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Asset Management

Asset Management
Tactical Quarterly
Q3 2010

Executive Summary 3

Hedge Funds 4

Private Equity 13

Credit Strategies 14

Commodities 16
About the Asset Management Tactical Quarterly

Welcome to the first issue of Credit Suisse Asset Management’s Tactical Quarterly.

In line with our mission to share knowledge and provide focused investment solutions to investors
worldwide by leveraging the firm’s best ideas, access, resources and capabilities globally, the Tactical
Quarterly offers a range of views from our leading portfolio managers on the trends and opportunities
shaping today’s financial markets.

We hope you find the insights in this new publication to be a useful tool in helping you develop solutions
and investment strategies.

We would also like to hear your feedback as we continue to further develop this new quarterly publication.
For further information or to comment on any views expressed here, please contact your Credit Suisse
Asset Management relationship manager or write to us at online.am@credit-suisse.com.

Credit Suisse Asset Management | 2 Tactical Quarterly


Executive Summary

Although encouraged by September’s global equity market rallies, many investors have been hamstrung
by the uncertainty over the global economic growth outlook, the general lack of directionality in global
equity markets and high levels of correlations among stocks so far in 2010. These conditions were
particularly strenuous for stock pickers and quantitative strategies in the first half of the year as global
equity markets exhibited a binary “risk-on, risk-off” trade pattern. On the other hand, these macro-
driven market conditions have been beneficial to relative value hedge fund strategies (such as fixed
income arbitrage and convertible arbitrage), event driven, and tactical strategies (such as managed
futures and systematic global macro). There may be signs of improvement in these market dynamics,
however, going into the fourth quarter.

The points above are some of the key market developments presented by our portfolio managers and
business heads in this first issue of Credit Suisse Asset Management’s Tactical Quarterly. Readers
will also find our managers’ views on alternative investment areas such as hedge funds, private equity,
credit and commodities. Some key themes covered in this issue include:

ƁƁ Global business cycles have tapered off since the end of the first quarter of 2010, while corporate
earnings in much of the world have been supportive of global equity markets. We believe that we
could see an improvement for directional strategies such as long/short equity in the fourth quarter if
correlations decrease and trading volumes continue to increase as they did in September.

ƁƁ Global macro managers have been well positioned to take advantage of thematic trading
opportunities arising from macroeconomic divergence among developed and emerging market
countries, especially in currencies and interest rates—systematic macro managers in particular had
a strong third quarter.

ƁƁ Event driven hedge fund managers believe investors may consider taking advantage of inefficiencies
in the current financial landscape across a number of areas, such as merger-arbitrage and
distressed-debt investments.

ƁƁ The outlook for US fixed income is positive in senior loans, high yield bonds and collateralized loan
obligations, with record levels of issuance and spreads narrowing in the third quarter.

ƁƁ Investment levels by private equity firms continue to gain momentum globally with an increased
focus on emerging markets, particularly in Asia and Latin America. While investments have picked
up in the US and Europe, other regions, including China, have become increasingly important
markets. Global private equity firms are offering local-currency-denominated funds, such as in
renminbi for investments in China.

In summary, while 2009 was a strong year for directional hedge fund managers, 2010 has generally
been more favourable to relative value and systematic macro-oriented strategies through the third
quarter. Private equity, credit strategies and commodities present strong investment themes, with the
globalization of investments becoming an increasingly important factor.

Tactical Quarterly Credit Suisse Asset Management | 3


Hedge Funds
Global Tactical Asset Allocation/Global Macro
Anne Sophie Van Royen, Ph.D.
Portfolio Manager and Head, GTAA
Xiaomeng Yang, Ph.D.
Co-Portfolio Manager, GTAA

ƁƁ Global business cycles have tapered off since the end ƁƁ Global fixed income has been supported by yield
of the first quarter of 2010—with the only exception dynamics, but the sector’s attractiveness has been
of Australia—raising concern about a global economy eroded by expensive valuations and a modest
growing but losing momentum (Display 1). Europe comeback of risk appetite. Overall, the prospect of
appears more resilient in this cycle than the United States. further quantitative easing in the US has been an
important driver supporting Treasuries, while sovereign
ƁƁ Corporate earnings worldwide remain generally risk in Europe has somewhat abated.
supportive of equity markets, especially in the US,
Japan and Switzerland. Our models have a moderate ƁƁ We also see positive momentum supporting
equity overweight, with a tilt towards Europe, Asia commodities, especially in agriculture and metals.
and the United Kingdom.

Display 1: OECD Leading Indicators Point


to Slowdown in Global Economic Growth1

OECD Leading Indicators


2%
Month-Over-Month Change

1%

0%

-1%

-2%

-3% July 08 Nov08 Mar 09 July 09 Nov 09 Mar 10 July 10

United States Europe

1
OECD leading indicators summarize information on early signals contained in a number of key short-term economic
indicators known to have a leading relationship with GDP for 35 countries. Data from July 2008 to July 2010.
Source: Bloomberg and Credit Suisse

Credit Suisse Asset Management | 4 Tactical Quarterly


Hedge Funds
Global Macro
Sami Robbana
Portfolio Manager and Head, Global Macro Research, Alpha Strategies Group

ƁƁ Macroeconomic divergence across countries and in the first half of the year, requiring high levels of
between developed and emerging economies has government intervention.
remained significant. The resulting global imbalances
and structural issues continued to create thematic ƁƁ At the same time, removal of government stimulus
trading opportunities for macro managers, as market measures has been difficult to coordinate and the
uncertainty persisted regarding these processes and potential for policy errors remains significant, in our view.
the overall global economic growth trajectory.
ƁƁ In currencies, which we believe will remain an
ƁƁ With the transfer of liabilities from the private to the area of focus for managers, the reversal of global
public sector in response to the global financial crisis structural imbalances continue to drive directions
of 2008-2009, structural issues surrounding the in markets (e.g., central-bank interventions
sustainability of sovereign debt levels for the US and and currency-pegging issues) providing trading
the Eurozone came to the forefront of financial markets opportunities (Display 2).

Display 2: Outlook on Foreign-Exchange Volatility Presents Trading


Opportunities Based on Growing Volatility Divergence

Select Currency Pair Volatility

450
400
Index (Rebased to 100)

350
300
250
200
150
100
50
Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10
EUR/USD 3-mo Implied Volatility USD/JPY 3-mo Implied Volatility
AUD/JPY 3-mo Implied Volatility EUR/CHF 3-mo Implied Volatility

Data from September 2007 to September 2010


Source: Bloomberg and Credit Suisse

Tactical Quarterly Credit Suisse Asset Management | 5


Hedge Funds
Event Driven
Sebastien Fiaux
Portfolio Manager, Head, Event Driven Research, Alpha Strategies Group

Distressed Credit
ƁƁ The distressed-credit sector appears to anticipate that the driven by unprecedented global issuance, such as the
significant amounts of leverage incurred by many global US$1 trillion European leveraged debt market.
companies in pre-2008-crisis years is now unsustainable
under the “new normal” earnings expectations. ƁƁ Other relevant market drivers for distressed managers
are new capital requirements (notably Basel III) and
ƁƁ Much of this debt will be maturing in the next three new banking rules in the US limiting proprietary
to four years, creating a so-called “wall of maturities” investing activities for large investment banks
(Display 3). Some of this debt may be difficult to (the so-called Volcker Rule). We believe that the new
refinance and, therefore, could create opportunities rules could potentially accentuate the supply and
stemming from companies’ pre-emptive recapitalizations, demand imbalance in credit markets.
forced restructurings or liquidations.
ƁƁ Small- to mid-cap restructurings form the bulk of the
ƁƁ New opportunities may also arise from the emergence global opportunity set, limiting participation from the
of non-US distressed credit markets, which have been largest funds.

Display 3: “Wall of Maturities” in Next


Three-to-Four Years May Lead to Opportunities

Global Maturities

300
253

200
(US$ Billion)

142 145
127 128
114
100 69 68 76
61 45 65
45
26 17
2 9 0
0

2010 2012 2014 2016 2018

Leveraged Loans High Yield Bonds

As of June 30, 2010


Source: Credit Suisse Global Leveraged Finance

Credit Suisse Asset Management | 6 Tactical Quarterly


Hedge Funds
Event Driven (continued)
Sebastien Fiaux
Portfolio Manager, Head, Event Driven Research, Alpha Strategies Group

Risk Arbitrage
ƁƁ There are a number of drivers that we believe will them attractive to acquirers, in our view. We also
generate activity in the risk-arbitrage sector in the believe that the abundance of capital-rich buyers
coming months. These include: the need for private and unwilling sellers is likely to lead to more hostile
equity capital that was raised in 2006 to be put to work takeovers and increased deal premiums.
(within a five-year window); cash levels on corporate
balance sheets reaching all-time highs (Display 4); ƁƁ We therefore expect to be entering a worldwide M&A
weak organic growth rates for companies (an incentive upswing in 2011, especially in the areas of strategic
for growth through mergers and acquisitions (M&A)); transactions and hostile situations.
increasing cross-border M&A activity; and ease of
financing from strong capital markets. ƁƁ The severity of financial crisis and continued risk
aversion among corporate management and boards has
ƁƁ US companies are trading at discounts when attenuated the M&A recovery, but is having the effect
compared to historical long-term P/E levels, making of adding to the M&A backlog.

Display 4: Corporate Firm Valuation and Liquid


Asset Levels Point to Increased M&A Activity in 2011

Corporate Liquid Assets, S&P 500 Index P/E Ratio

8.0% 35x
Average P/E 30x
7.0% S&P 500 P/E Ratio (x)
Liquid Assets (%)

25x
6.0%
20x
5.0%
15x
4.0%
10x
3.0% 5x
2.0% 0x
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
90 92 94 96 98 00 02 04 06 08 10
Liquid Assets as % of Total Assets S&P 500 P/E Ratio
from Non-Financial Corp. Business (Right Hand Side)

As of June 30, 2010


Source: Credit Suisse Global Leveraged Finance

Tactical Quarterly Credit Suisse Asset Management | 7


Hedge Funds
Long/Short Equity
Vanita Gaonkar
Portfolio Manager and Head, Long/Short Equity and Equity Market Neutral Research, Alpha Strategies Group

ƁƁ Long/short equity managers faced a challenging against fundamental analysis, making it challenging
environment in the first half of the year because of for managers to identify profitable themes.
global equity market sell-offs, high stock correlations
and low trading volumes. Displays 7 and 8 illustrate ƁƁ However, a shift occurred in September as
the outflows from equity mutual funds globally in global equity markets experienced a sharp rise in
favor of bonds. performance, correlations eased and trading activity
ramped up. Rising volumes and increased stock
ƁƁ Combined with an overall lack of trends, the diminishing dispersion could signal the potential for improvement
liquidity levels and low stock dispersion have worked for long/short equity managers in the fourth quarter.

Display 7: Global Equities Have


Display 8: … In Favor of Global Bonds
Been Experiencing Outflows…

Global Equity Mutual Funds Global Bond Mutual Funds


Net Cash Flow Net Cash Flow

Cumulative Flow (US$ Billion)


25 40 60 700
Monthly Flow (US$ Billion)

20
Cumulative Flow (US$ Billion)

30 600
50
Monthly Flow (US$ Billion)

15
20
10 500
10 40
5
400
- - 30
-5 -10 300
-10 20
-20 200
-15
-30 10 100
-20
-25 -40
- -
-30 -50 J M M J S N J M M J
J M M J S N J M M J
09 09 09 09 09 09 10 10 10 10 09 09 09 09 09 09 10 10 10 10
Monthly Flows Cumulative Flows (Right Hand Side)

Data from January 2009 to September 2010


Source: Investment Company Institute

Credit Suisse Asset Management | 8 Tactical Quarterly


Hedge Funds
Multi-Strategy Arbitrage
Mika Toikka
Global Head, Multi-Strategy Arbitrage
Timothy Schwider
Portfolio Manager, Multi-Strategy Arbitrage

ƁƁ 2010 has seen some of the highest levels of correlation volatility skews (the relative price difference between out-of-
among risky assets globally. In the US, S&P 500 Intra- the-money puts and calls). While index skews have declined
index correlations (correlations of stocks within major from extreme levels earlier in the year, the decline was
indices) breached levels last seen during the crisis of sharpest in short maturity options after the Fed signalled that
2008 (Display 9). Furthermore, these correlation levels QE2 would likely be a reality. While longer-dated volatilities
occurred in a relatively low volatility environment (with the have also seen some decline, they remain relatively high.
VIX volatility index in the low 20s). This dual combination This relatively steep term structure of volatility reflects the
of high correlation and low volatility has created a difficult fact that the market may be comfortable with near term
environment in the last few quarters for stock pickers and risks but is still pricing in much higher levels of concern for
quantitative managers (who tend to focus on capturing alpha the next year and beyond. With regard to volatility skews,
within a pool of idiosyncratic risk). our view is that the “new normal” for skews will be at much
higher equilibrium levels than before the crash of 2008. We
ƁƁ As we go into the final quarter of the year, we suggest expect the overall demand for crash protection to remain with
keeping a close eye on correlation—especially implied us for a long time to come.
correlations in global equity markets. Shorter-maturity
implied correlations have declined substantially towards ƁƁ With the VIX hovering around 20%, the market is currently
the end of the third quarter and realized correlations have pricing in a shorter term “Bernanke Put.” That is, the overall
started to follow suit. If correlations’ declines persist— perception seems to be that the Fed will provide the “right”
especially following US Federal Reserve announcements level of quantitative easing to keep the equity markets higher
on quantitative easing (QE2)—we believe it will signal in the near term and mitigate any potential for a 2008-type
the potential start of an overall normalization within the market crash scenario. However, the old adage that you
market’s risk framework. This should be encouraging for the “buy the rumor and sell the fact” will focus concern on the
performance of various hedge fund related strategies that immediate aftermath of the QE2 announcement.
are sensitive to idiosyncratic or stock-specific risk.
ƁƁ In our view, there are too many underinvested investors and
ƁƁ The fall in correlations is not the only sign that normalization an extremely wide range of macro views about the future
is occurring within risk perceptions. Correlation levels path of global economies to assume that the ride to year-end
have been moving in sync with the gyrations surrounding is going to be smooth. Regardless of the market’s reaction
perceptions of “crash risk.” One way to measure the degree to QE2, we recommend keeping a close eye on correlations
of “crash risk” priced into the market is by analyzing implied and index volatility skews for continued signs of overall
normalization, but be prepared to fasten your seat belts.

Display 9: 2010—Record Levels of


Correlation in a Low-Volatility Environment
S&P 500 Intra-Stock Correlations
0.9
0.8
1 = Full Correlation

0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct
00 01 02 03 04 05 06 07 08 09 10
Realized 3-mo Correlation Implied 3-mo Correlation
Data from October 2000 to September 2010
Source: Bloomberg and Credit Suisse

Tactical Quarterly Credit Suisse Asset Management | 9


Hedge Funds
Relative Value
Fred Shek
Head, Convertible Arbitrage and Multi-Strategy Research, Alpha Strategies Group

ƁƁ Fixed income funds have had a strong year, benefiting ƁƁ US mortgages have been another profitable area
from uncertainty around European sovereigns and the for relative value traders in 2010. Mortgage-
sustainability of the global economic recovery. Volatility backed securities (MBS) richened substantially from
remains elevated in the intermediate and longer end November 2008 to March 2010, propped up by
of US and European sovereign yield curves, offering the Fed’s purchase of over US$1 trillion of agency
attractive opportunities for relative value strategies. bonds. Following the Fed’s exit, volatility around
MBS spreads increased, presenting traders with new
ƁƁ Government bond curves are expected to remain steep themes (Display 10).
since global central banks seem intent on keeping
short-term rates at historically low levels for the ƁƁ On the convertible bond front, the primary market
foreseeable future, offering a number of arbitrage seems to have opened up after the summer
opportunities for managers. doldrums, with more new deals expected to be
issued in coming months. We believe convertible
ƁƁ The combination of substantial government bond supply valuations remain cheap relative to fair value, and
and diminishing activity from bank proprietary trading there continue to be a fair amount of corporate
desks allows arbitrageurs to profit from consistent actions such as M&A, bond buybacks and debt
trends in the auction cycle. The reduced presence refinancings that may serve as positive catalysts for
of “sophisticated” capital also creates short-term bond prices.
trading opportunities around futures expiries, given the
considerable trading volume generated by less
price-sensitive players, such as macro and managed
futures hedge funds.

Display 10: End of US Fed’s MBS Purchase in March 2010


Created New Conditions for Relative Value Plays on Mortgages

Mortgages
350 richened with US
300 Fed purchase of
US$1 trillion of MBS
250
Spread to TSYs (bps)

New arbitrage
200 opportunities arise
as Fed policy
150 changes

100

50

0
Oct 08 Apr 09 Oct 09 Apr 10

Fannie Mae Spread to Treasuries

Data from October 2008 to September 2010


Source: Credit Suisse Fixed Income Research

Credit Suisse Asset Management | 10 Tactical Quarterly


Hedge Funds
Hedge Fund Replication
Jordan Drachman, Ph.D.
Head, Alternative Beta Strategies Research

Peter Little
Head, Alternative Beta Strategies Portfolio Management and Implementation

ƁƁ The Liquid Alternative Beta group’s models indicated performance, perhaps indicating that, in their search
that investors’ risk aversion was trending lower in the for yield, investors are ignoring the risk associated with
third quarter. holding illiquid assets. The model has also identified an
increasing exposure to distressed debt, indicating that
ƁƁ The long/short equity hedge fund replication model credit is a key driver of profits in this sector.
put a greater emphasis on the technology sector
by replacing the S&P 500 Index with the Nasdaq ƁƁ Another indication that investors are beginning to re-
Index, while shorting the financials sector. The model risk was the narrowing of the spread between US high
also maintained long emerging markets exposure yield bonds and investment grade bonds (Display 11),
throughout the quarter. amidst record issuance for high yield bonds for the year
as of the end of September (see Credit section of this
ƁƁ The event driven hedge fund replication model has document for further detail).
indicated that illiquidity is not a factor in that sector’s

Display 11: High Yield Spreads Have Narrowed


in the Third Quarter as Investors Hunt for Yield1

Spread of High Yield to Investment Grade Bonds


540

520

500
Spread (bps)

480

460

440

420

400
July 2010 August 2010 September 2010

1
US high yield bonds measured by the Markit CDX North America. High Yield Index; investment
grade bonds measured by the Markit CDX North America Investment Grade Index. Data from June 30, 2010 through September 30, 2010.
Source: Bloomberg and Credit Suisse

Tactical Quarterly Credit Suisse Asset Management | 11


Private Equity
Fund of Private Equity Funds
Kelly Williams
Head, Customized Fund Investment Group

Nadim Barakat
Chief Investment Officer, Customized Fund Investment Group
Ɓ Private equity fundraising trended lower in 2010 worldwide Year-to-date global M&A transactions reached nearly
as a larger number of fund managers delayed fundraising US$1.5 trillion compared with US$1.7 trillion for
to focus on portfolio company growth. In the latest quarter, full year 2009. For the third quarter of 2010, M&A
global fundraising totalled US$41 billion compared to transactions increased 26% over last quarter on a dollar
US$92 billion for the same period last year. volume basis and 55% over last year’s third quarter.
Also worth noting is that private equity sponsored M&A
Ɓ The investment level by private equity firms continues transactions now represent over 14% of total deal
to gain momentum. There have been four consecutive value, up from less than 10% last year.2
quarters of increasing investment pace since the second
quarter of 2009 when US$17.9 billion was invested Ɓ Private equity in Asia continues to expand. Over US$19
(Display 12). The level of investments reached US$49.7 billion of funds have been raised for this region year-
billion in the second quarter of 2010, up 179% year-over- to-date in 2010 compared with US$17 billion in 2009.
year. CFIG believes this pace has been driven partly by the China has become an important market as global private
improved lending environment and record high-yield and equity firms have offered local funds with over US$9
leveraged-loan issuance volumes.1 billion raised year-to-date in renminbi denomination.
Private equity investment in Latin America has also been
Ɓ Private equity investment exits have increased in 2010. exhibiting solid growth and interest from investors.3
Display 13 suggests there is room to grow for PE in
– Global IPO activity has increased to over 290 year-to- several emerging markets.
date (as of September 30) compared to 177 for full-year
2009. Of the IPOs transacted in the US this year, 62% Ɓ Private equity fund selection remains critical. Top-quartile
were sponsored by private equity firms. private equity managers have been able to achieve strong
returns on over various economic cycles. CFIG believes
– The level of M&A has also contributed to successful that top-performing managers are less sensitive to capital
exits for private equity firms. Deal volume has been market conditions due to their ability to add operating
particularly strong, especially for the start of 3Q 2010. value to companies.

1
Source: Venture Economics, September 2010
2
Source: Dealogic, September 2010
3
Source: Venture Economics, September 2010

Display 12: If Future Deal Volume Follows Display 13: ...While in Emerging Markets,
a Similar Pattern, the Current US$1 Trillion of Private Equity Penetration Has Room to Grow
Dry Powder Would Burn Off in 4.5 Years...
Private Equity Investment Volume PE Penetration as % of GDP
$900
$818 0.32%
$800 $760 0.30% 0.30%
PE Investment/GDP (%)

0.27%
$700 0.25%
(US$ Billion)

$600 '01 - '05 '09E - '13E 0.20% 0.19%


$500 CAGR: 43% CAGR: 43% 0.17%
$440 0.15% 0.15%
$400 0.13% 0.12%
$336
$308 0.10%
$300 (50%) 0.07% 0.06%
(19%) $230 $212 $216 0.05%
$200 $151
0.03%
0.02%
$100 $100
$81
$106
$132 $107 0.00%
Eu a
e

ia
ia

a
ina
US

l
d

an
ica ran

azi
ic

ca
rop

ssi
l

As
Ind

r
Afr

Jap

00 01 02 03 04 05 06 07 08 09 10E 11E 12E 13E


Wo

Ch

Br

eri
Afr aha

Ru
Am
uth

b-S

As of December 31, 2009


So

tin
Su

Source: Morgan Stanley’s “In the Flow” (December 2008),


La

Thomson SDC, Thomson VentureXpert as of December 31, 2009, As of December 31, 2009
and Credit Suisse analysis Source: Emerging Markets Private Equity Association
Credit Suisse Asset Management | 12 Tactical Quarterly
Credit Strategies
John G. Popp
Global Head, Credit Investment Group

US Senior Secured Loans Collateralized Loan Obligations (CLOs)

ƁƁ An increase in new US loan issuance (Display 14) ƁƁ Global CLO secondary markets experienced a strong
offers opportunities to access attractive risk-adjusted rally in September 2010, despite a substantial supply in
returns in senior secured loan markets. New issue the form of bid-list activity.
loans provide LIBOR floors of 1.5% to 3%, higher
spreads than vintage deals and seniority levels in the ƁƁ Equity and mezzanine tranches showed the largest
capital structure equal to, or better than, high yield bonds. increases, while original AAAs were flat on the month.

ƁƁ We continue to see opportunities in better-quality ƁƁ Absent a large macroeconomic or geopolitical event, we


performing loans with attractive current interest income, expect continued positive price performance during the
relatively low-default risk, and yield targets of LIBOR fourth quarter of 2010.
plus 5% to 7% (assuming a three-year average life).
ƁƁ We believe hedge funds and proprietary trading desks
––Return potential in excess of these target yield will be opportunistic sellers; their bid lists should be
levels could arise from positive events such as M&A, well received by dealer desks and traditional CLO
refinancings and bond-for-loan takeouts. accounts that have cash on the sidelines that needs to
be put to work.
ƁƁ Amendments to older vintage loans provide the
opportunity to enhance risk-adjusted returns through: ƁƁ On the new issue front, we expect a few lower
increased spreads to LIBOR, the inclusion of LIBOR leverage, cleaner, simpler CLOs will price, as equity
floors, maturity extensions and bond-for-loan takeouts tranches have been placed and there appears to be
resulting in loan paydowns. ample demand for new issue liabilities.

Display 14: Senior Loan Issuance Indicates Renewed Growth


New Issuance for Global Leveraged Loans
500
388
Issuance (US$ Billion)

400 325
300
184
200 154
90 99
57 60 58 72
100 28 44 34 38
0
Sept. 2010
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Global Leveraged Loans


Source: JP Morgan

Tactical Quarterly Credit Suisse Asset Management | 13


Credit Strategies
John G. Popp (continued)
Global Head, Credit Investment Group

US High Yield Loans

ƁƁ The re-opening of both debt and equity capital markets ƁƁ The new issuance market continues to be robust,
has made capital available to a broad selection of hitting a 12-month rolling all-time high in September
companies, allowing many non-investment grade issuers 2010 (Display 15).
to refinance and extend maturities.
ƁƁ We continue to focus on select new issues, especially
ƁƁ The improved debt market liquidity, combined with those that are senior secured in predominantly
a stabilizing near-term fundamental backdrop, has defensive industries with little-to-moderate debt ahead
decreased expectations for defaults. of the high yield bond claim.

Display 15: Record High Yield Issuance


May Signal Improved Opportunities

New Issuance for Global High Yield Bonds


250

200
(US$ Billion)

150

100

50

0
Sept. 2010
1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

High Yield Bonds New Issuance


Source: JP Morgan

Credit Suisse Asset Management | 14 Tactical Quarterly


Commodities
Nelson Louie
Global Head, Commodities Group
Christopher Burton
Portfolio Manager, Commodities Group

ƁƁ Commodities prices have tended to perform best during for commodities, especially those needed for
periods of unexpected inflation (Display 16). We may infrastructure. We also expect copper, corn, soybeans
be headed into such an environment should developed and especially crude oil to remain well supported.
governments continue to attempt to boost tepid
economies through fiscal and monetary measures. ƁƁ Energy prices continue to be impacted by macro-economic
Certain developed countries are either discussing or factors in addition to fundamentals, with the former
currently engaging in devaluing their currencies in potentially being the key driver over the short term.
order to keep their exports globally competitive, while
fiscal policy remains accommodative worldwide. As a ƁƁ Based on statements made by Fed Chairman Ben
result, investors may continue to seek out investments Bernanke at the September 22nd Federal Open Market
that should retain their value in spite of inflation, Committee meeting, subduing deflation will be a top
benefitting commodities generally, and precious metals priority of the Federal Reserve. As more and more
in particular. quantitative easing takes place, we expect US-dollar-
denominated commodity prices to continue to rise. We
ƁƁ With developed economies’ growth staying low, continue to believe investors will benefit from including
we expect developing countries to drive demand commodities in a well-diversified portfolio.

Display 16: Commodities Prices Tend to Perform


Best During Periods of Unexpected Inflation1
Performance in Higher than Expected and Lower than
Expected Inflation Environments

Lower than Expected Inflation Higher than Expected Inflation


1.80 1.64
Average Monthly Returns (%)

1.60
1.37
1.40
1.20
1.00 0.84
0.80
0.60 0.48 0.42
0.40 0.27
0.20
0.00
S&P GSCI Ibbotson S&P 500 S&P GSCI Ibbotson S&P 500
Intermediate Intermediate
Term Bond Term Bond
1
Unexpected inflation is based on the historical relationship between 1-month Treasury bills and US
Consumer Price Index. Data from January 1970 to September 2009
Source: Ibbotson, Bloomberg, and Credit Suisse Asset Management
Past Performance does not guarantee future results.

Tactical Quarterly Credit Suisse Asset Management | 15


About the Authors

Nadim M. Barakat, Managing Director, is the Chief earned a B.B.A. in Finance from L’Ecole des Hautes
Investment Officer of the Customized Fund Investment Commerciales (H.E.C) de Montreal, a Minor in
Group within Private Equity in Alternative Investments. Economic Sciences from Universite de Montreal, and
Mr. Barakat holds a B.Sc. (Hons) degree in Systems attended McGill University Graduate Business School.
Engineering and Operations Research from the
University of Virginia (USA). Timothy Schwider, Ph.D., Director, is a member of the
Quantitative Equities Group management team focusing
Christopher Burton, CFA, Director, is the Lead Portfolio his research on global equities. Mr. Schwider holds a
Manager and Trader for the Commodities Team. Mr. B.S. in Mathematics from Harvey Mudd College, and a
Burton earned a B.S. in Economics with concentrations Ph.D. in Mathematics from the University of Michigan.
in Finance and Accounting from the University of
Pennsylvania’s Wharton School of Business. Fred Shek, CFA, Director, is the Head of the Convertible
Arbitrage and Multi-Strategy sectors in the Hedge Fund
Jordan Drachman, Ph. D., Director, is Head of Research Research and Selection team within Alpha Strategies.
for the Liquid Alternative Beta team. Mr. Drachman has Mr. Shek earned a B.S. in Accounting from Binghamton
received a B.S. in Mathematics from MIT and Ph.D. in University in 1994 and is a CFA Charter holder.
Mathematics from Stanford University.
Mika Toikka, Managing Director, is a Portfolio Manager
Sebastien Fiaux, Vice President, is Head of the and Global Head of Multi-Strategy Arbitrage in Alternative
Event Driven sectors in the Hedge Fund Research Investments at Credit Suisse. He is also the Head of
and Selection team within Alpha Strategies. Mr. Fiaux Volaris Volatility Management. Mr. Toikka holds an M.S.
earned an M.S. in Finance, Economics and Statistics in Applied Economics from the University of California
from ENSAE, an M.A. in Political Science from the Santa Cruz and a B.A. in Economics from the University of
Institute of Political Science and a Masters in Financial California at Davis.
Engineering from Cornell University.
Anne-Sophie van Royen, Ph.D., Managing Director, is
Vanita Gaonkar, Director, is the Head of the Long/ a Senior Portfolio Manager for the global tactical asset
Short Equity and Equity Market Neutral sectors in the allocation strategies and products at Credit Suisse.
Hedge Fund Research and Selection team within Alpha Ms. van Royen holds an M.S. in Business Studies from
Strategies. Ms. Gaonkar earned a B.A. in Mathematics the Ecole des Hautes Etudes Commerciales (HEC); a
and Economics from Wesleyan University. B.A. in Psychology from the Université de Paris-Saint
Denis; and Ph.D. and M.S. degrees in Mathematical
Peter Little, CFA, Director, is Head of Portfolio Economics from the Université de Paris-Sorbonne.
Management and Implementation for the Liquid
Alternative Beta team. Mr. Little holds B. Comm. in Kelly M. Williams, Managing Director, is the Group Head
Finance from the University of Port Elizabeth in South of the Credit Suisse Customized Fund Investment Group.
Africa in 1995. Ms. Williams graduated magna cum laude from Union
College in 1986 with a B.A. in Political Science and
Nelson Louie, Managing Director, is Global Head of the Mathematics, and received her Juris Doctor degree from
Commodities Group. Mr. Louie holds a Bachelor of Arts New York University School of Law in 1989.
degree in Economics from Union College.
Xiaomeng Yang, CFA, Ph.D., Vice President, is a
John G. Popp, Managing Director, is the Group Portfolio Manager for the global tactical asset allocation
Head of the Credit Investments Group, with primary strategies and products. Ms. Yang holds a B.A. in
responsibility for making investment decisions and economics from Tsinghua University in Behiing, and a
monitoring processes for CIG’s global investment Ph.D. in Economics from Boston College. She is a CFA
strategies. Mr. Popp graduated with a B.A. from charter holder and holds a Financial Industry Regulatory
Pomona College and an M.B.A. from the Wharton Authority (“FINRA”) Series 3 license.
Graduate of the University of Pennsylvania.

Sami Robbana, Director, is the Head of the Global
Macro sector in the Hedge Fund Research and
Selection team within Alpha Strategies. Mr. Robbana

Credit Suisse Asset Management | 16 Tactical Quarterly


Credit Suisse Asset Management Publications

Robert Parker, Credit Suisse Senior Advisor Risk Management: A Changing Paradigm
October Market Update November 2009—Renewed interest in risk management
October 2010—Strong earnings growth and easing and the creation of a culture of risk awareness are driving
economic concerns should support equity markets in current investment committee meeting agendas. This should
the short term. Eurozone is clearly becoming a “two- come as no surprise in light of market events in 2008 and
track” economy. Some government bond markets may be early 2009. While experience and judgment that have been
overbought following latest flight to quality. battle-tested under various market conditions prepares
CIOs for uncertainty in the future, how do they implement
Liquid Alternative Beta: Enhancing Liquidity in risk-based solutions while facing real-world events?
Alternative Portfolios
June 2010—How to increase a portfolio’s liquidity Risk Parity—A Risk-Based Approach to
without sacrificing returns, especially in a post-crisis, Portfolio Structuring
low-yield environment? The paper illustrates how November 2009—In this paper we discuss a different
institutional investors can use Liquid Alternative Beta approach to portfolio risk management, called risk parity,
to seek to enhance portfolio liquidity, increase portfolio which aims to equate the contribution of risk across asset
transparency, short hedge fund sectors and gain hedge- classes and, as a result, create a portfolio which performs
fund-like exposure when investment policies restrict better in a variety of market conditions.
direct hedge fund investments.
In Search of Liquidity and Transparency:
Can Infrastructure Investing Enhance Managed Accounts, Single Investor Funds
Portfolio Efficiency? and Custom Portfolios
May 2010—The paper provides an in-depth look at October 2009—Investor interest in managed accounts
infrastructure as an investment tool, and analyzes what has grown. This paper outlines four investment structures
role the asset class might play in institutional portfolios. which may offer investors a range of solutions for greater
Specifically, the paper examines whether infrastructure can liquidity and transparency in their hedge fund investments.
be an effective tool to mitigate inflation and duration risks,
reduce funding gaps, and enhance portfolio efficiency. Preparing for Inflation: Is It Too Early
to Position Your Portfolio?
Gaining Efficient Hedge Fund Exposure Through September 2009—As governments continue to implement
Passive Investing stimulus programs, some investors worry about potential
January 2010—This paper examines the benefits of an future inflation. Positioning your portfolio for increasing
index-based approach to hedge fund investing: Cost inflation before it strikes is critical.
efficient access to the broad hedge fund industry, strong
performance vs. active fund of funds, reduced manager- Equity Market Neutral – Diversifier Across
specific risk and a simplified core holding. Market Cycles
September 2009—This paper examines the role that the
Credit Portfolio Management in 2010: A Nimble Equity Market Neutral strategy can play in an alternatives
Approach Needed portfolio, as it was one of the few strategies that remained
January 2010—Tracking and timing credit cycles can be uncorrelated to other asset classes during the 4Q 2008
challenging, particularly since today’s credit environment market dislocation.
appears to be going through increasingly rapid cycle
changes. We believe that fixed income investors need
to be increasingly nimble and tactical in 2010, while at
the same time considering strategic preparations for
medium-to-longer-term regime changes in interest rates
and inflation.

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 www.credit-suisse.com.

Tactical Quarterly Credit Suisse Asset Management | 17


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Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the
relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption
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Important Legal Information for Investors in the US


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or other illiquid assets and the use of short sales, options, leverage, futures, swaps, and other derivative instruments may create special risks and substantially
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exists or is likely to develop. The incentive fee may create an incentive for the hedge fund manager to make investments that are riskier than it would
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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 may not 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 the model functions as anticipated, it cannot account for all
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The charts, tables and graphs contained in this document are not intended to be used to assist the reader in determining which securities to buy or sell or
when to buy or sell securities. Benchmarks are used solely for purposes of comparison and the comparison does not mean that there will necessarily be a
correlation between the returns described herein and the benchmarks. There are limitations in using financial indices for comparison purposes because, 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 or other 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 in such
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.

IMPORTANT NOTE: The contents in the attached presentation can only be modified or edited in a way that the meanings are remained substantially the
same. Any figures shown in the contents cannot be altered in any way.

Credit Suisse Asset Management | 18 Tactical Quarterly


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