 1st QuarterCredit Suisse/ Tremont Hedge Fund Index, (Gross)


Assessing Hedge Fund Investment Alternatives

Yes

Medium

Medium

Monthly (with lag), Daily estimates

Monthly (some products offer less than monthly with spread)

Manager fees (perf & mgt), Index fees (perf & mgt)

High

Primarily Beta

HF Indices

YesYesNoManager Specific

Risk (Head-line risk)

LowLowHighSuitable for

Structured Products

LowLowHighTransparency

Monthly (with lag)Monthly (with lag)Daily final values (no lag)Valuations

Monthly/Quarterly/ Semi-annualMonthly/Quarterly/ Semi-

annualDailyLiquidity

Manager fees (perf & mgt)Manager fees (perf & mgt),

FOHF fees (perf & mgt)Product fees

(mgt only, no perf)Cost

LowHighHighDiversification

Some Beta, Some AlphaSome Beta, Some AlphaSolely BetaPotential Alpha/Beta

Single ManagersFoHFsAlternative Beta

Indexation to Replication


Evolution of Alternative Beta

1994

Fung & Hsieh publish a paper using Sharpe’s (1992) asset class factor model to

define common sources of hedge fund returns (later defined as “alternative

beta”) for the purposes of risk analysis

2004

2003

CS launches HF Index tracker fund as quantitatively managed product to

provide access to alternative beta represented in hedge fund indices

CS makes more granular exposure to sources of alternative beta available with

Sector Invest Indices

First fund launched that employs a combination of quantitative techniques with

liquid financial instruments to provide alternative beta

CS launches an Investable Hedge Fund Index to allow index-linked alternative

beta products

2006Factor indices launched out of investment banking structured derivative desks

2007

Other investment banks announce similar products or their intention to launch

similar products

2002

CS launches first asset-weighted HF Index in the first step to broadly measure

alternative beta as delivered by hedge funds1999


The Rationale Behind Investing in Alternative Beta Strategies

� Hedge fund & FOF fees are high: Awareness of management and performance fees charged for sometimes average returns on the single manager side, and a double layer of such fees with fund of funds

� Lower fees are possible: Market exists for cost effective access to hedge funds through indexation and hedge fund replication that offer lower fee structures and comparable returns

� Better investment terms are possible: Parallel move towards more liquidity, increased transparency, more frequent valuations, and the possibility to create a number of derivative structures in a more regulatory friendly environment

� FOF Performance: Actively managed Multi-Strategy FoFs face additional criticism in that they do not always outperform against a benchmark

� FOF Value Proposition: FoFs apply a high standard of due diligence when sourcing potential hedge funds for their investment platform but may not always provide adequate protection against manager default or blow-up


� Following similar trends: Indexation increased transparency and liquidity in returning alternative beta while Replication has further improved those factors

� Similar net of fee returns: Indexation offers lower fees than active FoHFs while Replication eliminates double layer through investments in liquid tradable securities

� Structure of data: Indexation helps in understanding of how hedge fund data is impacted by different fee levels, share classes and other hedge fund idiosyncrasies

� Strategy classification: Index style categorization of hedge funds with more granularity enables more precise modeling

� Superior hedge fund knowledge: Better factor selection for replication models due to thoroughunderstanding of returns and of risks that managers are being compensated for

The Natural Extension from Indexation to Replication


Goals:

� To offer similar risk/return characteristics to hedge funds in aggregate

� To create exposure to tradable liquid risk factors which offer portfolio diversification benefits and high levels of liquidity and transparency

� To use statistical techniques on hedge fund returns to replicate their risk/return characteristics

Benefits:

� Increased liquidity, valuation and transparency

� Ability to achieve short or long exposure to various strategies

� Lower fees, no capacity constraints and fewer regulatory issues

� Sector level products can be used to hedge specific risks or facilitate more rapid reallocation of capital

Challenges:

� Finding a relevant benchmark to replicate

� Ensuring the models adjust to shifting opportunity sets in a timely manner

� Considering the risks inherent in all sectors

Alternative Beta through ReplicationA Closer Look at Hedge Fund Replication


Benchmark (non-investable) hedge fund indices vs. investable hedge fund indices:Which is the more appropriate for replication modeling?

� Investable hedge fund indices already provide the following in an investable product:

– Alternative Beta

– Transparency

– Frequent valuations and liquidity

– Few capacity constraints

� Replication models should target non-investable hedge fund indices:

– No double layer of fees

– Accurate reflection of the hedge fund industry through performance of both closed and open funds

– Inclusion of more funds than investable hedge fund indices and hence more alternative beta

Model Construction


Using Fund-Level Data

� Information is lost when indices are created

– Sector information is lost when aggregated into a broad index

– Fund information is lost when aggregated into a sector index

– Driving factors are averaged out at certain times

� Use factor analysis on individual fund returns

– Extracts dynamics from data

– Helps identify subsets of funds within each sector that behave similarly


Alternative Beta through ReplicationHedge Fund Replication Models: Tapping Into Alternative

Beta � Multi-Factor-Model:

– Use a regression analysis that can identify liquid, tradable market factors that explain hedge fund returns

– Trading certain combinations of these factors can achieve alternative beta with hedge fund style returns

� Distribution Replication Analysis:

– Use liquid, tradable securities and complex derivatives to replicate statistical properties of hedge funds (volatility, correlation with stocks and bonds, etc.)

– Trading certain combinations of these factors daily can produce returns with the investor’s desired statistical properties

– The returns are not necessarily achieved in the same order as the hedge fund returns they are based on, leading to a large tracking error

� Mechanical Strategy Replication:

– Replicate strategies that hedge funds implement, using a rules-based approach

– Can be implemented for many hedge fund investment styles (i.e. Merger Arbitrage, Convertible Arbitrage and Volatility Arbitrage)

Replication Techniques


Two Main Questions

� What to replicate?

� How to replicate?


What to Replicate?

� What benchmark should be used?

� Choices

– Equal-Weighted

– e.g. HFRI Fund Weighted Composite Index (“HFRI Composite Index”)

– Asset-Weighted

– e.g. Credit Suisse Tremont Hedge Fund Index (“CS/Tremont Broad Index”)


Equal-Weighted Index

� Many replicators have chosen HFRI Composite Index

� Easy to fit

� Simple five factor model plus cash:

– S&P 500

– Russell 2000

– EAFE Index

– EM Index

– US Dollar Index


What to Replicate?

� Equal-Weighted HFRI Composite Index:

– Essentially identical to the HFRI Equity Non-Hedge sector

– Has been correlated for at least 10 years

– Not representative of the hedge fund universe

� Asset-Weighted CS/Tremont Broad Index:

– Has variable correlation to the CS/Tremont Long/Short Equity sector

– More representative of the hedge fund universe

– More dynamic, and therefore more difficult to model

� Answer: Asset-Weighted Index


How to Replicate?

� Need to create robust models that adapt to changing markets

� Issues to address:

– Is a broad model sufficient?

– Can fund-level information add any value?

– Does knowledge of fund/sector allocations help to model indices?


Is A Broad Model Sufficient?

� It doesn’t work on all sectors

� A single modeling technique and set of factors probably won’t work for every sector

� A model of the broad index is implicitly ignoring the contributions of many of the sectors

� If these sectors don’t contribute much to the broad index, who cares?

CS/Tremont Sector R2

Square Error

Long/Short Equity 87.38% 90.07% Broad Index 76.13% 82.25%

Emerging Markets 62.87% 74.67% Multi-Strategy 51.04% 67.03%

Dedicated Short Bias 50.10% 51.05% Event Driven: Merger Arb 40.63% 59.56%

Event Driven: Multi-Strategy 30.97% 53.79% Event Driven 30.09% 57.24%

Convertible Arbitrage 10.41% 27.15% Equity Market Neutral 3.02% 47.88%

Managed Futures -1.33% 1.58% Global Macro -1.52% 38.95%

Event Driven: Distressed -10.41% 44.77% Fixed Income Arbitrage -20.55% 10.55%

Sources: Credit Suisse Tremont Index, LLC, Bloomberg. All data was obtained from publicly available sources believed to be reliable. Credit Suisse has not sought to independently verify information obtained from such sources and makes no representations and warranties as to accuracy, completeness or reliability of such information. Projections do not represent future returns.


Jan 1997

Multi-

Strategy

0%

Global

Macro

45%

Long/Short

Equity

23%

Event

Driven

13%

Is A Broad Model Sufficient?� The influence of each hedge fund sector changes from month to month

� Any sector could eventually become important and therefore they must all be modeled individually

Aug 2007

Event

Driven

25%

Long/Short

Equity

30%

Multi-

Strategy

11%

Global

Macro

10%

Source: Credit Suisse Tremont Index, LLC.


Putting It All Back Together

� Once the sectors have been modeled, they can be combined into a broad index

� Problem: sector allocations are dynamic

� If allocations aren’t known, they must be inferred

� Can these allocations be accurately inferred from return data?

� Regress returns of the CS/Tremont Broad Index vs. returns of each of its sectors to estimate weightings


Inferring Sector Allocations

� Need actual monthly sector weightings to obtain a model that captures the dynamics of the industry in a timely fashion

Source: Credit Suisse Tremont Index, LLC.

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '070%

20%

40%

60%

80%

100%Estimated

Long/Short Equity

Event Driven

Global Macro

Multi-Strategy

Emerging Markets

Fixed Income Arbitrage

Equity Market Neutral

Managed Futures

Convertible Arbitrage


Estimated Peak ExposureFebruary, 2002

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '070%

20%

40%

60%

80%

100%Actual

Actual Peak ExposureAugust, 2000


Contacts

Americas

Hong Kong

Stephen Pak +85 2 2101 6563 [email protected]

Tokyo

Akira Takahashi +81 3 4550 9232 [email protected]

Sydney

Kate Wilkie +61 2 8205 4159 [email protected]

Asia Pacific

London

Paul Brine +44 20 7888 1204 [email protected]

Zurich

Donald Rice +41 44 333 2330 [email protected]

Renato Aebi +41 44 332 4934 [email protected]

Europe

New York

Philippe Schenk +1 212 538 5738 [email protected]

Christian Hoffmann +1 212 538 8616 [email protected]

www.hedgeindex.com

The information provided herein is confidential and may not be distributed to others without the consent of Credit Suisse Alternative Capital, Inc. Funds and Alternative Solutions. These materials do not constitute an offer to sell securities or a solicitation of an offer to buy securities; no offer to sell or solicitation of an offer to buy any security may be made without the delivery of a private placement memorandum. The use of risk management tools and models do not guarantee investment performance. Past performance is not indicative of future results. This presentation may not be altered except by members of Funds and Alternative Solutions. Please see additional disclaimers and end notes starting on slide 33.

Important Legal InformationThis document is for informational purposes only. The assumptions and parameters used have been selected by Credit Suisse Tremont Index LLC, and no guarantee is given as to the accuracy, completeness, or reasonableness of any such quotations, disclosure or analyses. All opinions and views expressed constitute judgments as of the date of this writing and may change at any time without notice or obligation to update. The strategy descriptions are provided by Credit Suisse Tremont Index LLC. No representation or warranty is made that any indicative performance or return indicated will be achieved in the future. The information contained herein is not and shall not constitute an offer to sell or a solicitation of an offer to buy shares, limited partnership interests or other securities in any of the products referred to herein. Any offer to sell such shares, limited partnership interests or other securities can be made by prospectus or private placement memorandum only. You cannot invest in the Indices directly or the basket described herein.

The returns provided herein by Credit Suisse Tremont Index LLC are based upon the allocation and the past performance of the underlying managers initially contained in the described indices. We rely on the actual performance returns provided by the underlying managers to a database which we believe to be reliable, but make no representations or warranties as to its accuracy or completeness. The underlying managers’ performance returns are unaudited and we make no representations as to their accuracy. In addition to the fees charged by the underlying hedge funds Credit Suisse might impose additional fees for its services. Please review the index description or private placement memorandum for a summary of the fees charged.

The Credit Suisse/Tremont Hedge Fund Indices are based upon index calculation rules which may be subject to change. The most recent version is available on www.hedgeindex.com. Index members may be removed or added based upon the Index’s criteria for inclusion and removal. Such criteria may include subjective measures and may be changed or modified without notice. Therefore, the actual performance of the indices may vary substantially from the performance presented herein. Past performance is not indicative of future performance.

The performance figures are based upon performance provided by hedge fund managers included in the index or obtained through the Credit Suisse/Tremont database to the Credit Suisse Tremont Index LLC, the Index Calculation Agent. Credit Suisse Tremont Index LLC believes such data is reliable but has made no independent representation as to its accuracy or completeness. Some of the underlying hedge fund's returns are denominated in a foreign currency and hence these returns deviate from what they would be if denominated in US dollars. The underlying hedge fund performance data is net of the underlying hedge fund managers' fees and expenses. Hedge funds are classified by their primary strategy as determined by the Index Calculation Agent in its sole discretion based on each underlying hedge fund's private placement memorandum and other offering materials. The information presented herein has been prepared on the basis of the publicly available information, internally developed data or other third-party sources believed to be reliable.

If you are a current or potential investor in a product based upon the Index, the performance of your product may differ materially from the Index performance presented herein. For time periods before the actual launch of the index the initial allocation of the index has been used for demonstration purposes along with the past performance of the underlying hedge funds included in the Index. The underlying hedge funds' performance returns are unaudited.

Please note that the availability to invest in these hedge funds is uncertain and is subject to change, at any time without prior notice. This information reflects the benefit of hindsight, and is not indicative of future performance. There can be no assurances that the underlying hedge funds will meet their investment objectives.

We have not run a contemporaneous investment model or actual portfolio in connection with the proposed investments presented. Actual investment performance will be made under different economic and market conditions and such time period presented herein does not necessarily reflect the performance in different economic cycles. It should not be assumed that investors will experience returns in the future comparable to the performance presented herein. The time period shown has been selected by Credit Suisse Tremont Index LLC for demonstration purposes only, nothing should be inferred or implied from this date.


EndnotesCredit Suisse/Tremont Hedge Fund Index is compiled by Credit Suisse Tremont Index LLC. It is an asset-weighted hedge fund index and includes only funds, as opposed toseparate accounts. The Index uses the Credit Suisse/Tremont database, which track over 5,000 funds, and consists only of funds with a minimum of US$50 million under management, a 12-month track record, and audited financial statements. It is calculated and rebalanced on a monthly basis, and shown net of all performance fees and expenses.

Credit Suisse/Tremont Investable Hedge Fund Index, comprised of 60 funds across 10 style-based sectors, is constructed as a sub-set of the Credit Suisse/Tremont Hedge Fund Index, the most widely quoted hedge fund index in the world. The Investable Index is asset weighted and enables investors to gain diversified exposure to the hedge fund industry. It is the exclusive property of Credit Suisse Tremont Index LLC.

HFRI Fund Weighted Composite Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all HFR hedge fund strategies and is asset weighted based on the distribution of assets in the hedge fund industry. It is the exclusive property of Hedge Fund Research.

S&P 500 Total Return Index: The Standard & Poor’s 500 Index is an unmanaged index (with no defined investment objective) of common stocks. It includes reinvestment of dividends, and is a registered trademark of McGraw-Hill Co., Inc. Investors cannot invest directly in an index.

Russell 2000 Total Return Index: The Russell 2000 Index is designed to be representative of the small-cap segment of U.S. equities. It is rebalanced annually to ensure that larger equities do not skew the performance of the small-cap segment and is comprised of the smallest 2000 securities from the Russell 3000. It includes reinvestment of dividends, and is the exclusive property of Russell Investment Group. Investors cannot invest directly in an index.

MSCI EAFE Total Return Index: The MSCI EAFE Index is an unmanaged Index designed to show the performance of equities in Europe, Australia and Far East. The Index is market capitalization weighted and includes equities from 21 developed markets. It includes reinvestment of dividends, and is the exclusive property of Morgan Stanley Capital International. Investors cannot invest directly in an index.

S&P/Citigroup BMI Emerging Markets Total Return Index: The S&P/Citigroup BMI Emerging Markets Index includes equities of over 1,500 companies spread among 26 countries. It includes reinvestment of dividends, and is a registered trademark of McGraw-Hill Co., Inc. Investors cannot invest directly in an index.

US Dollar Index: The US Dollar Index is designed to benchmark the performance of the US dollar. The Index averages the exchange rates between the US dollar and 6 major world currencies. The Index is calculated by the New York Board of Trade. Investors cannot invest directly in an index.

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