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Asset Management Alternatives Quarterly Q3 2012

CONFIDENTIAL – Only Available For Suitable, Pre-Qualified Investors

2 Credit Suisse Asset Management Alternatives Quarterly

Table of ContentsMessage from the Chief Investment Officer 3

Hedge Funds 4

Credit Strategies 11

Commodities 14

Private Equity 15

Emerging Markets 16

About the Asset Management Alternatives Quarterly Credit Suisse Asset Management’s Alternatives Quarterly offers investors authoritative insight on economic trends and capital markets around the world, spanning a wide spectrum of asset classes and investment styles.

Drawing directly from our mission to share knowledge and provide focused investment solutions to investors worldwide by leveraging the firm’s best ideas, access, resources and capabilities, the publication compiles views from our Chief Investment Officer on current macroeconomic and investment themes as well as a range of analyses from our leading alternatives portfolio managers on the trends and opportunities shaping today’s financial markets.

We hope you find the insights in this publication to be an important tool in helping you develop solutions and investment strategies.

For more information or to comment on any views expressed here, please contact your Credit Suisse relationship manager.

Alternatives Quarterly Credit Suisse Asset Management 3

Message from the Chief Investment OfficerStefan Keitel

Global Chief Investment OfficerCredit Suisse Asset Management and Private Banking

Global challenges remain, but setbacks provide buying opportunities

In the first half of 2012, global capital markets remained in the familiar “risk-on/risk-off” pattern. During the first quarter, coordinated stimulus from global central banks sparked a visible upswing in risky asset prices. A different story emerged in the second quarter, however, as the Greek government’s haircut for private-sector bondholders, Spanish banks’ recapitalization needs, French and Greek elections and continued fears of a Eurozone break-up renewed investors’ concerns about Europe’s economic future. Slowing growth in the US, China and the Eurozone periphery, in particular, also weighed on prices. All in all, global equities dropped 5% to 15% in the second quarter, depending on the market. Commodity prices followed suit, posting poor year-to-date returns.

As risk aversion ensued, US Treasury yields hit new historically low levels as investors continued to seek shelter amid economic and financial uncertainty. In this context, a key question comes to the fore: When will capital markets be ready to stabilize?

Our current view is for markets to stay volatile in the short term, but visibly stabilize in the latter part of this year. We believe sluggish global growth and Eurozone concerns will continue to weigh on investor sentiment, but these worries have, to a certain extent, already been priced into the markets. Additionally, we see the outcomes of the June European Union (EU) summit as steps in the right direction. In our view, any steps towards resolving the Eurozone debt crisis will largely derive from policy action, and we are optimistic that central banks will follow suit to provide the sustainable relief demanded by capital markets.

Asset Allocation Views

In this light, we have increased our allocation to equities after the expected market correction in March to May, as part of our real-asset strategy. We increasingly prefer the more countercyclical and lagging markets (namely in the Eurozone) over the more defensive ones (i.e., US and Switzerland), with a moderate overweighting in emerging market (including China, Korea and Russia) and UK equities. Our decision stems from the following views: Slow but positive economic growth in core markets, healthy inflation expectations and further central bank action with strong liquidity support in a persistently low-yield environment should support equities going forward. We reiterate our recommendation to use market corrections as an opportunity to add to positions. But, as noted previously, the road is unlikely to be smooth, especially in the short term.

Within fixed income, in this prolonged cycle of negative real yields, we believe that high-grade government bonds offer limited upside potential with yield levels inconsistent with our overall scenario. Additionally, we expect the flight to safety to gradually fade later this year. Therefore, we continue to prefer corporate and high-yield bonds. In particular, we believe the latter—even after posting gains year-to date—still offer attractive yields and potential for price appreciation should yields tighten further as we expect.

We believe currencies will remain range-bound based on tight interest-rate differentials across the developed world, as well as sluggish growth in all core markets. That said, it is increasingly likely that central banks, including the US Federal Reserve, will ease monetary conditions once again in the second half of the year, which should shield the Euro from future depreciation against the US Dollar.

Turning to commodities, we maintain our strategic overweight position on gold based on general currency mistrust and the negative real-yield environment within developed markets. Further, oil prices should stabilize after having factored in macroeconomic weakness and largely priced out the Middle Eastern geopolitical risk premium from the first quarter of 2012.

Alternative assets, such as hedge funds, performed relatively well in the second quarter and outperformed many global equity indices, including the S&P 500.1 We believe hedge funds, particularly global macro managers, will be well-positioned to add value in the second half of the year. Given the expected continued volatility in global capital markets, we are also focused on uncorrelated strategies, including relative value, managed futures and insurance-linked strategies, as well as foreign exchange strategies, given their attractive liquidity profile.

(1) In the second quarter of 2012, the Dow Jones Credit Suisse Hedge Fund Index outperformed the S&P 500 by 99 bps. Source: Dow Jones Credit Suisse Hedge Fund Indexes (www.hedgeindex.com)


Hedge FundsFundamental Strategies

Sebastien FiauxHead, Fundamental Strategies Research, Alternative Funds Solutions

Managers have generally reduced gross and net exposures during the second quarter, but opportunities remain in credit-driven strategies

ȷ Following the first quarter’s rallies in both credit and equity markets, the second quarter was marked by lingering concerns over European sovereign-debt issues. As a result, managers generally reduced their gross long and net exposures, exited or trimmed profitable positions and increased their cash levels, shorts and hedges.

ȷ Notwithstanding these challenges, corporate credit restructuring and liquidation processes continued to unfold as expected during the quarter. Contributions to credit event-driven manager gains include: – Pricing resilience and lower correlation of leveraged credit markets during the second quarter’s equity market pullback; – Continued investor appetite for high yielding securities in the current low-yield environment; – Specific events occurring within individual names (e.g., refinancings, restructuring court decisions, asset sales); – Increased loan volumes year-to-date, as issuers push out their upcoming maturities (“amend-to-extend”) (Display 1); and – Attractive premiums on European senior-secured credits.

ȷ In view of limited activity in the space and low overall arbitrage spreads, merger-arbitrage managers continue to be moderately active, focusing on strategic cash deals with a high likelihood of completion. However, we believe this sector may offer interesting opportunities going forward, supported by a improving M&A outlook, low interest rates for financing costs and abundant cash that can provide managers with hard-catalyst and liquid opportunities.

ȷ The special-situations environment has been somewhat challenging for individual stocks, but focus has been on sourcing investments with limited beta correlation and shorter-duration catalysts. Managers have selectively deployed capital to investments that are idiosyncratically event driven, as opposed to those where there is no known catalyst to unlock value. Despite being bullish on selective opportunities with limited market correlation, managers also remain mindful of potential market corrections and volatility.

Display 1: Robust amend-to-extend loan volume in 2012, as issuers push out upcoming maturities

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Hedge FundsFundamental Strategies (cont’d)

Vanita Gaonkar Director, Fundamental Strategies Research, Alternative Funds Solutions

Long/short managers capitalize on higher dispersion among stocks in the second quarter

ȷ Long/short equity hedge funds have posted gains year-to-date. While global economic activity is a long way from its previous strength, long/short managers were able to capture opportunities in an environment of declining correlation levels and higher dispersion among stocks.

ȷ Generally, managers generated alpha on the long side via financials and cyclical sectors in the early part of the year. Managers were successful in monetizing some of these gains, and rotated into more defensive areas (i.e., utilities and consumer staples) ahead of the market downturn in the second quarter.

ȷ On the short side, managers benefited from select shorts in financials, technology, industrials and consumer names. Overall, managers increased their net exposure to take advantage of an overall slightly positive economic environment, but remain nimble in light of continuing challenges stemming from the European debt crisis and a potential further slowdown in the US and emerging markets.

ȷ Moving forward, managers remain cognizant of the macroeconomic risks facing equity markets, but continue to find attractive investment opportunities, on both the long and short sides. Despite the uncertainty in global equity markets, we believe managers are finding plenty of attractive long opportunities in companies with strong balance sheets, good earnings and reasonable valuations. As seen in Display 2 below, widening spreads between US equity and government bond yields may indicate attractiveness of equities as an asset class going forward.

Display 2: Widening spreads between S&P 500 earnings and US 10-year bond yields indicate a positive secular trend for equity performance

As of May 31, 2012 Source: JP Morgan Research

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Hedge FundsRelative ValueYung-Shin KungHead, Relative Value Research, Alternative Funds Solutions

Flexible credit managers with conservatively positioned portfolios see opportunities in volatile markets

ȷ In the second quarter of 2012, government bond prices rallied in safe-haven countries, such as US and Germany, as concerns mounted over a worsening Eurozone crisis and weakening economic data in the US. 30-year German bund yields fell below 30- year Japanese government bond yields, while long-end US rates touched new lows. A directional bias towards curve-steepening proved costly in the quarter, as lower growth expectations, technical dynamics and risk aversion kept curves flat.

ȷ Managers were relatively conservative during the second quarter—particularly in Europe. Gains were realized in crowded tail-risk hedges. However we expect policy-driven interest-rate moves to increase volatility and set a floor on premiums available to liquidity providers. This—combined with yield curve distortions resulting from quantitative easing, such as the extension of Operation Twist in the US—should provide a favorable backdrop for fixed income managers.

ȷ In the agency mortgage-backed security (MBS) market, the US government’s efforts to alter refinancing rules (i.e., Home Affordable Refinance Program) are driving an increase in prepayment rates more than the level of interest rates themselves. In our view, this distortion has created a compelling carry opportunity for agency derivative specialists, since policy risk seems more difficult to hedge than duration risk.

ȷ Turning to non-agency MBS, managers continue to see attractive loss-adjusted yields in a market that is now approximately 90% below investment grade, with many traditional holders unable to invest due to restrictions around investing in lower-quality credit. However, base case manager-underwriting assumptions (e.g., loan loss, prepayment speeds, default rates, home price values) appear conservative, given the green shoots that have emerged in the US housing market. For example, the CoreLogic Aggregate Home Price Index has risen 3.8% on a seasonally-adjusted basis over the first four months of the year. As such, we believe that properly-managed structured credit portfolios are attractive, with healthy yield margins over “risk-free” assets, such as US Treasuries.

ȷ Given that the convertible bond market appears to be approaching new lows (Display 3), this defensive approach has served investors well as convertible arbitrage managers have generated solid returns through May (+3.74% according to the Dow Jones Credit Suisse Broad Convertible Arbitrage Hedge Fund Index). Currently, approximately 46% of the global convertible bond market (by market value) comprises equity-sensitive names compared to 33% in the fourth quarter of 2011. Managers are consequently showing more interest in volatility trades. However, given the uncertainty in the current environment, portfolio positions generally continue to be duration neutral and balanced across bond floor, credit and volatility trades.

Display 3: Convertible bonds are approaching lows seen in 2011, creating relative-value opportunities

Data from January 1, 2011 to May 31, 2012. “Richness” and “cheapness” are based on theoretical value.Source: Barclays

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Display 4: Drop in implied versus realized correlations of S&P 500 top 50 stocks has led to normalization of equity prices

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Hedge FundsRelative Value (cont’d)Yung-Shin KungHead, Relative Value Research, Alternative Funds Solutions

ȷ Concerns over tight spreads between corporate credit and risk-free rates, low absolute yields and macroeconomic risks have underpinned the generally bearish outlook among long/short credit managers. While high-yield prices fell during the second quarter, US and European non-financial, investment-grade credit yield remained close to historically low levels, reflecting the lack of bank credit availability and fickle capital-market appetite for risky issuers.

ȷ At the same time, a drastic decline in the amount of corporate-debt securities held by primary dealers (ahead of the proposed Volcker Rule) is reducing market liquidity; inventory levels have declined approximately 75% to $50 billion, underscoring the transformation of broker/dealers from principals to agents. We believe that the structural undercurrents emanating from bank deleveraging should provide interesting opportunities for flexible, risk-aware credit managers. We also expect near-term positioning to remain conservative, focusing on US and European high-yield opportunities with liability management and balance-sheet catalysts as key themes.

ȷ Quantitative equity market-neutral managers continued to post positive returns in the second quarter of 2012. In contrast to most other hedge-fund strategies, quantitative equity managers have maintained normal leverage levels, consistent with relatively range-bound equity markets in the US. Managers have seen rapid rotation of performance attribution across various sets of models. This has generally disadvantaged narrowly focused managers relative to their more diversified peers. We are monitoring the impact of lower equity-trading volumes, trading restrictions and new stamp taxes1 on stocks on quantitative-equity strategies, but continue to value the unemotional decision-making implicit in model-oriented trading, particularly when equity market are exhibiting healthy volatility and dispersion.

ȷ Volatility-trading strategies have posted mixed results in the second quarter of 2012. With the growth of portfolio hedging, as indicated by implied volatility post-2008, the sensitivity of implied volatility to equity-price movements seems to have declined, particularly in May. Recently, this has coincided with a cheapening of the S&P 500 index versus single-name skew and a corresponding drop in implied correlations with respect to realized correlations (Display 4). We see this as a normalization of the US equity and equity-volatility markets.

ȷ Despite disappointments in directional-equity volatility trades in May, managers have found interesting relative-value opportunities in single names, ETFs and ETNs and dividends, as well as inexpensive, long volatility positions in rates. Managers are likely to continue to trade volatility tactically, taking advantage of specific situations and dislocations as they arise.

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Display 5: Emerging-market currencies, particularly the Brazilian Real, have weakened relative to the US Dollar

Hedge FundsTactical TradingBernard HechingerHead, Tactical Trading Research, Alternative Funds Solutions

Return to risk-off environment led to mixed performance, with bearish managers profiting

ȷ During the second quarter, economic indicators disappointed across geographies, with deteriorating US employment data leading to speculation about further quantitative easing by the Fed. The resulting sharp drops in long-dated Treasury yields to new lows hurt many macro managers who had expected static short rates, but were positioned for a steepening of yield curves. Additional concerns included the growth slowdown in China and the uncertainty surrounding the scope of a policy response. Markets reacted to the global slowdown by returning to the risk-off pattern of the latter part of 2011.

ȷ Global macro performance was mixed, rotating in favor of bearish managers who had actually underperformed in the first quarter equity-market rally. In fixed income, while many managers shorted French and Dutch bonds vs. German Bunds in the first quarter—as spreads tightened ahead of the French presidential elections—they have since reversed their positions, as both Italian and Spanish bond yields widened further. “Safe-haven” flows pushed two-year German Schatz yields temporarily into negative territory. Unlike the two previous quarters, bank funding spreads to LIBOR experienced less variability, as investors remained confident that these institutions would continue to finance themselves via the ECB’s Long-Term Refinancing Operation (LTRO) or receive further support via recapitalization and nationalization measures, like those seen in Spain.

ȷ Growth-sensitive asset classes were under pressure in the second quarter. Emerging-market currencies, particularly the Brazilian Real (Display 5), weakened on fears of Euro exit(s) and its potential impact on global growth. Managers with bullish expectations on emerging-market currencies were surprised by the sizeable, sustained US Dollar and Japanese Yen safe-haven rallies, which resulted in significant profit givebacks from the first quarter. In contrast, short Euro and Australian Dollar positions made positive contributions.

ȷ In commodities, the Saudi-led OPEC production push added downside pressure to oil prices. Diversified commodity managers with longer-dated demand themes lost significantly more than their tactical peers, who were able to preserve previous gains. Despite macro headwinds, certain sectors continued to display a surge in prices due to idiosyncratic opportunities (e.g., US natural gas) or serious supply dislocations (e.g., soybeans).

ȷ Managed futures posted balanced returns with shorter-term trend followers outperforming—particularly in May—while those with longer outlooks suffered losses, as signals were adversely affected by market volatility.

As of June 29, 2012 Source: Bloomberg

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Hedge FundsHedge Fund ReplicationJordan Drachman, Ph.D.Head of Liquid Alternative Beta Strategies

Models point to high-yield bonds, emerging markets and tech stock exposure; merger arbitrage muted

ȷ The Credit Suisse event-driven replication model continues to show significant exposure to high-yield bonds. This suggests that, as interest rates remain at all-time lows and global macroeconomic concerns continue to suppress equity markets, hedge funds are turning to high-yield bonds in an attempt to generate some level of yield. This exposure has paid off as the high-yield bond factor was the only position to have a positive contribution in the second quarter.

ȷ Similarly, our long/short equity model is pointing to sizeable positions in emerging markets and NASDAQ stocks, both of which would imply that hedge-fund managers are actively searching for opportunities in areas of higher expected growth.

ȷ Merger deal volume continues to be modest when compared to historical levels (Display 6). The percentage level of cash held on corporate balance sheets has also ticked downwards relative to previous quarters (Display 7). These observations support the current lack of exposure to merger arbitrage in the event-driven replication model.

Display 6: Global merger-arbitrage activity remains modest in 2012

Display 7: US non-financial corporate cash as percentage of total assets has decreased over the past two years

As of June 29, 2012 Source: Bloomberg, Credit Suisse

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Hedge FundsSecuritized Products

Albert SohnChief Investment Officer, Securitized Products

Cory DeForrestProduct Specialist, Securitized Products

Non-Agency RMBS offering attractive yields at present, supported by a stabilizing US housing market

ȷ In the second quarter of 2012, non-agency RMBS prices in both US and Europe were supported by a number of positive factors, including the announcement of the Granite UK RMBS tender offer,1 a stabilizing US housing market and, most importantly, a continued influx of capital into the asset class. Securitized products’ synthetic indices rallied sharply, outpacing cash bonds. We believe the sector appears well-positioned to rally in the second half of the year, based on favorable fundamentals in the US housing market, as well as increased demand for higher-spread products.

ȷ In the US, home prices, including distressed sales, increased nationwide on a year-over-year basis by 2.0% in May 2012 compared to May 2011. According to CoreLogic, home prices, including distressed sales, increased by 1.8% in May 2012 compared to April 2012. The May 2012 figures mark the third consecutive increase in home prices nationwide on both a year-over-year and month-over-month basis (Display 9). Case-Schiller data echoed this strength as the index posted its first three-month winning streak in two years.

ȷ We believe another positive development for securitized products was the release of the Fed’s better-than-expected market risk capital rule.2 When compared to earlier proposals, the final rule is less onerous in its treatment of downgraded yet highly enhanced bonds (which corresponds to the majority of the RMBS and CMBS market). While the previous methodology focused more on historical losses, the current rules, in our view, better reflect market pricing by looking through to the collateral performance of the borrower.

Display 9: US home prices, including distressed sales, increased in the second quarter

(1) In May 2012, UK lender Northern Rock Asset Management Plc offered to buy back mortgage bonds issued under its Granite program. (2) In June 2012, the Fed approved a final rule to implement changes to the market risk capital rule, which requires banking organizations with significant trading activities

to adjust their capital requirements to better account for the market risks of those activities. For more information, please see: http://www.federalreserve.gov/newsevents/press/bcreg/20120607b.htm

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Credit StrategiesUS Senior Secured Loans

John G. PoppGlobal Head, Credit Investment Group

Senior loans continue to present attractive relative value compared to other fixed income sectors

ȷ The senior loan market exhibited overall positive performance in the second quarter of 2012, with the Credit Suisse Leveraged Loan Index finishing up 1.01% for the quarter with monthly returns of 0.78%, -0.51% and 0.74% for April, May and June respectively. While May was the first negative month for the asset class since November 2011, the market recovered its losses in June. The three-year discount margin for senior loans widened to 602 bps at the end of June from 588 bps at the end of March.

ȷ CLO issuance has been a significant driver of demand with new deal issuance remaining at elevated levels. Overall, $12 billion in new CLOs priced during the most recent quarter, making it the highest volume period since 2007 (Display 10).

ȷ Stable retail inflows have also contributed to increased demand for the asset class. Retail mutual funds saw net positive flows totaling $1.2 billion for the quarter with positive flows in all three months, according to Lipper FMI. In addition, we continue to see interest and allocations from pension funds and other institutional investors into senior loans.

ȷ From a supply perspective, senior loan new-issue activity remained modest in the second quarter, coming in at $79.7 billion, compared to $133.8 billion in the first quarter of 2012. As capital market volatility increased due to uncertainty over the situation in Europe, new-issue clearing yields1 (Display 11) widened and opportunistic deal volumes decreased over the course of the quarter.

ȷ Default rates fell marginally to 2.04% this quarter, down from 2.11% posted in March 2012. Moody’s trailing 12-month global speculative grade default rate was 2.67% in June and is forecast at 2.92% for June 2013.

Display 10: CLO volumes remain at elevated levels Display 11: New-issue clearing yields have increased, resulting in fewer opportunistic deals

As of June 29, 2012Source: S&P LCD, Credit Suisse

As of June 29, 2012Source: S&P LCD, Credit Suisse

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(1) At uniform-price auctions, the market clearing yield is the lowest yield such that the cumulative dollar amount of bids with lower yields equals the total outstanding dollar amount of the issue at par value. The market clearing yield is the yield that all holders of the security earn over the interval until the subsequent auction.

Direct investments in senior secured loans are typically made by sophisticated institutional investors. Sophisticated and suitable private clients may invest in senior secured loans via an investment in a mutual fund, exchange traded fund or an alternative investment fund, if they meet the applicable investment qualification (i.e., generally an accredited investor or qualified purchaser).


Credit StrategiesUS High Yield Bonds

John G. PoppGlobal Head, Credit Investment Group

High-yield market exhibits gains despite slowing activity in the second quarter

ȷ The Bank of America Merrill Lynch High Yield Master II Constrained Index returned 1.79% for the quarter, with returns of 1.01%, -1.23% and 2.03% for April, May, and June, respectively. The average high yield spread widened during the period, finishing the second quarter at 655 basis points, and the average yield-to-worst ended June at 7.38%.

ȷ High-yield defaults increased slightly quarter-to-quarter, with JP Morgan’s par-weighted high yield bond default rate rising to 2.2% in June, from 1.9% at the end of the first quarter. The default rate remains well below its historical average of 4.2%. The US high yield distress ratio, which measures the proportion of bonds trading at spreads of more than 1,000 basis points over US Treasuries, finished at 13.3% of the market in June compared to 15.5% at the end of March.

ȷ High-yield mutual fund flows turned negative in the second quarter, with outflows totaling $800 million. This, combined with a first quarter inflow of $20.6 billion, brought the year-to-date inflow to $19.8 billion at the half-year mark, according to Lipper FMI. This figure surpasses the $3.7 billion inflow in the first six months of 2011, thus indicating a strong increase in retail demand.

ȷ New high-yield issuance in the second quarter totaled $54.7 billion compared to first quarter volume of $107 billion (Display 12). The slowdown in primary markets was largely due to uncertainty regarding Europe and the global economic backdrop. Year-to-date volume now totals $162 billion, trailing the $182 billion that priced over the same period in 2011, according to JP Morgan.

ȷ Credit markets have continued to improve against the backdrop of a perceived easing of macroeconomic risk, as signs of resilient fundamentals in the US mitigate continued Eurozone concerns. Investors have shown more confidence in the credit markets as demonstrated by record inflows into high-yield funds. We see continued opportunities within the high-yield asset class given the current stable fundamentals of corporate issuers, combined with a benign credit outlook and an expectation of below-average default rates through 2012.

Display 12: New high-yield issuance was muted in the second quarter given Eurozone concerns

As of June 29, 2012Source: JP Morgan

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Credit StrategiesUS Municipal Bonds Lori CohaneHead, US Municipal Bonds

Ovadya Aryeh Director, US Municipal Bonds

Supply-demand dynamic keeps yields low, but municipals continue to present attractive relative value

ȷ US municipal bonds (munis) have posted consistent gains this year, with the Barclays Muni Index returning +3.63% through the first half of 2012. In our view, this year’s muni rally has been due to a few factors: a) a contraction in US and global growth, resulting in an ongoing flight-to-quality trade that benefits munis; b) overall relative value of muni-to-Treasury yields; and c) supply-demand imbalance, with large amounts of cash flowing into the asset class and limited new issuance to satisfy the increased demand.

ȷ Although muni yields have decreased this year, they remain cheap to Treasuries on a relative basis. Historically, 10-year munis have traded at 82% of 10-year Treasury yields; currently, the ratio is at 114% (Display 13). We believe this relative cheapness continues to keep participants in the market, and it encourages non-traditional crossover buyers (i.e. hedge funds, other tactical fixed income managers) to enter the muni space, particularly at the longer end of the curve.

ȷ Year-to-date supply in the new issue market has dramatically increased, with $191 billion (Display 14), representing a 63% increase versus the same period in 2011. This increase was mostly due to a spike in refunding (i.e., refinancing) deals ($83 billion, or 45% of year-to-date issuance) that have been brought to market in this low-rate environment. On the demand side, muni bond fund flows experienced 30 consecutive weeks of inflows, bringing 2012 year-to-date totals to over $26 billion. Additionally, large amounts of outstanding bonds have matured or were called. The combination of consistent muni fund inflows, conversion to cash of existing bonds and issuance comprised largely of refunding deals has increased sums of investable cash in this market.

ȷ Issuance typically slows down in the summer months, and bond calls/maturities from June through August are expected to set a new record high, likely creating a very strong technical period for munis.

ȷ The potential for negative news related to specific municipalities or municipal issuers continues to exist, underscoring the importance of proper credit selection when investing in a universe of over 50,000 different issuing entities in the US muni market.

Display 13: Munis appear cheap to Treasuries… Display 14: ...With high new issuance driven by refinancings

As of June 29, 2012Source: Municipal Market Data (Thomson Financial) and Bloomberg

As of July 1, 2012Source: The BondBuyer

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CommoditiesNelson LouieGlobal Head, Commodities Group

Christopher Burton, CFAPortfolio Manager, Commodities Group

Ongoing Eurozone crisis and slowing growth momentum continue to put pressure on commodity prices

ȷ Commodities were down 4.55% in the second quarter of 2012, as measured by the Dow Jones-UBS Commodity Index Total Return. The worsening economic environment in Europe and a perceived slowdown in China have raised concerns of a possible softening in underlying consumption for economically sensitive commodities, such as petroleum and base metals. These concerns were eased somewhat by the end of the quarter, as global markets reacted positively to outcomes from the June EU summit.

ȷ Beyond the uncertain demand outlook, we believe commodities will continue to face global supply shocks and may benefit from a potential upswing in prices. Key factors that we believe may contribute to further supply shocks in 2012 include: – Agriculture remains vulnerable to non-cyclical weather disruptions. For example, the recent increase in corn prices was due to

hot, dry weather in the US Midwest which led to deteriorating crop prospects and lowered yield expectations for grains. Corn rated in good or excellent condition fell to 56% of the total crop output compared to the five-year median of 70%, nearing a five-year low of 61%, last observed in 2008 (Display 15);

– Despite a perceived oversupply, natural gas prices rebounded in the second quarter. Hot weather in the US and continued coal-to-gas switching drove power generation demand. This led to smaller-than-expected weekly storage injections, as reported by the Department of Energy; and

– In base metals, obtaining new mining capacity has proven more difficult and expensive, while labor disputes continue to threaten existing production. We believe this may bode well for component prices as macroeconomic risk, at some point, subsides.

ȷ As we move into the second half of the year, we believe that the key driver of commodity prices will ultimately be global growth. While we continue to hold the view that global GDP growth will be stronger in the second half of the year than the first, the ongoing downswing in cyclical momentum is becoming more concerning and should be closely monitored.

Display 15: US corn crop conditions are down versus their five-year range and median

As of July 5, 2012Source: Bloomberg, US Department of Agriculture, Credit Suisse

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Private EquityKelly WilliamsHead, Customized Fund Investment Group

David Weissman, CFA Vice President, Customized Fund Investment Group Market Research

Amid challenging fundraising environment, appetite increases for mezzanine and distressed debt

ȷ Institutional investors continue to be selective and disciplined in making private equity (PE) commitments primarily due to the large number of offerings in the market and more rigorous diligence in vetting recession and post-recession performance. At the same time, increased competition has led to a new high in the length of time for US buyout funds to reach final closing. According to Preqin, in the first half of 2012, the average time for US buyout funds to reach a final close was approximately 21 months (Display 16). This is nearly twice as long as the average closing time in 2005.

ȷ Year-to-date, there have been more buyout funds raising in excess of $300 million year-to-date compared to the same time period at the peak of the market in 2005. According to Preqin, there were a total of 81 US buyout funds raising more than $300 million in 2012, of which 10 were US mega-buyout funds. This compares to a total of 75 US buyout funds that raised above $300 million in 2005, of which only four were mega-buyout funds. Given that, on a normalized basis, 2012 year-to-date total fundraising targets would amount to 80% of 2005 figures, which is making the environment for raising capital very competitive, in our view.

ȷ Against this challenging environment, we find investors are increasing their appetite for mezzanine investments based on attractive yields currently averaging 12% and that significant loans made between 2005 and 2008 need to be refinanced.1 In the US, approximately $9.1 billion was raised for mezzanine funds through the first half of 2012, up 12% from $8.1 billion raised over the full year 2011.2

ȷ Demand is also strong for distressed-debt investments as macroeconomic conditions remain volatile and as maturing debt obligations need to be paid or refinanced (Display 17). Further, 2010 and 2011 were record years for new high-yield issuance. We believe this may be followed by a spike in corporate default rates in coming years, providing a solid pipeline of opportunities for distressed-debt funds. In our view, value creation for special-situation funds will stem from rehabilitating operations and balance sheets of distressed companies.

Display 16: Time-to-final closing of US buyout funds at a new high

Display 17: Investor appetite for distressed debt remains strong

Source: Preqin, June 2012.

(1) Source: Pension and Investments. As of June 2012.(2) Source: Thomson Reuters. As of June 2012

Source: Preqin. As of July 2012.

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Emerging Markets: Brazil Fixed IncomeRicardo ValentePortfolio Manager, Fixed Income, Credit Suisse Hedging-Griffo

Franco VeludoFixed Income, Credit Suisse Hedging-Griffo

The government’s ongoing stimulus measures should make an impact in the second half of the year, providing investors opportunities in inflation-linked bonds

ȷ Concerns continue to linger surrounding low growth prospects in the Eurozone and its impact on the global economy. The Chinese government acted on this negative sentiment, leading to both fiscal and monetary stimulus measures. The Chinese central bank cut its benchmark interest rates for the second time in two months from 6.31% to 6.00%.

ȷ Against this backdrop, Brazil’s growth has declined year-to-date. Market forecasts for Brazil’s GDP growth this year have converged to below 2%, or lower than half of the 4% expectation from a year ago (Display 18) based on slow credit growth (due primarily to lower consumer demand, in view of current household indebtedness) and weak industrial activity.

ȷ As a result, the Brazilian government implemented a series of growth measures, as it did in 2008. These include cutting the tax on Industrialized Products (IPI) on automobiles and household appliances, and creating additional incentives for government purchases and credit by reducing the long-term interest rate. The government also intervened in the foreign exchange market by keeping the US Dollar hovering above R$2.0, which, in turn, helped support the country’s manufacturing market by keeping export prices low.

ȷ The country’s annual inflation rate fell below 5% for the first time since late 2010. The drop in prices was partially attributable to the measures implemented by the government (such as the above-mentioned reduction in the IPI rate on automobiles) and the re-weighting of the IPCA inflation index. Lower commodity prices and a slowdown in domestic consumption also helped mitigate upward price pressures.

ȷ We expect that any fiscal impact from the interest-rate cuts and stimulus measures will be felt at some point in the second half of the year. This scenario remains positive for Brazilian inflation-linked bonds and indicates a better outlook for break-even inflation positions, as we expect inflation to recover in the second half of the year due to the current stimulus in the economy.

Display 18: Brazilian 2012 GDP expectations are down sharply, prompting government stimulus

As of July 7, 2012Source: Bloomberg

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Emerging Markets: Brazil EquitiesIram Siqueira, João Luiz Braga, CFA

Mauricio Felicio and Pedro Sales, CFA

Portfolio Managers, Equities, Credit Suisse Hedging-Griffo

Brazilian exporters, namely mining companies, look to Chinese infrastructure for demand

ȷ Over the past few years, domestic-related sectors (e.g., banks, retail, real estate) have gradually gained more prominence within the Brazilian equities market. However, export-driven companies (i.e., commodities players) still account for nearly 40% of the Brazilian Equity Index (Bovespa). In the latter case, stocks’ performance is mostly dependent on global growth prospects and, to a certain extent, leveraged to expectations regarding the Chinese economy (the world’s largest commodities consumer). Therefore, recent concerns over a prolonged slowdown in China may not bode well for the Brazilian economy.

ȷ China’s declining growth trend can be partly attributed to the country’s infrastructure expenses—already at levels much lower than in previous years—and railroad investments are a clear example of this trend (Display 19). In addition, investments in residential property have been discouraged by restrictions implemented by the government’s policies around higher down payments and limitations for second-home purchases. These factors combined may imply lower demand for steel products that, in turn, may lead to weaker volumes for Brazilian iron ore.

ȷ Having said this, the Chinese government has already demonstrated greater concern over economic growth, which is said to lead to “selective easing” focused on fiscal measures. Accordingly, over the past few weeks, various pro-growth measures have been announced, and many of them are related to the approval of infrastructure projects. In other words, the Chinese government has a large capacity to implement counter-cyclical measures to contain an economic downturn and thus promote a reacceleration in the second half of this year. This uptick in demand should have a positive impact on Brazilian mining stocks.

ȷ In addition, global iron-ore capacity additions are relatively constrained over the next few years. Over the past decade, most Brazilian infrastructure projects faced delays, stemming from: (1) a difficult credit environment; (2) lack of environmental permits; (3) CAPEX inflation; (4) lack of skilled labor; and (5) operational challenges. As a result, we expect a tight supply-demand balance to persist in the iron-ore market for the next few years, supporting prices and further favoring Brazilian mining stocks.

Display 19: Chinese investment in railroads has declined year-over-year

As of June 29, 2012Source: National Bureau of Statistics of China

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Emerging Markets: Indian Equities*Prashant Jain, CFAExecutive Director and Chief Investment Officer, HDFC Asset Management Company

Despite India’s current challenges, attractive valuations and long-term growth outlook present a window of opportunity for equities

ȷ Despite the growth slowdown in emerging markets in the most recent quarter, we believe incremental progress continues to be made in certain economies, particularly India. As such, we continue to adhere to our time-tested philosophy: Good returns are seldom made on investments made in good times. Rather, good returns are typically made on investments made in adverse times.

ȷ The Indian economy is currently facing some well-known challenges, including a high current account deficit (CAD), fiscal deficit and a nearly 25% depreciation of the rupee (INR). However, we believe these issues can be resolved over time: – The worsening CAD from 1.3% of GDP in 2008 to nearly 3.8%(E) in 2012 is primarily due to an increase in gold imports from

0.4% of GDP in 2008 to 2.3%(E) of GDP in 2012. Based on recent data, we believe the high levels of gold imports are behind us and gold imports could revert back to their long-term average. This should progressively address the CAD over the next few years.1

– We believe that the sharp depreciation of the INR appears to be excessive. What could support INR going forward are the expected improvement in the CAD in 2013 as mentioned above, as well as policy steps that improve investment sentiment (notably reducing fuel subsidies) and moderation in global crude oil prices.

– The sharp INR depreciation should also moderate the CAD in 2013 and beyond, by making exports more competitive and imports costlier.

– Steps have been taken by the government in their last budget to reduce the fiscal deficit (i.e., proposal to raise taxes and curb government spending). We believe a key solution lies in eliminating or sharply reducing government subsidies on diesel. We are hopeful that this will be addressed in a timely manner.

ȷ We believe the impact of the European crisis on the Indian economy should be less significant than that on other countries. This is because India’s exports to, and investments in, the stressed economies of Europe remain small (India’s total exports to the EU was 2.6% of India’s GDP in 2011).2

ȷ We believe attractive valuations and a reasonably positive long-term growth outlook present a window of opportunity for Indian equities. Since early 2008, the MSCI India is down over 20% even though earnings of the underlying companies have increased by 48% in the same time period. Consequently, P/E multiples have come down and are currently more than 20% below the long term averages (Display 20).3

Display 20: One-year forward price/earnings multiples for MSCI India trading 20% below long-term averages3

* Commentary based on June 2012 letter written by Prashant Jain, Executive Director and CIO of HDFC AMC. HDFC AMC is Credit Suisse’s Indian partner in the long-only asset management space.

(1) Source: HDFC AMC; BoFA-ML Estimates(2) Source: Ministry of Commerce and Industry, India; Reserve Bank of India. Data for FY 2010-11(3) Source: Bloomberg. Earnings growth is measured by comparing trailing 12 month earnings per share for MSCI India Index. Data as of June 29, 2012.

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Stefan Keitel, Managing Director, is the Global Chief Investment Officer for Credit Suisse Asset Management and Private Banking. Mr. Keitel holds a Masters degree in Finance (Diplom-Kaufmann) from Mainz University.

Ovadya Aryeh, Director, is the Co-Portfolio Manager and Trader for Credit Suisse Asset Management’s tax-advantaged fixed income strategy. Mr. Aryeh graduated with honors from Yeshiva University with a B.S. in Finance.

Joao Luiz Braga, CFA, Director, is a Portfolio Manager for Credit Suisse Hedging-Griffo long-only funds with a focus on financials, consumer, retail, health care and education. Mr. Braga earned an M.B.A. at the IBMEC Business School, an Electrical Engineer degree at Escola Politécnicada Universidade São Paulo and is a CFA charter holder.

Christopher Burton, CFA, Managing Director, is the Lead Portfolio Manager and Trader for the Commodities Group. Mr. Burton earned a B.S. in Economics with concentrations in Finance and Accounting from the University of Pennsylvania’s Wharton School of Business. He is a CFA charter holder.

Lori A. Cohane, Managing Director, is the Portfolio Manager and Senior Research Analyst for Credit Suisse Asset Management’s tax-advantaged fixed income strategy. Ms. Cohane holds a B.S. in Finance with honors from the State University of New York at Albany.

Cory DeForrest, Director, is the Product Specialist of structured credit and residential real estate assets within Credit Suisse Asset Management. Mr. DeForrest graduated with a B.A. from West Chester University.

Jordan Drachman, Ph.D., Director, is Head of Research for the Liquid Alternative Beta team. Mr. Drachman has received a B.S. in Mathematics from Massachusetts Institute of Technology and Ph.D. in Mathematics from Stanford University.

Mauricio Felicio, Director, is a Portfolio Manager for Credit Suisse Hedging-Griffo long-only funds with a focus on agribusiness, food, infrastructure and logistics, and industrials and technology. Mr. Felicio has an M.B.A. from Stanford University and a B.A. in business from the Faculdade de Economia, Administração e Contabilidade da Universidade São Paulo.

Sebastien Fiaux, Director, is Head of Portfolio Management for the Americas and of Fundamental Strategies Research for the Alternative Funds Solutions group. Mr. Fiaux earned an M.S.

in Finance, Economics and Statistics from ENSAE, an M.A. in Political Science from the Institute of Political Science and a Masters in Financial Engineering from Cornell University.

Vanita Gaonkar, Director, is on the Fundamental Strategies Research team for the Alternative Funds Solutions group. Ms. Gaonkar earned a B.A. in Mathematics and Economics from Wesleyan University.

Bernard Hechinger, CFA, Managing Director, is Head of Portfolio Management for Switzerland and of Tactical Trading Strategies Research for the Alternative Funds Solutions group. Mr. Hechinger holds a B.A. from the University of Pennsylvania and a B.Sc. from the University of Pennsylvania’s Wharton School. He is a CFA charter holder.

Niklaus Hilti, Managing Director, is Head of Insurance Linked Strategies within Credit Suisse Asset Management. Mr. Hilti holds both a Pre-Diploma in Mathematics and a Master’s in Mathematical Physics and Meteorology from University Basel, Switzerland.

Prashant Jain, CFA, Executive Director, is the Chief Investment Officer at HDFC Asset Management Company Limited. Mr. Jain completed the Post Graduate Program in Management from the Indian Institute of Management, Bangalore and has a degree in Technology from the Indian Institute of Technology, Kanpur.

Yung-Shin Kung, Director, is Head of Relative Value Research for the Alternative Funds Solutions group. Mr. Kung holds a B.A. in Economics/Statistics from the University of Chicago (Phi Beta Kappa).

Nelson Louie, Managing Director, is Global Head of the Commodities Group. Mr. Louie holds a B.A. in Economics from Union College.

John G. Popp, Managing Director, is the Global Head of the Credit Investments Group, with primary responsibility for making investment decisions and monitoring processes for CIG’s global investment strategies. Mr. Popp graduated with a B.A. from Pomona College and an M.B.A. from the Wharton Graduate School of the University of Pennsylvania.

Pedro Sales, CFA, Director, is a Portfolio Manager for Credit Suisse Hedging-Griffo long-only funds with a focus on telecom, utilities and real estate. Mr. Sales has an Electrical Engineer degree from Pontífica Universidade Católica do Rio de Janeiro and is a CFA charter holder.

About the Authors


Iram Siqueira, Director, is a Portfolio Manager for Credit Suisse Hedging-Griffo long-only funds with a focus on mining, steel, oil and gas, airlines, and pulp and paper. Mr. Siqueira has a degree from the Business School at Fundação Getulio Vargas, São Paulo.

Albert Sohn, Managing Director, is the Chief Investment Officer of structured credit and residential real estate assets within Credit Suisse Asset Management. Mr. Sohn earned a B.S. from Cornell University.

Ricardo Valente, Director, is a Portfolio Manager for Credit Suisse Hedging-Griffo in Fixed Income and Dynamic Family. He has a degree in Business Administration from Fundação Getulio Vargas, São Paulo.

Franco Rodrigues Resende Veludo, Vice President, is a Market Analyst for Credit Suisse Hedging-Griffo in Fixed Income and Dynamic Family. He has a degree in Business Administration from the IBMEC Business School, São Paulo.

David Weissman, CFA, Vice President, leads market research for private equity in the Credit Suisse Customized Fund Investment Group. Mr. Weissman graduated business and engineering programs at Boston University with M.B.A., M.S.E.E., and B.S.E.E. (cum laude) degrees.

Kelly M. Williams, Managing Director, is Head of the Credit Suisse Customized Fund Investment Group. Ms. Williams graduated magna cum laude from Union College in 1986 with a B.A. in Political Science and Mathematics, and received her Juris Doctor degree from New York University School of Law in 1989.


Emerging Markets: A Structured Approach to Country AllocationJune 2012—Investors looking to emerging markets to capture additional returns face a key challenge: How to strategically allocate across countries and sectors in such a heterogeneous universe? Our team of EM experts tackles this key question.

Credit Investing: Preparing Portfolios for a Post-Treasury-Rally WorldMay 2012—John Popp, Global Head and CIO of the Credit Investments Group, suggests that investors can capture additional returns by moving beyond core fixed income and trading duration risk for credit risk.

Asset Management’s Q2 2012 Alternatives QuarterlyApril 2012—Our Global CIO, Stefan Keitel, shares his views on the sustainability of recent improvements in global capital markets. Additionally, our leading alterbnatives portfolio managers outline areas of opportunity in their respective strategies following the equity-market rally in the first quarter.

New Normal Investing: Is the (Fat) Tail Wagging Your Portfolio?April 2012—The “new normal” environment has led to two primary challenges for investors: the search for yield and the need to better manage “fat-tail” events. In this paper, our Investment Strategy Americas team discusses how investors can modify their risk framework to accommodate fat-tail risk and help minimize negative returns.

European Debt Crisis in Focus: Time to Re-Risk Portfolios?March 2012—Could an improvement in recent economic data and a rally in global equities indicate that investor risk aversion is waning? In his latest paper, Credit Suisse Senior Advisor Robert Parker tackles this question, arguing that the time might be right for investors to consider increasing their exposure to risky assets.”

Robert Parker, Credit Suisse Senior Advisor, January 2012 Market UpdateJanuary 2012—Robert Parker, Credit Suisse Senior Advisor, outlines the market conditions going into 2012, the factors that could support riskier assets this year, as well as the potential risks.

Fixed Income Outlook: The Search for YieldNovember 2011—In this white paper, John Popp, Global Head and CIO of the Credit Investments Group, reviews options for investors seeking returns in a low-yield environment.

Credit Suisse Asset Management Publications

Hedge Fund Investing: How to Optimize Your PortfolioOctober 2011—In a post financial-crisis environment, how can investors address potential risks associated with hedge fund investing? The paper discusses how hedge fund replication can help address these challenges while potentially providing alternative-like returns.

The Way Forward: Measuring the Impact of Short-Term and Structural Growth Drivers on Emerging Market InvestingSeptember 2011—In the aftermath of the 2008 global financial crisis, many emerging countries were able to recover more quickly than their developed counterparts. Can this scenario be repeated during the current slowdown?

Real Assets: Inflation Hedge Solution Under a Modified Risk FrameworkSeptember 2011—In the “new-normal” environment, what is the right mix for a real assets portfolio? The ISS team presents a modified risk framework with which to optimize the benefits of the asset class.

Commodities Outlook: Increased Volatility, Increased Opportunity?August 2011—The paper examines the recent rise in the volatility of commodity prices within the context of a longer-term, secular trend of increasing volatility and how investors can best position their portfolios in this environment going forward.

Commercial Real Estate: Has the Tide Turned?June 2011—After suffering through the credit crisis, US commercial real estate macro indicators are starting to improve. But how sustainable is this turnaround? The paper addresses this question, and examines how institutional investors can manage their exposure to this asset class during still uncertain times.

Managing Fixed Income Investments in a Rising Inflation and Interest-Rate EnvironmentMarch 2011—This paper addresses key challenges facing fixed income investors today: How to achieve higher returns in a still low-yield environment while mitigating the rising threats of inflation and interest-rate risks? The ISS team’s analysis suggests that diversifying fixed income exposure into specific instruments as well as adding inflation hedges may present an efficient way to manage these challenges. A full case study helps to illustrate the team’s findings.

The views and opinions expressed within these publications are those of the authors, are based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date hereof.

For a copy of any of these papers, please contact your relationship manager or visit our website at credit-suisse.com.


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Important Legal InformationThis material has been prepared by the Asset Management division of Credit Suisse (“Credit Suisse”) and not by Credit Suisse’s Research Department. It is not investment research or a research recommendation for regulatory purposes as it does not constitute substantive research or analysis. This material is provided for informational and illustrative purposes and is intended for your use only. It does not constitute an invitation or offer to the public to subscribe for or purchase any of the products or services mentioned. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated financial service. It does not take into account the financial objectives, situation or needs of any persons which are necessary considerations before making any investment decision. The information provided is not intended to provide a sufficient basis on which to make an investment decision and is not a personal recommendation or investment advice. It is intended only to provide observations and views of the said individual Asset Management personnel at of the date of writing without regard to the date on which the reader may receive or access the information. Observations and views of the individual Asset Management personnel may be different from, or inconsistent with, the observations and views of Credit Suisse analysts or other Credit Suisse Asset Management personnel, or the proprietary positions of Credit Suisse and may change at any time without notice and with no obligation to update. To the extent that these materials contain statements about future performance, such statements are forward looking and subject to a number of risks and uncertainties. Information and opinions presented in this material have been obtained or derived from sources believed by Credit Suisse to be reliable, but Credit Suisse makes no representation as to their accuracy or completeness. Credit Suisse accepts no liability for loss arising from the use of this material. If nothing is indicated to the contrary, all figures are unaudited. All valuations mentioned herein are subject to Credit Suisse valuation policies and procedures. It should be noted that historical returns and financial market scenarios are no guarantee of future performance.

Every investment involves risk and in volatile or uncertain market conditions, significant fluctuations in the value or return on that investment may occur. Investments in foreign securities or currencies involve additional risk as the foreign security or currency might lose value against the investor’s reference currency. Alternative investments products and investment strategies (e.g. Hedge Funds or Private Equity) may be complex and may carry a higher degree of risk. Such risks can arise from extensive use of short sales, derivatives and leverage. Furthermore, the minimum investment periods for such investments may be longer than traditional investment products. Alternative investment strategies (e.g., Hedge Funds) are intended only for investors who understand and accept the risks associated with investments in such products.

Backtested, hypothetical or simulated performance results have inherent limitations. Unlike an actual performance record based on trading actual client portfolios, simulated results are achieved by means of the retroactive application of a Backtested model itself designed with the benefit of hindsight. Backtested 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 backtesting 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 backtested 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 backtest results are neither an indicator nor guarantee of future returns. Actual results will vary, perhaps materially, from the analysis.

This material is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Credit Suisse and/or its subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. Materials have been furnished to the recipient and should not be re-distributed without the expressed written consent of Credit Suisse.

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