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Asset Management
Hedge Fund Investing: How to Optimize Your Portfolio
Dr. Jordan DrachmanHead of Credit Suisse Alternative Beta Strategies
May 20, 2013
CONFIDENTIAL. For pre-qualified purchaser use only. Not for redistribution. These materials do not constitute an offer to sell or a solicitation of an offer to buy securities.
This presentation may not be altered except by Credit Suisse. Past performance is no guarantee or indicator of future results. Please see “Important LegalInformation” at the end of this document for important disclosures regarding the data and information contained and the views and opinions expressed in thismaterial.
1
Searching for yield in a low interest rate environment
A diversified approach to hedge fund investing
Liquid alternatives: a potential solution
Using liquid alternatives in a portfolio
Appendix
Table of Contents
2
Searching for yield in a low interest rate environment
3
The search for yield
Slowing growth and heightened uncertainty are forcing investors to seek alternative
sources of return
Equity markets are at an all time high, bond yields remain low
5 Year Yields (as of 4/30/13)
US Treasury Notes 0.68%
US Investment Grade Bonds 1.39%
US High Yield Bonds 4.29%
Source: Bloomberg, 2013. All data was obtained from publicly available information, internally developed data and other third party sources believed to be reliable. Credit Suisse has not sought to independently verifyinformation obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. Investment Grade and High Yield yields are based on 5year North American CDX spreads.
Investors should consider a more diversified approach to portfolio management
Hedge funds have the flexibility to allocate across asset classes, markets and industry
sectors
4
Adding hedge funds may help improve portfolio returns
Past performance is no guarantee or indicator of future results.
Equities represented by MSCI World Total Return Net Index, Bonds represented by Barclays Global Aggregate Bond Index and Hedge Funds represented by Dow Jones Credit Suisse Hedge Fund Index. Portfolio construction: Equities and Bonds rebalanced monthly. Hedge funds rebalanced annually.Source: Credit Suisse, Bloomberg. All data was obtained from publicly available information, internally developed data and other third party sources believed to be reliable. Credit Suisse has not sought to independently verifyinformation obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information.
The time period reflects index performance since 2000 (first full year of live performance for the Dow Jones Credit Suisse Hedge Fund Index). The performanceshown is hypothetical and for illustrative purposes only and does not represent performance of any Credit Suisse investment. The performance of the Dow JonesCredit Suisse Hedge Fund Index fluctuated over the period shown and the actual performance in relation to any other asset classes can and will vary dependingon market conditions. Risk is measured as standard deviation annualized.
8.5%
10.8%
16.5%
Annualized
Risk
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Equities
Portfolio of 60% Equities, 40% Bonds
Portfolio of 40% Equities, 40% Bonds, 20% Hedge Funds
5
But there are potential drawbacks… such as name risk
Lehman Brothers
(Sep 2008)
$100 bn in prime brokerage assets frozen
Madoff
(Dec 2008)
$50 bn Ponzi scheme
Amaranth Advisors
(Sep 2006)
$5 bn trading loss highlights lack of transparency in industry
Westgate Capital Management
(Feb 2009)
Misappropriation of $554 mn of Equity Market Neutral fund
Past events have renewed investor focus on transparency and due diligence
Limited transparency makes risk management of a hedge fund portfolio more difficult
and it may also create hard to detect “style drift” scenarios
Source: Credit Suisse Asset Management, LLC. All data was obtained from publicly available information, internally developed data and other third party sources believed to be reliable. Credit Suisse has not sought toindependently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information.
6
And picking top performers is difficult
2012 Dow Jones Credit Suisse Hedge Fund Index Dispersion
14.70%
(7.89%)
38.94%
13.54%
32.78% 44.28%
30.29% 32.06%
17.23%
34.18%
0.84%
(33.81%)(43.31%)
(12.82%)(24.31%)
(3.13%)
(13.93%)
(27.66%) (27.45%) (25.20%)
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%C
onve
rtibl
eA
rbitr
age
Ded
icat
edS
hort
Bia
s
Emer
ging
Mar
ket
Equi
ty M
arke
tN
eutra
l
Even
t Driv
en
Fixe
d In
com
eA
rbitr
age
Glo
bal M
acro
Long
/Sho
rtEq
uity
Man
aged
Futu
res
Mul
ti-St
rate
gy
Ret
urn
Past performance is no guarantee or indicator of future results.Note: The bulk of returns, shown as the dark blue boxes, represent returns within one standard deviation from the mean in either direction.Source: Credit Suisse Asset Management, LLC. All data was obtained from internally developed data 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.
7
So is picking top strategies
Individual sector performances can vary greatly over time
Timing and liquidity constraints make timely reallocations difficult
Past performance is no guarantee or indicator of future results.Source: Credit Suisse Asset Management, LLC. This graph is based on the sector returns of the Dow Jones Credit Suisse Hedge Fund Index. All data was
obtained from internally developed data 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.
2008 2009 2010 2011 2012
Managed Futures 18%
Convertible Arbitrage 47%
Global Macro 13%
Global Macro 6%
Multi-Strategy 11%
Dedicated Short Bias 15%
Emerging Markets 30%
Event Driven 13%
Fixed Income Arbitrage
5%
Fixed Income Arbitrage
11%
Global Macro -5%
Fixed Income Arbitrage
27%
Fixed Income Arbitrage
13%
Equity Market Neutral
4%
Event Driven 11%
Emerging Markets -30%
Equity Market Neutral
4%
Long/Short Equity9%
Emerging Markets -7%
Equity Market Neutral
1%
Convertible Arbitrage -32%
Managed Futures -7%
Equity Market Neutral
-1%
Long/Short Equity-7%
Managed Futures -3%
Equity Market Neutral -40%
Dedicated Short Bias
-25%
Dedicated Short Bias
-22%
Event Driven -9%
Dedicated Short Bias
-20%
Top 3
Performing
Strategies
Bottom 3
Performing
Strategies
8
A diversified approach to hedge fund investing
9
Pros & cons of diversified hedge fund exposure
Building a diversified portfolio of hedge funds can help:
Provide exposure to a range of strategies
Mitigate single name risk
However, this approach comes with its own drawbacks:
High minimum investments required
Fee netting can be a drag on returns
Potential to generate alpha is diluted
Past performance is no guarantee or indicator of future results.Source: Credit Suisse Asset Management, LLC. This graph is based on the sector returns of the Dow Jones Credit Suisse Hedge Fund Index. All data was
obtained from internally developed data 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.
10
The more funds you add, the less alpha you get
Probability of Generating Over 1% of Alpha* by Adding Hedge Funds to a Portfolio
* Alpha is measured relative to the Dow Jones Credit Suisse Hedge Fund Index.Simulated hedge fund portfolios are chosen from the universe of funds in the Dow Jones Credit Suisse Hedge Fund Index. Depending on the number of funds (N=1, 5, 10, 20, 50, 75, or 100) in the simulated portfolio, N funds are randomly selected from the universe of funds in the Dow Jones Credit Suisse Hedge Fund Index and their performance is recorded assuming the funds remain equal-weighted each month. Funds that drop out of the Index are replaced with new randomly selected funds and all funds are randomly re-selected annually. The procedure is repeated 5,000 times. Figures shown represent data from January 1998 through December 2012.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1 5 10 20 50 75 100Number of funds
Past performance is no guarantee or indicator of future results.Source: Credit Suisse Asset Management, LLC. All data was obtained from internally developed data 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.
Our conclusion: Index-like returns in a relatively illiquid format
Pro
babi
lity
of G
ener
atin
g O
ver
1% o
f Alp
ha
11
Why is liquidity a concern for pension funds?
Hedge funds may employ long lock-up periods and infrequent subscription/redemption
A lack of liquidity can exacerbate asset allocation imbalances
‐60%
‐50%
‐40%
‐30%
‐20%
‐10%
0%
10%
20%
10/200
7
02/200
8
06/200
8
10/200
8
02/200
9
06/200
9
10/200
9
02/201
0
06/201
0
10/201
0
02/201
1
06/201
1
10/201
1
02/201
2
06/201
2
10/201
2
02/201
3
Cum
ulat
ive R
etur
n
MSCI World Index Dow Jones Credit Suisse Hedge Fund Index
Dec 2007
Equities Allocation80.0%
Alts Allocation20.0%
Feb 2009Alts
Allocation28.7%
Equities Allocation71.3%
-55.4%
-19.5%
1
2
1 2
Note: Past performance is no guarantee or indicator of future results.Source: Credit Suisse Asset Management, LLC, Credit Suisse Hedge Index, LLC, Bloomberg. 2013. All data was obtained from 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.
12
Holding cash can result in performance drag
10 Yr. Return Comparison – Hedge Fund vs. Fund of Hedge Fund Indices (2003 –2012)
Source: Credit Suisse Asset Management, LLC, Bloomberg. All data was obtained from 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.
How do you solve your liquidity needs? Hold more cash?
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
HFRI Fund of Funds Composite Index Annual ReturnsDow Jones Credit Suisse Hedge Fund Index Annual ReturnsCumulative Outperformance of Hedge Fund Index vs. Fund of Funds Index
Average annual difference: 3.3%
38.5%
Largest annual difference: 7.1%
13
Investors need a solution that addresses all problems
Funds of Hedge
Funds
Managed Account
Hedge Funds
Profile Actively managed portfolios of hedge funds
Hedge fund proxies meet strict liquidity,transparency and risk management guidelines
Daily/Weekly Liquidity X √ √Position Level
Transparency X √ √Minimizes Manager
Risk √ X √
Solves risk of investing in individual managers, but not very liquid or transparent
Provides increased liquidity and transparency – but not broadly diversified
?
14
Liquid alternatives: a potential solution
15
What are liquid alternatives?Strategies that seek to deliver the risk/return characteristics of hedge funds using
highly liquid and often exchange traded instruments
Deliver broad hedge fund or strategy-specific exposure
There are two main types:
Mechanical strategies – strategies that seek to mimic the trades a typical hedge fund
would make
Factor-based strategies – strategies that seek to track a hedge fund index
16
Mechanical strategy example: merger arbitrage
Buy the
target
Short the acquirer
Buy the
target
Short the acquirerCashCash StockStock
New deal announcedNew deal announced
1
New deal announced
1
Apply liquidity /
arbitrage constraints
Apply liquidity /
arbitrage constraints
2
Apply liquidity /
arbitrage constraints
2
What
type
of deal?
3
Hold until completion/terminationHold until completion/termination
5
Hold until completion/termination
5
Buy the targetBuy the target
4 4
1
2
34 4
5
17
How do factor-based liquid alternatives work?
Hedge fund returns are composed of two primary components:
Alternative beta: Returns attributed to market and other dynamic factors that drive the average performance of traditional and non-traditional investments
Alpha: Returns attributed to expertise of individual hedge fund managers
Research has shown that alternative beta is the largest driver of aggregate hedge fund returns
“For diversified hedge fund portfolios… seven factors can explain up to 80% of monthly return variations.”
Fung, William and David A. Hsieh, 2004, “Hedge Fund Benchmarks: A Risk-Based Approach,” Financial Analysts Journal, vol. 60, no. 5 (September/October), 65-80.
18
What is a factor?
A fundamental risk exposure taken by hedge funds
The aim of factor-based liquid alternatives is to identify when hedge fund managers
are exposed to these risks and to allocate alongside them
Complex
Currency carry
Exotic asset classes
Credit default swaps
Simple
Large cap equities
Mechanical strategies
Merger arbitrage
19
How do we identify factor exposures?
Use hedge fund index performance
Determine core factors common to most managers
Source: Credit Suisse.
20
-50%
0%
50%
100%
150%
200%
Dec
-97
Dec
-98
Dec
-99
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Hypothetical CS Liquid Alternative Beta Index*DJCS Hedge Fund Index
* The above chart shows hypothetical performance of the Credit Suisse Liquid Alternative Beta Index from January 1998 to December 2009 and actual historical performance since January 2010. Where shown, the black vertical line and grey shading in the chart and graph above delineates hypothetical from actual historical performance. Please see important information regarding hypothetical, back-tested or simulated performance at the end of this document.
Hypothetical Actual
The Result: Credit Suisse Liquid Alternative Beta Index
Past performance is not a guarantee or indicator of future results. Sources: Credit Suisse Asset Management LLC, Bloomberg. All data was obtained from 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.
Hypothetical and Actual Cumulative Performance*
Based on hypothetical performance from 1/98 to 12/09 and actual performance from 1/10 to 3/13
Hypothetical CS Liquid Alternative
Beta Index*DJCS Hedge Fund Index
Annualized Return 6.90% 6.99%1 Month 1.22% 1.21%1 Year rolling 3.17% 7.17%5 Year rolling (Annualized) 2.87% 3.38%YTD 2.17% 3.55%Annualized Volatility 7.55% 6.82%Sharpe Ratio 0.60 0.67
Corr. to S&P 500 Index 0.64Corr. to Barclays US Aggregate Bond Index
0.06
Corr. to DJCS HF Index 0.83
21
Using liquid alternatives in a portfolio
22
A core/satellite approach
Add alpha while diversifying and minimizing due diligence
Core allocation (broad liquid alternative)
Long term investment
Provides diversification and liquidity
Minimal fees
Satellite (alpha generators)
Tactical hedge fund positions
Focus on choosing a few individual managers
Pay higher fees to achieve outperformance
Total hedge fund allocation
Flexible, more liquid portfolio
Diversified, but with alpha
+ =
23
Manage liquidity
Sample case study: substitute 10% of hedge fund exposure with a diversified liquid
alternatives allocation
Seeks to add liquidity without sacrificing performance
Liquidity profile: sample multi-strategy
hedge fund portfolio1
Liquidity profile: portfolio utilizing liquid
alternative allocation
35.0%
9.0% 48.0%
3.0%5.0%2.7%
43.2%
31.5%
8.1%
14.5%
Annual (and above)MonthlyDaily Weekly Bi-Monthly Quarterly Semi-Annual
For illustrative purposes only. Does not represent an actual investment or the actual performance of any product or portfolio.1 Liquid alternative data represented by the Credit Suisse Liquid Alternative Beta Index. Source: Credit Suisse Asset Management, LLC. All data was obtained from 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.
24
Get access faster
Sample Case Study: Transitioning into hedge funds
Liquid alternatives may also facilitate tactical allocations among strategies
Enables quick, tactical increase/decrease of exposure
For illustrative purposes only. Does not represent an actual investment or the actual performance of any product or portfolio. Source: Credit Suisse Asset Management, LLC. All data was obtained from 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.
Starting portfolio Transition portfolio incorporates liquid
alternatives allocation
Final portfolio incorporates hedge
funds
EquitiesHedge fundsFixed
income
Liquid alternatives
0 1 12Due Diligence – 12 months
Investor decides to allocate
Implement a liquid alternative program
Draw down liquid alternative exposure. Allocate capital directly to hedge funds
60% 40%
50%
30%20% 20%
50%
30%
25
A flexible solution
Credit Suisse Liquid Alternative Beta (“LAB”) investment options
Strategy
Broad Exposure
Long/Short Equity
Event Driven
Merger Arbitrage
Global Strategies
Investment Vehicle(s)
US Mutual Fund, Cayman Fund, CIT, UCITS Fund
Cayman Fund, ETN, Unit Trust, US Mutual Fund, OTC Derivatives, UCITS Fund
US Mutual Fund, UCITS Fund
Cayman Fund, ETNs, OTC Derivatives
UCITS Fund
Managed Futures US Mutual Fund, OTC Derivatives
Note: ETNs and structured notes linked to the Credit Suisse Long/Short Liquid Index and the Credit Suisse Merger Arbitrage Liquid Index are distributed through Credit Suisse Securities, LLC. 1940-Act Mutual Funds linked to the Credit Suisse Long/Short Liquid Index and Credit Suisse Event Driven Liquid Index are distributed by Rydex Distributors, LLC (RDL).
Source: Credit Suisse Asset Management, LLC. All data was obtained from 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.
26
Summary
Investors are looking to hedge funds in their search for returns
There are many challenges when investing in hedge funds
Liquid alternatives can help address these challenges
Liquid nature of the strategies enables a range of applications that can help
optimize portfolio efficiency:
− Improve liquidity without sacrificing returns
− Speed up the portfolio construction process
− Capitalize on tactical opportunities
− Better manage risk
Risks:
Performance of liquid alternative strategies may not correlate with the performance
of their benchmarks
There is no assurance that the hedge fund strategies on which the liquid alternative
strategies are based will be successful
28
Appendix
29
About the Speaker
Dr. Jordan Drachman, Director, is head of the Credit Suisse Alternative BetaStrategies group focusing on the creation of new alternative beta products. Dr.Drachman joined Credit Suisse in 2007 from Banc of America Securities wherehe developed options strategies and other mathematical models for the EquityFinancial Products Group in New York. Prior to this, Dr. Drachman was aQuantitative Researcher for Jemmco Capital where he led a team that producedstatistical models and trading strategies. Dr. Drachman has also worked at J.P.Morgan & Co. in the Quantitative Trading Group and the Corporate RiskManagement Group where he developed trading models and risk managementtechniques. Dr. Drachman received a B.S. in Mathematics from theMassachusetts Institute of Technology and a Ph.D. in Mathematics fromStanford University.
30
Important Legal InformationThis material has been prepared by Credit Suisse Asset Management, LLC (“Credit Suisse”) on the basis of publicly available information, internally developed data and other third party sources believed to bereliable. 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 ofsuch information. All opinions and views constitute judgments as of the date of writing without regard to the date on which the reader may receive or access the information, and are subject to change at anytime without notice and with no obligation to update. 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 issuitable for any investment purpose other than as specifically contemplated by a written agreement with Credit Suisse and it should not be used as a basis for investment decisions. This material does notpurport 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. Pastperformance does not guarantee or indicate 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 securitiesidentified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in companies, securities, sectors,strategies and/or markets identified or described herein were or will be profitable and no representation is made that any investor will or is likely to achieve results comparable to those shown or will make anyprofit or will be able to avoid incurring substantial losses. This informational report does not constitute research and may not be used or relied upon in connection with any offer or sale of a security or hedgefund or fund of hedge funds. Performance differences for certain investors may occur due to various factors, including timing of investment and eligibility to participate in new issues. Investment return willfluctuate and may be volatile, especially over short time horizons. Investing entails risks, including possible loss of some or all of the investor’s principal. The investment views and marketopinions/analyses expressed herein may not reflect those of Credit Suisse AG as a whole and different views may be expressed based on different investment styles, objectives, views or philosophies.
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 managertypically 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 carryadditional 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 substantiallyincrease the impact of adverse price movements. Hedge funds typically charge higher fees than many other types of investments, which can offset trading profits, if any. Interests in hedge funds may besubject to limitations on transferability. Hedge funds are illiquid and no secondary market for interests typically exists or is likely to develop. The incentive fee may create an incentive for the hedge fundmanager to make investments that are riskier than it would otherwise make.
In addition, the investment strategy described herein relies on proprietary models and predictions with regard to the performance of an asset class or particular investment generated by these models and maynot be accurate because of imperfections in the models, their deterioration over time, or other factors, such as the quality of the data input into the model, which involves the exercise of judgment. Even if themodel functions as anticipated, it cannot account for all factors that may influence the prices of the investments, such as event risk. The asset management business of Credit Suisse Group AG is comprised ofa 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 clienttypes. There is no intention to offer products or services in countries or jurisdictions where such offer would be unlawful under the relevant domestic law. The charts, tables and graphs contained in thisdocument 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 thecomparison does not mean that there will necessarily be a correlation between the returns described herein and the benchmarks. There are limitations in using financial indices for comparison purposesbecause, among other reasons, such indices may have different volatility, diversification, credit and other material characteristics (such as number or type of instrument or security).
Certain information contained in this document constitutes “Forward-Looking Statements” (including observations about markets and industry and regulatory trends as of the original date of this document),which can be identified by the use of forward-looking terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe”, or the negatives thereof orother variations thereon or comparable terminology. Due to various risks and uncertainties beyond our control, actual events, results or performance may differ materially from those reflected or contemplated insuch forward-looking statements. Readers are cautioned not to place undue reliance on such statements. Credit Suisse has no obligation to update any of the forward-looking statements in this document. Theonly legally binding terms of this investment product including risk considerations, objectives, charges and expenses are set forth in the private placement memorandum and subscription documents which areavailable 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. Where not explicitlyotherwise stated, the issuer has no duty to invest in the underlying assets. Before deciding to invest, prospective investors must carefully read the relevant private placement memorandum and subscriptiondocuments 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 theinvestor’s tax, legal and financial advisers) the specific risks (maximum loss, currency risks, etc.) and the legal, regulatory, credit, tax and accounting consequences. Prospective investors should have thefinancial 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 or as to the future performance of this investment product.
Copyright 2013, Credit Suisse Group AG and/or its affiliates. All rights reserved.
31
Important Legal Information (continued)Important Information Regarding Hypothetical, Back-Tested or Simulated Performance
The hypothetical performance shown is for illustrative purposes only and does not represent actual performance of the index. Credit Suisse Asset Management, LLC.(“Credit Suisse”) does not represent that the hypothetical returns would be similar to actual performance had the firm actually managed the index or accounts in this manner.
Simulations for the Credit Suisse Liquid Alternative Beta Index, the Credit Suisse Long/Short Liquid Index, the Credit Suisse Global Macro Liquid Index, the Credit Suisse GlobalStrategies Liquid Index and the Credit Suisse Event Driven Liquid Index were conducted to measure how a portfolio of securities and security indices designed to track hedge fund indiceswould have performed in the period beginning December 31, 1997. Returns were simulated assuming no transaction costs for execution at daily closing prices. Any invested or borrowedcash earned or paid interest at market rates. Monthly index portfolio weights were computed on the day that the Dow Jones Credit Suisse Hedge Fund Index data was updated, whichhas typically occurred on the first US business day on or after the 15th day of each month. Index rebalancing occurred on the first day after the portfolio weights were computed and forwhich all instruments involved in the rebalancing process were available to be traded. The platform on which this testing was performed is a proprietary system developed at Credit Suisse.All simulations were conducted by Credit Suisse Asset Management, LLC.
Simulations for the Credit Suisse Merger Arbitrage Liquid Index were conducted to measure how a portfolio of securities designed to mimic a merger arbitrage strategy would haveperformed in the period beginning December 31, 1997. Returns were simulated assuming no transaction costs for execution at daily closing prices. Any invested or borrowed cashearned or paid interest at market rates. Index portfolio weights were computed daily and index rebalancing occurred on the day after the portfolio weights were computed and for which allinstruments involved in the rebalancing process were available to be traded. The platform on which this testing was performed is a proprietary system developed at Credit Suisse. Allsimulations were conducted by Credit Suisse Asset Management, LLC.
Hypothetical, back-tested or simulated performances have many inherent limitations only some of which are described as follows: (i) It is designed with the benefit ofhindsight, based on historical data, and does not reflect the impact that certain economic and market factors might have had on the decision-making process. No hypothetical, back-tested or simulated performance can completely account for the impact of financial risk in actual performance. Therefore, it will invariably show positive rates of return. (ii) It doesnot reflect actual asset trading and cannot accurately account for the ability to withstand losses. (iii) The information is based, in part, on hypothetical assumptions made for modelingpurposes that may not be realized in the actual management of indices. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptionsused 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 ofany particular index’s performance. Investors should not assume that they will have an investment experience similar to the hypothetical, back-tested or simulatedperformance shown. There are frequently material differences between hypothetical, back-tested or simulated performance results and actual results subsequently achieved by anyinvestment strategy.
Unlike an actual performance record based on trading actual portfolios, hypothetical, back-tested or simulated results are achieved by means of the retroactive application of a back-tested model itself designed with the benefit of hindsight. Hypothetical, back-tested or simulated performance does not reflect the impact that material economic or market factors mighthave on an adviser's decision making process if the adviser were actually managing a portfolio. The back-testing of performance differs from performance because the investmentstrategy 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 includeshypothetical 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 aclient would have paid or actually paid. No representation is made that any index will or is likely to achieve profits or losses similar to those shown. Alternative modelingtechniques or assumptions might produce significantly different results and prove to be more appropriate. Past hypothetical, back-test or simulated results are neither indicators norguarantees of future returns. In fact, there are frequently sharp differences between hypothetical, back-tested and simulated performance results and the actual resultssubsequently achieved. As a sophisticated investor, you accept and agree to use such information only for the purpose of discussing with Credit Suisse your preliminary interest ininvesting in the strategy described herein.
