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INVESTMENT SOLUTIONS & PRODUCTS

Hedge Fund Strategy

Investment Strategy

October 2016

This document represents the views of the Investment Strategy Department of CS and has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. It is not a product of the Credit Suisse Research Department even if it contains published research recommendations.

IS&P Alternative Investment Strategy

Tobias Merath, Stefan Graber, Anand Datar

Section Page

1. Hedge Funds Key Observations 3

2. Investment Strategy Overview and Strategy Outlook 4

3. Hedge Funds (Broad) 9

4. Special Topic: Hedge fund drawdowns and correlations 20

5. Fundamental: Overview (23) & Long Short Equity (25) 23

6. Fundamental: Emerging Markets 33

9. Fundamental: Event Driven Overview (39) & Merger Arbitrage (42) 39

8. Fundamental: Event Driven - Distressed 49

10. Tactical Trading: Overview (53) & Global Macro (55) 53

11. Tactical Trading: Managed Futures 62

13. Relative Value: Overview (68) & Fixed Income Arbitrage (70) 68

12. Relative Value: Convertible Arbitrage 76

13. Relative Value: Equity Market Neutral 81

14. Appendix 84

Table of Contents

2

Historical performance indications and financial market scenarios are not reliable indicators of current or future performance

October 2016

Key Observations

• Financial market conditions stay positive for hedge funds driven by robust economic momentum and low volatility. Systemic risks are

favorable but have stopped improving. Financial market liquidity conditions have deteriorated somewhat but are still sufficient.

• The improved market conditions are also reflected in improving performance. August was a positive month for the industry and data from investable indices and UCITS hedge funds indicate that September could be a positive month as well.

• The industry seems on track to produce the 2-4% total return we expect for the full year 2016.

• The Investment Committee of Credit Suisse has a positive view on

hedge funds as they still offer a good trade off between return and risk.

Source: Hedge Fund Research, Bloomberg, Credit Suisse

Hedge fund market conditions stay favorable

90

Dec 93 Dec 97 Dec 01 Dec 05 Dec 09 Dec 13

Credit Suisse Hedge Fund Index (logarithmic scale)

Period: Nov 1999 - Aug 2008

Return: 8.3% p.a.Volatility: 5.9%

Period: Jan 1994 - Aug 1998Return: 15.5% p.a.

Volatility: 8.9%

Period: Mar 2010 - Jul 2016Return: 3.9% p.a.

Volatility: 4.4%

Structural change in the hedge fund industry

• The trend toward more liquid trading strategies, tighter risk-limits and more transparency that we have seen in hedge funds over the last years

also has an effect on hedge fund returns. • As the hedge fund industry is gradually maturing, returns have

moderated. However at the same time, the volatility of hedge fund

returns has declined as well. That means hedge funds are now a more conservative investment than they were a few years ago.

• Since both return and risk have declined, the trade-off between the two has not changed that much. Although hedge funds returns are now lower than in the past, they still offer a comparably high Sharpe Ratio.

• As a result of this, hedge funds remain a popular building bloc for cross asset class portfolio construction.


October 2016

Hedge Fund Strategy Outlook at a glance (arrows show relative strategy preferences)

Strategy Fundamental View Sep 16

View

FU

ND

AM

EN

TA

L

Long Short

Equity

The recent drop in market volatility, as well as low inter-stock correlations are supportive for short-term performance of the style. However while corporate earnings in Q2 were better than expected, the year-on-year growth is still tepid, leaving the market vulnerable, particularly as valuation is

expensive. As a result we are expecting limited support from broader equity market beta, given political and macro risks and have a neutral outlook for Long/Short equity strategies. Within Long/Short equity we prefer funds with opportunistic or lower net exposure.

Emerging

Markets

Recent economic data in EMs has been better, while capital inflows have been strong. Equity valuations of EMs lower than for developed markets

and EMs should be relatively immune from a Brexit related slowdown in UK/ Europe. The recent stabilization of the US dollar index and of commodity prices is helpful. We have a neutral view on the strategy to neutral noting attractive opportunities in countries with reform momentum.

Risk

(Merger)

Arbitrage

Deal activity continues to grow at moderate levels, which provides a reasonable opportunity set. Meanwhile, deal spreads stay tighter, which is supportive of performance of existing trades. Pressure to grow top-line revenue, industry consolidation opportunities in stressed sectors and large

cash levels still keep the case for M&A intact. We view the low directionality and net exposure of the strategy favorably.

Distressed The number of issuers under distressed conditions stay near average levels, suggesting a reasonable opportunity set. Performance of distressed strategies continues to benefit from higher valuations of speculative issuers with the fundamental back-drop improving recently. Default rates are

expected to rise modestly, adding to opportunity set. Given strong performance recently, we stay neutral, awaiting better entry-points.

TA

CTIC

AL T

RA

DIN

G

Global

Macro

Global macro managers should be able to benefit from a good set of trading opportunities – US elections, BREXIT consequences, the timing of the next Fed rate hike, the future of unconventional monetary policy in Europe, Japan and elsewhere, the stabilization of commodity and emerging markets to name just a few. The current market combination of sufficient market liquidity and benign volatility is also supportive. We have a positive view on the style and see its tactical nature and low exposure to market directionality as additionally appealing.

Managed

Futures

(CTA)

With the exception of long-dated US treasuries, trend strength stays at the weakest levels for the year in most financial instruments. This, coupled

with low trading ranges has resulted in limited opportunities for managers over the past couple of months. We believe the Fed may hike in December, which is not fully priced into the markets yet and could be a source of opportunity for CTAs. We view managed futures positively since

they are typically less correlated to other strategies and can benefit from an increase in volatility.

RE

LA

TIV

E V

ALU

E

Fixed

Income

Arbitrage

Repricing of Fed rate hike expectations, ECB easing, as well as negative rates in several economies provide opportunities for classical fixed income arbitrage strategies. The recent drop in fixed-income volatility is also supportive of performance. The search for yield and continued ECB/BoJ easing is supportive of credits. We are positive on Fixed-Income Arbitrage strategies, preferring corporate arbitrage and structured credit related styles over classic fixed income arbitrage funds which are vulnerable to a potential volatility spike.

Convertible

Arbitrage

The valuation case for convertible bonds is attractive given lower implied volatilities and greater yield differentials compared to traditional bonds.

Equity market delta is at reasonable levels. The search for yield is supportive for convertible bond valuations. However given the strong rally recently

and limited return expectations from equities, we prefer to stay neutral and wait for better entry opportunities.

Equity

Market

Neutral

We have a positive stance on the strategy. Very low net exposure to broader markets help reduce drawdowns during corrections and also provides

uncorrelated returns. The better fundamental backdrop also lowers risks of a sharp, detrimental spike in volatility, while low inter-stock correlations are supportive. Overall we maintain our positive stance.

4


October 2016 5

Investment Strategy overview

Source: Credit Suisse

Comment

We remain neutral on fixed income. The Fed and BoJ’s last policy meetings indicated an environment where central banks will remain accommodative for longer due to a dull growth and productivity outlook. Yet, we do not see the rally in government bonds, especially in longer maturities as sustainable. Within

fixed-income, financial and emerging market debt is best positioned to deliver higher returns in Q4 2016, while we are neutral on investment grade and high yield credits

Fixed Income

Asset Category

Equities We maintain our negative view on global equities amid weak earnings, slow growth, political risks and looming Fed tightening. While earnings beat very low expectations last season in Q2, YoY earnings growth for Q2 was negative, with 2016 expectations getting closer to zero. We think equity markets might be too optimistic regarding the outlook for earnings growth next year. Continue to prefer emerging

markets, Switzerland, and Australia, amid improved fundamentals.

The US Fed has left its policy rate unchanged, but is shifting to a slightly more hawkish tone. We still expect a rate hike in December. Introducing ‘yield curve controls’, the Bank of Japan (BoJ) is clearly

anchoring nominal long-term yields. Latest data releases indicate ongoing stabilization in China. We have revised our GDP forecasts for 2016 and 2017 higher.

Overview

Foreign Exchange The USD is set to remain range-bound against EUR and CHF (as the Fed is tightening policy only very gradually), but to strengthen vs. GBP. We are positive on JPY against USD, EUR and CHF due to the

historically narrow rate spreads, Japan's fiscal stimulus and Japan's external surplus. We are positive on

the EM FX Index due to positive technical momentum and still supportive valuation.

Alternative Investments Our Hedge Fund Barometer indicates continued improvement in operating conditions for hedge funds,

driven by benign market volatility, steady if not spectacular business conditions and improved liquidity conditions. Commodities are neutral overall as the rebalancing process remains uneven. Energy is seen

as outperforming as the rebalancing process continues regardless of OPEC action/inaction. We remain neutral overall on global listed real estate, with an outperform view on Japanese real estate equities.


October 2016

1 Performance Financial Markets

Source: Datastream, Credit Suisse / IDC 6

Indices (Regions) Price Chg 1M Chg 6M Chg YTD Chg 1 Y Chg 3 Y PE Ratio Indices (Sectors) Price Chg 1M Chg 6M Chg YTD Chg 1 Y Chg 3 Y PE Ratio

S&P 500 2'168 -0.1 % 5.3 % 6.1 % 12.9 % 28.9 % 20.8* DJS Banks 140.1 -2.7 % -3.0 % -23.3 % -24.0 % -23.3 % 27.5

Dow Jones Industrials 18'308 -0.5 % 3.5 % 5.1 % 12.4 % 21.0 % 19.3 DJS Oil and Gas 282.3 0.0 % 8.5 % 7.6 % 11.1 % -12.0 % 40.9

DJ Euro Stoxx 50 (P) 3'002 -0.7 % -0.1 % -8.1 % -3.2 % 3.8 % 19.8 DJS Health Care 442.9 -0.3 % 5.0 % 3.3 % 10.5 % 13.2 % 24.7

FTSE 100 6'899 1.7 % 11.7 % 10.5 % 13.8 % 6.8 % 36.0 DJS Industrials 418.1 -0.1 % 5.4 % 3.8 % 11.3 % 17.3 % 25.1

Nikkei 225 16'450 -2.6 % -1.8 % -13.6 % -5.4 % 13.8 % 15.1 DJS Utilities 288.1 0.7 % 0.1 % -5.2 % -1.0 % 6.5 % 19.4

DAX 10'511 -0.8 % 5.5 % -2.2 % 8.8 % 22.3 % 15.54* DJS Telecom 294.4 -1.5 % -9.6 % -15.2 % -11.4 % 7.3 % 41.1

CAC 4'448 0.2 % 1.4 % -4.1 % -0.2 % 7.4 % 18.02* DJS Basic Resources 333.1 10.3 % 24.8 % 36.0 % 25.9 % -15.6 % 57.1

SMI 8'139 -0.8 % 4.2 % -7.7 % -4.4 % 1.5 % 21.82* DJS Food & Beverage 646.4 0.3 % 3.8 % 0.3 % 8.8 % 33.3 % 27.9

Hang Seng 23'297 1.4 % 12.1 % 6.3 % 11.8 % 1.9 % 11.6 DJS Chemicals 804.2 -1.1 % 3.1 % -2.6 % 2.2 % 14.0 % 19.8

Shanghai SE Comp 3'005 -2.6 % 0.0 % -15.1 % -1.6 % 38.2 % 17.5 DJS Household 770.7 0.2 % 3.1 % 2.0 % 5.7 % 35.0 % 21.8

Brazil Bovespa 58'367 0.8 % 16.6 % 34.6 % 29.5 % 11.5 % 17.13* DJS Technology 368.4 2.4 % 9.5 % 3.5 % 17.6 % 33.2 % 25.0

Russian RTS $ 991 4.3 % 13.1 % 30.9 % 25.5 % -30.3 % 7.7 DJS Construction 411.6 0.6 % 6.8 % 5.7 % 14.7 % 37.4 % 22.6

India Sensex 27'866 -2.1 % 10.0 % 6.7 % 6.5 % 43.8 % 17.6 DJS Retail 303.4 -1.0 % -4.0 % -9.9 % -8.9 % -5.2 % 19.9

CBOE Volatility (%) 13.3 -1.0 % -4.7 % -27.0 % -45.8 % -19.9 % DJS Insurance 233.7 0.5 % -5.9 % -18.2 % -8.7 % 15.8 % 11.7

* Datastream calculated

Government bond rates Yield Chg 1M Chg 3M Chg 6M Chg YTD Chg 1 Y Short term rates Yield Chg 1M Chg 3M Chg 6M Chg YTD Chg 1 Y

US Generic Govt 10 Y 1.56 % -0.01 % 0.08 % -0.26 % -0.71 % -0.50 % USD Generic 3 Months 0.27 % -0.06 % 0.02 % 0.08 % 0.11 % 0.29 %

US Generic Govt 5 Y 1.11 % -0.08 % 0.10 % -0.17 % -0.54 % -0.25 % EUR Deposit 3 Months -0.28 % 0.01 % -0.01 % -0.06 % -0.20 % -0.22 %

German Generic Govt 10 Y -0.19 % -0.07 % -0.06 % -0.33 % -0.82 % -0.78 % JPY T-Bills 3 Months -0.38 % -0.13 % -0.10 % -0.26 % -0.34 % -0.35 %

German Generic Govt 2 Y -0.69 % -0.07 % -0.05 % -0.21 % -0.36 % -0.45 % UK T-Bills 3 Months 0.32 % -0.00 % -0.15 % -0.19 % -0.24 % -0.24 %

UK Generic Govt 10 Y 0.72 % 0.07 % -0.36 % -0.69 % -1.24 % -1.04 % CHF LIBOR 3 Months -0.81 % -0.01 % 0.03 % -0.02 % 0.01 % -0.02 %

Japan Generic Govt 10 Y -0.08 % -0.02 % 0.15 % -0.00 % -0.34 % -0.42 %

Switzerland Generic Govt 10 Y -0.56 % -0.06 % -0.04 % -0.15 % -0.49 % -0.44 % Credit Spreads Level Chg 1M Chg 3M Chg 6M Chg YTD Chg 1 Y

Brazil Generic Govt 11.63 % -0.48 % -0.56 % -2.19 % -4.86 % -3.84 % Itraxx Europe Generic 5Y 72.6 4.8 -11.3 -0.1 -4.6 -18.3

Russia Generic Govt 8.16 % -0.04 % -0.15 % -0.94 % -1.58 % -3.06 % Itraxx Europe Crossover 5Y 333.0 23.7 -33.4 28.0 18.4 -43.5

China Generic Govt 2.77 % 0.03 % -0.11 % -0.17 % -0.08 % -0.53 % JPM Emerging Market Spread 345.5 -4.9 -31.0 -54.7 -64.6 -97.3

Hedge Funds & Private Equity Price Chg 1M Chg 3M Chg 6M Chg YTD Chg 1 Y Real Estate Yield Chg 1M Chg 3M Chg 6M Chg YTD Chg 1 Y

HFR Global Index 1189.07 0.5 % 2.1 % 3.2 % 1.3 % 0.7 % S&P Global Property Index TR 434.7 -0.2 % 2.2 % 5.9 % 11.3 % 16.7 %

HFR Equal Weighted Strategies 1202.52 0.4 % 2.3 % 3.9 % 2.5 % 1.9 % S&P Switzerland BMI Property P 1127.8 1.2 % 2.0 % 1.4 % 13.2 % 20.1 %

HFR Convertible Arbitrage 737.74 0.2 % 3.5 % 6.2 % 5.1 % 3.6 % S&P Asia Pacific Property Index TR 590.0 1.4 % 3.9 % 7.2 % 13.4 % 18.1 %

HFR Distressed Securities 1019.03 0.3 % 5.9 % 15.4 % 13.7 % 6.1 % S&P Eurozone BMI Property P 227.4 -1.3 % 5.4 % 1.8 % 10.2 % 11.5 %

HFR Equity Hedge 1147.34 1.6 % 3.4 % 2.4 % -0.6 % 0.2 % S&P United Kingdom BMI Property 268.5 -3.2 % 1.1 % -13.2 % -22.4 % -26.0 %

HFR Equity Market Neutral 1000.51 0.4 % 1.2 % -1.3 % -3.8 % -3.0 % Commodities Level Chg 1M Chg 3M Chg 6M Chg YTD Chg 1 Y

HFR Event Driven 1510.96 0.2 % 3.9 % 8.6 % 7.3 % 6.6 % DJ-UBS Total Return Index 172.4 3.1 % -3.9 % 8.4 % 8.9 % -2.6 %

HFR Macro 1157.34 -0.0 % -0.7 % -1.1 % -1.0 % -1.5 % Rogers International Comm TR 2211.7 3.6 % -1.8 % 9.8 % 8.8 % -3.3 %

HFR Merger Arbitrage 1792.52 0.5 % 0.7 % 1.5 % 3.1 % 6.5 % Gold Spot 1321.5 1.0 % 0.0 % 7.1 % 24.4 % 18.6 %

HFR Relative Value Arbitrage 1121.54 0.0 % 1.0 % 2.1 % -0.7 % -3.0 % Crude Oil 48.2 7.9 % -0.2 % 25.8 % 30.2 % 7.0 %

HFR US Absolute Return 1031.08 0.2 % 0.8 % 1.1 % 0.6 % 0.8 % DJ-UBS Energy 36.3 4.1 % -3.7 % 15.8 % 4.9 % -18.9 %

HFR US Market Directional 1204.08 2.1 % 5.9 % 15.6 % 8.0 % 5.1 % DJ-UBS Agriculture 55.1 4.2 % -8.2 % 3.4 % 4.0 % 1.8 %

DJS Private Equity 20 Index 3453.72 5.4 % 13.7 % 17.2 % 11.1 % 22.1 % DJ-UBS Grains 36.7 4.0 % -13.6 % -7.5 % -7.4 % -14.6 %

LPX50 TR Private Equity 1821.6 0.0 % 8.0 % 7.1 % 2.7 % 7.9 % DJ-UBS Industrial Metals 102.0 5.2 % 4.0 % 10.3 % 12.7 % 3.4 %

DJ-UBS Precious Metals 184.5 1.1 % 0.2 % 10.3 % 27.1 % 20.7 %

October 2, 2016

Alt

ern

ati

ve

In

ve

stm

en

ts

Market Scoreboardas of

Eq

uit

ies

Rate

s &

Cre

dit

s

For Hedge Funds, HFRX index data as of 29-09-2016


October 2016

1 Macro Global Activity

• While we are still in the initial stages, the focus of central banks is shifting away from further monetary easing towards more of a fine tuning of the current policies

using new tools such as yield targeting. Meanwhile, the focus on fiscal stimulus is increasing in several advanced economies. The shift is likely to become a key

theme in financial markets going forward. While Canada and Japan have announced some fiscal measures already, a more widespread adoption would have far-

ranging implications on markets.

• In the near-term though, US data has been softer recently, with the Fed now guiding for a rate hike in December. In the Eurozone, the tepid growth momentum

continues, though with greater downside risks surrounding Brexit and the European banking system. In China, while certain credit and housing indicators look

stretched, recent data points towards stabilization in economic activity and our economists have upgraded their growth forecasts.

Global GDP growth and contributions Global manufacturing PMIs

Rate hike expectations (derived from OIS) World macro momentum indicator

40

45

50

55

60

2010 2011 2012 2013 2014 2015 2016

Global USA Eurozone China 50-threshold

Index

-3

0

3

6

1993 1996 1999 2002 2005 2008 2011 2014

China Developing Asia USAJapan Eurozone Latin AmericaEastern Europe Other countries World

% YoY, contributions, PPP based

Global PMIs

7 Source: PMI Premium, DataStream, Bloomberg. Credit Suisse / IDC

Last datapoint: 31.08.2016 Last datapoint: 31.08.2016


-60

-40

-20

0

20

40

60

Fed ECB BoE SNB BoJ BoC RBA RBNZ

Expected change in short-term interest rates over 12 months, current

7 days ago

1 month ago

basis points*

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16

CHINA USA INDIA JAPAN GERMANY RUSSIA BRAZIL OTHERS TOTAL

#Std Dev


October 2016

1 Macro and Traditional Assets Financial Markets

Equities Fixed Income • After the ECB disappointed markets in August volatility levels have briefly risen. However since then, volatility has started to fade again and is now back to below

average levels across asset classes.

• However, BoJ’s yield curve control announcement provides a clear anchor to long-term nominal yields. The move is also likely to prevent a large spike in fixed-income volatility.

Credit Suisse Global Financial Market Risk Indicator Implied volatilities across asset classes

Credit Suisse Risk Appetite Indicator Credit Suisse Liquidity Indicator*

0

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15

Global Risk Indicator Median

Average of 1Y, 3Y, 5Y rolling percentiles of 1-month implied volatilites across asset classes and regions

Source: Datastream, Credit Suisse / IDC

Market Stress

8

0

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16

Equity Risk Indicator Rates Risk Indicator Credit Risk Indicator Commodities Risk Indicator FX Risk Indicator

Last reading

Equity

Rates

Credit

Cmdty

Global

FX

0.23

0.18

0.38

0.26

0.51

0.31

Aggregate of 1y, 3y, 5y percentile of 30D

implied volatilitypercentile



-8

-6

-4

-2

0

2

4

6

Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15

Alternative Investment Strategy


Broad Hedge Funds

60

70

80

90

100

110

120

130

140

Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15

Credit Suisse Hedge Fund IndexHFRX Global IndexHFRI Fund of Funds Composite IndexHFRU Hedge Fund Composite IndexSimple average of CS Hedge Fund, HFRX Global, HFRI FoF and HFRU (in USD)

Indexed performance in USD, December 2007 = 100

Last datapoint: 31.08.2016


October 2016

CS: Table Hedge Fund Index Statistics

2 Hedge Funds (broad) Performance Review

Total Return Performance by Style

0

100

200

300

400

500

600

700

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

CS Hedge Fund Index Directional Event-driven Tactical Relative Value

8.3% 7.7%

8.2% 6.2%

7.8% 10.4%

7.8% 7%

CAGR* Risk**

5.5% 6.6%

*compound annual growth rate**annualized volatility

Upside/ Downside Capture Ratios Hedge Fund exposure to Equity and Bonds

• The Credit Suisse Hedge Fund index gained 0.5% in August and is now nearly unchanged for the year

• The CS Liquid Alternative Beta (LAB) gained 0.6% in August, with 0.4% gain in September (until 29.09.2016) with YTD returns at 3.6%

• The HFRX Global Hedge Fund index gained 0.16% in August, with 0.55% gain in September to take YTD returns to 1.33%

• The HFRU hedge fund composite index (in USD) gained 0.5% in August, gaining a further 0.31% in September with YTD returns at 1.38%

Source: DataStream, Bloomberg. Credit Suisse / IDC 10



-1.00

-0.80

-0.60

-0.40

-0.20

0

0.20

0.40

0.60

0.80

1.00


52w rolling beta

HFRX net long exposure to MSCI AC World

HFRX net long exposure to Barclays Government Bond Index

41%

-18%

15%

-34%

-40%

-20%

0%

20%

40%

60%

During positive months of MSCI AC

World

During negative months of MSCI AC

World

% CS Hedge Fund Index returns as percentage of MSCI

AC World returns

Since 1999 Last 12 months


October 2016

2 Hedge Funds (broad) Performance Review

Source: DataStream, Bloomberg. Credit Suisse / IDC 11


Hedge Fund performance compared to global equity and bond market performance

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD

Hedge Funds (average index of CS Hedge Fund, HFRX Global Index, HFRI FoF and HFRU (in USD)

MSCI AC World TR in USD

Barclays Global Aggregate

Annual total return across asset classes


October 2016

2 Hedge Funds (broad) Positioning

Hedge Funds: Positioning

-60

-40

-20

0

20

40

60

S&P 500

2YR T-Note

5YR T-Note

10YR T-Note OIL

COPPERGOLD

SILVEREUR

USDCHF

JPY

30.09.2016 02.09.2016

%

Hedge Funds: Positioning

Future WoW % Change 30. Sep 4W % Change 02. Sep

S&P 500 Increased Long 3.07 hh S&P 500 Increased Long 1.5 h

2YR T-Note Increased Long 2.19 h 2YR T-Note Decreased Long -0.2 i

5YR T-Note Decreased Short 0.82 i 5YR T-Note Increased Short -0.5 h

10YR T-Note Increased Long 1.27 h 10YR T-Note Increased Long 1.1 h

OIL Increased Long 0.34 h OIL Decreased Long -1.9 i

COPPER Decreased Short 5.71 ii COPPER Decreased Short 10.5 iii

GOLD Increased Long 4.88 hh GOLD Increased Long 1.8 h

SILVER Increased Long 0.20 h SILVER Decreased Long -1.6 i

EUR Decreased Short 3.04 ii EUR Increased Short -0.4 h

USD Decreased Long -5.81 ii USD Decreased Long -2.7 i

CHF Shifted Long to Short -34.56 L CHF Shifted Long to Short -32.2 L

JPY Increased Long 1.18 h JPY Increased Long 6.8 hh

Change one week as of 30.09.2016

Positioning Positioning

Change over last 4 weeks since 02.09.2016

Hedge Funds: Leverage

• Hedge funds (as measured on CS prime services platform) have retreated leverage back to pre-summer levels • Speculators are reducing their long positions in near-term bonds, while adding positions in longer-term (10Y) maturities • Speculators have modestly reduced long positions in oil, covering copper short positions and adding to long positions in JPY

Source: CS Prime Services, CFTC, Bloomberg. Credit Suisse / IDC 12

* Based on funds on CS Prime services platform


1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2


Hedge fund leverage* (Average levels)

3.05

Multiple

* Intermittent data estimated


October 2016

2 Hedge Funds (broad) Assets

Hedge Funds Launched/Liquidated Hedge fund redemptions

Hedge Fund Strategy Distribution (by Number) Assets managed by hedge funds (incl. FoF)

• According to HFR, performance-driven gains in Q2 2016 have led to a USD 42 bn net increase in assets managed by hedge funds. Despite USD 8 bn in

investor outflows, total assets managed by hedge funds rose to USD 2.9 trillion during the quarter, the highest level in more than a year.

Source: HFR, SS&C GlobeOp. Bloomberg. Credit Suisse / IDC 13

47%

12%

21%

20%

Equity Hedge Event Driven

Macro Relative ValueLast datapoint: 31.06.2016




328

673

1087 1094

1435

2073

1518

1197

659784

9351113 1108 1060 1040

(71) (92) (162) (176)(296)

(848)(717)

(563)

(1471)

(1023)

(743) (775)(873) (904) (864)

968

(979)

-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

2000 2002 2004 2006 2008 2010 2012 2014

Launches Liquidations

No. of funds

Data as of Dec. 2015

300

350

400

450

500

550

600

Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

CS Hedge Fund Index Redemption Indicator inverse (r.h.s.)

4.22%

CS Hedge Fund Index Redemption Indicator (%)


October 2016

2 Hedge Funds (broad) Equity Exposure of Hedge Fund Strategies

Beta exposure by strategy

Long exposure to MSCI World: Fundamental Long exposure to MSCI World: Tactical and Relative Value

Source: HFR, Credit Suisse / IDC 14


00.100.200.300.400.500.60

36m rolling beta Stock Market Exposure* by Strategy

Aug 2015 Aug 2016

* vs. MSCI AC World

0

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16

36m rolling betaLong exposure to MSCI World: Fundamantal Strategies

Long/Short Equity Emerging Market Event Driven Index

Distressed Debt Index Merger Arbitrage Index

-0.60

-0.40

-0.20

0

0.20

0.40

0.60

0.80

1.00

1.20


36m rolling beta Long exposure to MSCI World: Tactical and Relative Value

Global Macro Managed Futures

Equity Market Neutral Index Convertible Arbitrage Index

Fixed Income Arbitrage Index


October 2016

Business Cycle Systemic Risks Volatility Liquidity

Hedge Fund Barometer [2.64]

Source: Bloomberg, Datastream, Credit Suisse/IDC

2 Hedge Funds (broad) Hedge Fund Barometer

15



October 2016 Source: Bloomberg, Datastream, Credit Suisse/IDC

16

2 Hedge Funds (broad) Hedge Fund Barometer

Hedge Fund Barometer and CS Hedge Fund Index returns




Volatility Volatility regimes and style performance

Liquidity regimes and style performance Liquidity conditions

2 Hedge Funds (broad) Hedge Fund Barometer (Risk Factor Set I)

0

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00


Liquidity composite 13w MAV composite

Liquidity tight

Liquidity plentiful

Percentile rank value

17





9%

-4%

-6%

-12%

17%15%

12%

6% 6% 5%

2% 1%

20%

16%

12%

8%

Tactical Tra

din

g

Rela

tive

Valu

e

Eve

nt D

rive

n

Directional

Directional

Eve

nt D

rive

n

Rela

tive

Valu

e

Tactical Tra

din

g

Rela

tive

Valu

e

Eve

nt D

rive

n

Directional

Tactical Tra

din

g

Directional

Eve

nt D

rive

n

Tactical Tra

din

g

Rela

tive

Valu

e

High volatility

(increasing)

High volatility

(decreasing)

Low volatility

(increasing)

Low volatility

(decreasing)


October 2016

Global manufacturing PMIs

Systemic risk overview

PMI regimes and style performance

Conclusion


2 Hedge Funds (broad) Hedge Fund Barometer (Risk Factor Set 2)

Our Hedge Fund Barometer indicates continued improvement in operating conditions for hedge funds, driven by benign market volatility, steady business conditions and resilient liquidity.

Business activity levels have stayed overall flattish. However at the margin conditions are improving in Emerging Markets and in the US.

Liquidity levels are better than those seen in the early part of the year with credit conditions continuing to ease.

Volatility levels continue to stay benign given central bank accommodation. Yet, upcoming U.S. presidential elections and potential tightening from the Fed in December may trigger some temporary flare-ups in volatility.

Despite some redemptions seen in the earlier part of the year, systemic risks are not a concern, given wider dispersion among hedge fund strategy returns and low co-movement among strategy returns.

40

45

50

55

60

2010 2011 2012 2013 2014 2015 2016

Global USA Eurozone China 50-threshold

Index

18




12% 12%

9%8%

12%

6%5% 5%

1%1%

-5%

-9%

17%16%

13%

2%

Eve

nt

Drive

n

Directional

Rela

tive

Valu

e

Tactical Tra

din

g

Tactical Tra

din

g

Directional

Rela

tive

Valu

e

Eve

nt

Drive

n

Tactical Tra

din

g

Eve

nt

Drive

n

Directional

Rela

tive

Valu

e

Directional

Eve

nt

Drive

n

Rela

tive

Valu

e

Tactical Tra

din

g

PMI > 50

(increasing)

PMI > 50

(decreasing)

PMI < 50

(decreasing)

PMI < 50

(increasing)



Strategy return dispersion Correlation between strategy returns

Beta sensitivity Performance differential between top and bottom quartile managers

2 Hedge Funds (broad) Hedge Fund Barometer (Systemic Risk Components)

19




0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11 Dec 13 Dec 15

%

Return Dispersion Among Hedge Fund Strategies

0

0.1

0.2

0.3

0.4

0.5

0.6


36M rolling beta

CS Hedge Fund Index Beta Exposure to MSCI World

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0


Percentile

Performance differential between top- and bottom- quartiles hedge fund managers

0

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80


12M pairwise correlations between monthly returns of Hedge Fund Strategies

Special topic: Hedge Fund drawdowns

and correlations


October 2016

3 Special Topics Hedge fund drawdowns vs. global equities

• Over the last 12 months hedge funds had an above average participation in negative equity returns. They captured more than 30% of negative equity market

performance. This is significantly above the longer-term average. At the same time however funds were not able to capture the upside to the same extent. The

participation during positive months was much lower. Hedge funds only captured 11% of realized upside in equity markets over the last year. This is significantly

below the historical average and is one reason for poor performance over the last 12 months.

• One reason for this suboptimal performance is that we only had very brief equity market rallies that turned abruptly. So when managers adjusted their exposure

when markets improved, the rally already turned again. This flip-flopping in market performance and the lack of longer-term trends make it difficult for managers

to react. As a result of this, mangers have generally scaled down their exposure to equity markets.

• For hedge fund performance to improve, we would need longer lasting trends and less abrupt market turns. We stick to our total return expectation of 2-4% for

the Credit Suisse Hedge Fund Index for the full year 2016 and now have a balanced view across styles.

Source: Bloomberg, Datastream, Credit Suisse/IDC 21


Hedge Funds during months of negative equity market performance Hedge Funds during months of positive equity market performance

0%

5%

10%

15%

20%

25%

30%

35%

Last 5 years Last 3 years Last 12 months

Average participation of hedge funds to World Equities in months ofnegative equity market performance

0%

5%

10%

15%

20%

25%

30%

35%

Last 5 years Last 3 years Last 12 months

Average participation of hedge funds to World Equities in months of positiveequity market performance


October 2016

3 Special Topics Hedge fund correlations vs. global equities and bonds

• The correlation between hedge funds (as measured by the Credit Suisse Hedge Fund Index) and equities (as measured by MSCI AC world) has declined slightly

over the last years, while their correlation with bonds has increased. Apparently, hedge funds have reduced risk.

• Greater institutional asset flows have led to a more conservative investment profile. Increased concentration of assets at top firms also help explain this trend.



Hedge fund correlation with equities and bonds

Hedge fund correlation with equities Hedge fund correlation with bonds

between monthly returns of CS Hedge Fund Index vs. MSCI AC World and Barclays Global Aggregate Bond Index

between monthly returns of CS Hedge Fund Index vs. MSCI AC World between monthly returns of CS Hedge Fund Index vs. Barclays Global Aggregate Bond Index

Fundamental Strategies


October 2016

Opportunities

Long/Short Equity

• Temporary volatility spikes create attractive

opportunities in fundamentally sound

companies

• Very low inter-stock correlations support

stock-picking strategies.

Event Driven / Merger Arbitrage:

• Consolidation opportunities in sectors

undergoing structural changes

• Tepid top-line growth, limited opportunities to

deploy cash and low funding costs for top-

rated companies keep the case for M&A

growth intact.

Challenges

Long/Short Equity

• Equity beta returns are likely to be unsupportive,

alpha (stock selection) remains a key source of

returns.

• Macro uncertainty may spill over to equity

markets more pronouncedly, potentially arising

from US presidential elections, a Fed rate hike

and / or Brexit negotiations

• Earning growth has been tepid, and valuations

are not cheap.

Event Driven Distressed:

• Speculative-grade issuers vulnerable to re-

pricing (especially after strong run-up), given

tighter lending standards and lower recovery

rates.

• Liquidity remains a concern in certain Fixed

Income and credit segments.

Event Driven Merger Arbitrage:

• Deal activity shows signs of deceleration from

high levels. Crowded individual deals are a risk.

4 Fundamental Strategies Opportunities and challenges

24

80

100

120

140

160

180

200

220

Sep 04 Sep 06 Sep 08 Sep 10 Sep 12 Sep 14

CS Long/Short Equity CS Allhedge Long/Short Equity

Index



Long Short Equity



October 2016

4 Long Short Equity Market exposure

0

10

20

30

40

50

60


0.10

0.20

0.30

0.40

0.50

0.60

0.70

VIX Index Long/short ratio of long/short equity funds (r.h.s.)

Level (VIX) Long/short ratio

-100

100

300

500

700

1991 1994 1997 2000 2003 2006 2009 2012 2015

20%

25%

30%

35%

40%

45%

50%

AUM: Equity long short

Net capital flows: Equity long short

% of industry assets

USD bn % Assets

Assets & Capital flows

Long/short ratio (Long Short Equity)

Volatility of Long / Short Equity Strategy Returns

Net Long Exposure to Index

Source: CS Prime Services, HFR, Bloomberg, Datastream, Credit Suisse/IDC

0

5

10

15

20

25

Jun 94 Jun 98 Jun 02 Jun 06 Jun 10 Jun 14

Standard deviation of CS Long/Short Equity Index Returns

Long-Term Average

6M rolling standard deviation (%)

26



• Market exposure of long-short equity funds stays modest (on aggregate), preventing larger drawdowns, while also limiting participation in the recovery.

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Sep 03 Sep 05 Sep 07 Sep 09 Sep 11 Sep 13 Sep 15

36m rolling beta

CS Long/Short Equity Index net long exposure to MSCI AC World


October 2016

4 Long Short Equity Equity Markets

Stylized business cycle and typical asset class performance Credit Suisse Macro Momentum Indicator

Over-heating Slowdown Contraction Recovery

Sto

cks

Co

mm

Bo

nd

s

Cash

Bo

nd

s

Sto

cks

Co

mm

Cash

Bo

nd

s

Co

mm

Sto

cks

Cre

dit

s

Cash

Co

mm

Bo

nd

s

Outperform

Underperform

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

Feb 00 Feb 02 Feb 04 Feb 06 Feb 08 Feb 10 Feb 12 Feb 14 Feb 16

World Macro Momentum Indicator Long-Term Average

Real-time indicator of economic momentum

Yield Difference – US equities versus US long-term Treasuries P/E ratio of US equities

-202468

1012141618

Oct

76

Oct

80

Oct

84

Oct

88

Oct

92

Oct

96

Oct

00

Oct

04

Oct

08

Oct

12

Oct

16

Spread UST 10Y yield S&P 500 Dividend yield

%

5

10

15

20

25

Sep 86 Sep 90 Sep 94 Sep 98 Sep 02 Sep 06 Sep 10 Sep 14

S&P 500 NTM PE Average +/- 1 STD

12-month forward P/E

27 Source: Bloomberg, Datastream, Credit Suisse/IDC



• Macroeconomic and political risks are still highest in the UK and the Eurozone, due to Brexit. We are therefore maintaining our negative view on these two

markets over the next 3–6 months.

• We continue to prefer emerging markets, Switzerland, and Australia, amid improved fundamentals.

• In terms of sectors we continue to prefer IT and healthcare, and expect consumer discretionary, consumer staples, industrials and materials to underperform.


October 2016

4 Long Short Equity Equity Markets

MSCI All Country World dividend yield

MSCI All Country World 12M forward EPS growth

MSCI All Country World 12M forward PE Ratio

MSCI All Country World 12M forward EPS revisions





October 2016

4 Long Short Equity Return Drivers

Correlation of US stocks Correlation of Eurozone stocks

US stocks return dispersion and long/short equity performance

* Measured as the standard deviation among S&P 500 index




• Inter-stock correlations stay below average, keeping conditions favorable for stock-picking. Declining return dispersion among stocks was additionally supportive.

• However, we expect greater macro influence on equities as political and macro risks stay high (given imminent Fed rate hike, and US presidential elections).


October 2016


Equity sector performance

Source: Bloomberg, Datastream, I/B/E/S, Credit Suisse/IDC

Equity valuations

Equity performance by country Equity performance by style

30

12.5

13.8

17.4

15.6

14.6

17.4

11.1

15.1

13.9

11.912.0

14.7

10

12

14

16

18

20

22

USA Eurozone UK Switzerland Japan Emerging Markets

Current P/E-Ratio Average P/E-Ratio over last 10Yr



-6

-4

-2

0

2

4

6

8

10

12

14

MSCI W

ORLD

MSCI E

nerg

y

MSCI M

ater

ials

MSCI I

ndus

trials

MSCI C

ons. D

iscre

tiona

ry

MSCI C

ons. S

taple

s

MSCI H

ealth

Car

e

MSCI F

inanc

e

MSCI I

T

MSCI T

eleco

m S

ervs

.

MSCI U

tilitie

s

3M % Change 1M % Change

% in USD

-2

0

2

4

6

8

10

12

14

MSCI W

orld

MSCI E

MU

MSCI S

witzer

land

MSCI U

K

MSCI G

erman

y

MSCI N

. Amer

ica

S&P 500

INDEX

MSCI J

apan

MSCI E

M

MSCI E

M E

ast.

Europ

e

MSCI E

M A

sia

MSCI E

M L

at. A

mer

ica

MSCI B

razil

MSCI C

hina

MSCI I

ndia

MSCI R

ussia

3M % Change 1M % Change

% in USD

QoQ % performance

-5%

0%

5%

10%

15%

20%

Cyc

licals

Defe

nsi

ves

Larg

e C

aps

Sm

all

Caps

Valu

e

Gro

wth

Hig

h Q

ualit

y

Low

Qualit

y

Mom

entu

m

Contr

arian


October 2016


Trading volume and performance of US stocks

Investor sentiment

Implied Volatility: S&P 500 vs. Eurostoxx 50 vs. Nikkei

-60

-40

-20

0

20

40

60

Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

AAII bulls minus bears AAII bulls minus bears (3-weeks moving average)

Bearish signal

Bullish signal

Options skew


'300

'500

'700

'900

1'100

1'300

1'500

1'700

1'900

2'100

Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 Apr 16

1'000

1'200

1'400

1'600

1'800

2'000

2'200

S&P 500 Up Days Volume (20d ma) S&P 500 Down Days Volume (20d ma) S&P 500 Index (r.h.s)

(millions)



10

15

20

25

30

35

40

45

50

Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16 Oct 16

VIX - S&P 500 imp Vol V2X - EuroStoxx50 imp Vol VNKY - Nikkei imp Vol

%


October 2016

4 Long Short Equity Performance Review

Upside / Downside capture ratios

Performance vs. MSCI World Return history

12-month performance vs. MSCI World



• The recent drop in market volatility, declining return dispersion among stocks as well as low inter-stock correlations are supportive for short-term performance of

the style. However while corporate earnings in Q2 were better than expected, the year-on-year growth is still tepid, leaving the market vulnerable, particularly as

valuation is expensive.

• As a result we are expecting limited support from broader equity market beta and now have a neutral outlook for Long/Short equity strategies. Political and

macro risks are not insignificant. Within Long/Short equity we prefer funds with opportunistic or lower net exposure.

-100

0

100

200

300

400

500

600

700


-15

-10

-5

0

5

10

15

Returns: CS Eq. Long Short Index (r.h.s.)CS Eq. Long Short IndexCS Hedge Fund IndexMSCI World Index

Aug 2016Until:

Index Monthly returns in %

58%

-35%22%

-56%-80%

-40%

0%

40%

80%

During positive months of MSCI

AC World

During negative months of MSCI

AC World

% CS Long/Short Equity Index returns as percentage of

MSCI AC World returns


-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16

85

90

95

100

105

110

115

CS Long/Short Equity Index(r.h.s.) MSCI World TR(r.h.s.)

monthly returns in % Index rebalanced (t-12)

6.68% (volatilty) :

(volatilty) :

MSCI World TR:

CS Long Short Equity Index : -2.93%

15.09%

5.02%



Emerging Markets

80

100

120

140

160

180

200

220


CS Emerging Markets Index CS Allhedge Emerging Markets Index

Index



October 2016

AUM of EM hedge funds

26%

1%

14%

3%

55%

1%

Asia (ex Japan) Africa Russia/East Europe

Latin America Multiple EM Middle East

Exposure to Developed equities

Volatility of Emerging Market Strategy Returns Hedge Fund Assets: Emerging Markets

-20

30

80

130

180

230

1991 1994 1997 2000 2003 2006 2009 2012 2015

2%

3%

4%

5%

6%

7%

8%

9%

AUM: Emerging markets

Net capital flows: Emerging markets


USD bn % Assets

5 Emerging Markets Market Exposure

Source: HFR, Bloomberg, Datastream, Credit Suisse/IDC 34



0

5

10

15

20

25

30


Standard deviation of CS Emerging Market Index returns Long-Term Average of Risk

Standard Deviation, in %

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80


36m rolling beta

CS Emerging Market Index net long exposure to MSCI AC World


October 2016

• Recent economic data in EMs has been better, while capital inflows have been strong. Equity valuations of EMs are lower than for developed markets and EMs

should be relatively immune from a potential Brexit related slowdown in UK/ Europe.

• The stabilization in the US dollar index and in commodity prices is also helpful for performance, especially for commodity exporting countries. We upped our view

on the strategy to neutral recently noting attractive opportunities in countries with reform momentum.

• A potential Chinese slowdown and a renewed drop in commodity prices are key risk factors.

5 Emerging Markets Emerging markets Equities

MSCI EM dividend yield

MSCI EM relative earnings sentiment

MSCI EM 12M forward PE Ratio

MSCI EM relative 12M forward EPS revisions





October 2016

EM equity performance relative to Developed Markets EM equities relative regional performance

5 Emerging Markets Return Drivers

EM Risk Sentiment Index EM relative valuation index

70

80

90

100

110

120

130

140

150

160

Sep

13

Jan

14

May

14

Sep

14

Jan

15

May

15

Sep

15

Jan

16

May

16

MSCI World (rebased to 100) MSCI EM (rebased to 100)

Rebased to 100

40

50

60

70

80

90

100

110

120

130

140

Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Sep 16

MSCI Latin America MSCI EM Asia MSCI EM EMEA




-6.0

-4.0

-2.0

0

2.0

4.0

6.0

Sep 96 Sep 98 Sep 00 Sep 02 Sep 04 Sep 06 Sep 08 Sep 10 Sep 12 Sep 14 Sep 16

EM Risk Sentiment Indicator +/-1 Stdev


October 2016

India EPS Revisions Valuation of major markets compared to long-term average

5 Emerging Markets Return Drivers

MSCI Russia forward P/E Ratio vs. EM and EMEA peers Hang Seng Index: Forward P/E ratio vs. long-term average

6

8

10

12

14

16

18

20

22

24

Oct 96 Oct 98 Oct 00 Oct 02 Oct 04 Oct 06 Oct 08 Oct 10 Oct 12 Oct 14

HSI 12M Fwd PE +/- 2 Std Dev +/- 1 Std Dev Average

x

2

4

6

8

10

12

14

16

Sep

06

Sep

07

Sep

08

Sep

09

Sep

10

Sep

11

Sep

12

Sep

13

Sep

14

Sep

15

Sep

16

MSCI RUSSIA MSCI EM MSCI EMEA

12M forward P/E

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Russia China EM India Mexico Brazil

12m Fwd P/E, current %-ile back to 1988

-20

-15

-10

-5

0

5

10

Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15

MSCI India 12M EPS change (3M%) +/- 2 Std Dev +/-1 Std Dev Average





October 2016

CS Emerging Markets Index vs. MSCI World CS Emerging Markets: Table returns

Upside / Downside capture ratios 12-month performance vs. MSCI EM

5 Emerging Markets Performance Review

-100

0

100

200

300

400

500

600


-25

-20

-15

-10

-5

0

5

10

15

20

Returns: CS Emerging Markets Index (r.h.s.) CS Emerging Markets Index CS Hedge Fund Index MSCI World Index

Aug 2016Until:




47%

-31%

36%

-27%

-40%

0%

40%

80%


EM


EM

% CS Emerging Markets returns as percentage of MSCI

EM returns


-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16

70

80

90

100

110

120

130

140

CS Emerging Markets Index(r.h.s.) MSCI EM Index(r.h.s.)


MSCI EM Index :

CS Emerging Markets Index :

9.15%

6.21%

(volatality) : 20.80%

(volatality) : 6.85%



Event Driven

100

120

140

160

180

200

220


CS Event Driven Index CS Allhedge Event Driven Index

Index



October 2016

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

1999 2001 2003 2005 2007 2009 2011 2013 2015

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

DJ CS Hedge Fund Index MSCI World Index

DJ CS Event Driven Index 12-month correlation Event Driven vs MSCI

Return (in %) Correlation

Exposure to Developed Equities

23%

2%

15%

48%

0%

9%3%

Distressed/Restructuring Credit Arbitrage Activists

Special Situations Private Issue Multi-Strategy

Merger Arbitrage

Strategy Decomposition

Correlation vs. MSCI World

6 Broad Event Driven Market Exposure

-100

0

100

200

300

400

500

600

700

800

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

AUM: Event driven Net capital flows: Event driven % of industry assets

USD bn % Assets

Hedge Fund Assets: Event Driven

40 Source: HFR, Bloomberg, Datastream, Credit Suisse/IDC



0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50


36m rolling beta

CS Event Driven Index Index net long exposure to MSCI AC World


October 2016

CS Event Driven Index vs. MSCI World CS Event Driven: Table returns


6 Broad Event Driven Performance Review

Event Driven 12 month performance

-100

0

100

200

300

400

500

600

700


-12

-10

-8

-6

-4

-2

0

2

4

6

Returns: CS Event Driven Index (r.h.s.) CS Event Driven Index CS Hedge Fund Index MSCI World Index

Aug 2016Until:




42%-14%28%

-83%

-120%

-80%

-40%

0%

40%

80%


AC World


AC World

% CS Event Driven Index returns as percentage of MSCI

AC World returns


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%


80

85

90

95

100

105

110

115

120

CS Event Driven Index(r.h.s.) MSCI World TR(r.h.s.)


MSCI World TR (return) :

Event Driven :

6.68%

-5.37%

(volatality):

(volatality) :

15.09%

6.21%


0

100

200

300

400

500

600


CS Merger Arb. Index CS Hedge Fund Index MSCI World Index

Aug 2016Until:



Event Driven: Merger Arbitrage



October 2016

Exposure to Developed Equities Correlation vs. MSCI World

Volatility of Strategy Returns

7 Merger Arbitrage Market Exposure





-10

-5

0

5

10

15

20

25

1991 1994 1997 2000 2003 2006 2009 2012

0.00%

0.50%

1.00%

1.50%

2.00%

AUM: Merger arbitrage

Net capital flows: Merger arbitrage


USD bn % Assets

0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0


Standard deviation of CS Risk Arbitrage returns Long-Term Average of Risk

0

0.05

0.10

0.15

0.20

0.25

0.30


36m rolling beta

CS Merger Arbitrage Index Index net long exposure to MSCI AC World


October 2016

Corporates under pressure to grow top line

7 Merger Arbitrage Return Drivers

M&A Global (proxy)

M&A rolling average deal size vs. S&P 500

M&A Global (proxy)

• The number and the value of M&A transactions globally has slowed down somewhat in 2016. However the opportunity set for merger arbitrage managers

remains sufficiently large and provides a reasonable opportunity set. Meanwhile, deal spreads stay tighter, which is supportive of performance of existing trades.

• Tepid top-line growth, limited capex opportunities, consolidation opportunities in stressed sectors and high corporate cash levels keep the case for M&A growth

intact. We view favorably the low directionality and net exposure of the strategy

0

2

4

6

8

10

12

1980 1985 1990 1995 2000 2005 2010 2015

Global M&A(12m sum), % of market cap

12'000

14'000

16'000

18'000

20'000

22'000

24'000

26'000


MSCI World total sales value

USD bn





0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Nov 82 Nov 86 Nov 90 Nov 94 Nov 98 Nov 02 Nov 06 Nov 10 Nov 14

0

500

1'000

1'500

2'000

2'500

Average deal size 12 month moving average S&P 500 index (rhs)

USD bn Index


October 2016

M&A Asia Pacific (proxy) M&A Emerging Markets (proxy)

M&A North America (proxy)


M&A Western Europe (proxy)





October 2016

Average Deal Premiums Premiums paid


Payment type summary Deal type summary






October 2016

US corporates (except financial sector): cash/total assets


1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

55 59 63 67 71 75 79 83 87 91 95 99 03 07 11 15


in %





October 2016


CS Risk Arbitrage Index vs. MSCI World

7 Merger Arbitrage Performance Review

12-month performance vs. MSCI World

CS Risk Arbitrage: Table returns

Source: HFR, Bloomberg, Datastream, Credit Suisse/IDC 48



Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD

1994 0.57% (0.44%) 1.86% (0.96%) 0.25% 0.18% 0.57% 1.69% 0.38% 0.20% 0.61% 0.26% 5.25%

1995 1.61% 1.88% 0.63% (0.45%) 0.61% 2.07% 1.56% 0.60% 1.14% 0.16% 1.68% (0.16%) 11.90%

1996 1.02% 1.57% 0.63% 2.00% 1.09% 0.28% 1.05% 1.23% 2.15% 0.45% 0.45% 1.12% 13.81%

1997 1.28% 0.22% (0.42%) (1.67%) 1.31% 2.39% 1.21% 0.57% 1.48% 0.02% 1.09% 2.01% 9.84%

1998 (0.54%) 3.81% 2.38% 1.64% 0.23% (0.53%) (0.37%) (6.15%) (0.65%) 2.41% 2.04% 1.55% 5.58%

1999 (1.51%) (1.37%) 2.56% 3.39% 2.47% 1.22% 0.16% 0.80% 2.16% 1.75% 0.52% 0.47% 13.23%

2000 0.15% 3.52% 0.05% 1.81% 0.68% 1.43% 1.58% 1.57% 1.01% 0.35% 0.28% 1.39% 14.69%

2001 1.91% 1.49% 0.33% 0.50% 1.31% (0.43%) 0.68% 1.01% (2.65%) (0.01%) 0.81% 0.67% 5.68%

2002 0.29% (1.22%) 1.00% 0.88% 0.03% (1.17%) (2.73%) (1.23%) (0.56%) 0.52% 0.21% 0.53% (3.46%)

2003 (0.39%) (0.71%) (0.27%) 1.52% 2.56% 0.75% 0.48% 1.16% 0.95% 1.21% 0.42% 1.00% 8.98%

2004 0.83% 0.50% 0.73% (0.58%) 0.44% 0.25% (1.52%) 0.18% 0.63% 0.92% 1.67% 1.32% 5.45%

2005 (0.09%) 0.46% 0.09% (0.54%) 0.32% 0.79% 0.46% 0.60% 0.23% (1.12%) 1.01% 0.85% 3.08%

2006 1.63% 0.58% 0.97% 0.30% (0.15%) 0.20% 0.46% 0.35% 0.22% (0.16%) 3.01% 0.49% 8.15%

2007 0.20% 1.15% 1.29% 2.15% 0.04% (0.00%) 0.43% (0.65%) 3.22% 2.13% (0.80%) (0.63%) 8.77%

2008 (0.10%) 1.26% 1.62% 0.88% (0.18%) (0.12%) (0.39%) (1.16%) (3.49%) (3.06%) (0.02%) 1.60% (3.27%)

2009 0.38% 0.69% 1.65% 0.72% 1.85% 0.89% 1.12% 0.95% 1.60% 0.16% 1.03% 0.38% 12.00%

2010 0.40% 0.30% 0.69% (0.10%) (1.52%) 0.10% 1.61% 0.31% 2.31% (0.62%) (1.44%) 1.14% 3.17%

2011 0.89% 0.79% 0.59% 1.74% (1.05%) (0.04%) (0.77%) (0.92%) (1.63%) 1.91% (0.27%) (0.39%) 0.80%

2012 0.97% 0.92% 0.18% (0.47%) (1.53%) 0.53% (0.51%) 0.52% 0.41% (0.77%) 1.05% 1.51% 2.82%

2013 (0.03%) (0.06%) 0.39% 0.65% 0.80% 0.17% 0.99% 0.01% 0.81% 0.57% 0.10% 0.39% 4.89%

2014 0.49% 0.93% (0.68%) 0.55% 0.56% 1.27% (1.40%) 0.22% (1.49%) (2.35%) 0.57% 0.08% (1.32%)

2015 (0.85%) 1.50% 0.04% 0.81% 1.06% (0.17%) (0.76%) (0.67%) (1.31%) (0.01%) (0.49%) 1.31% 0.42%

2016 0.59% 0.21% 1.31% (0.23%) 0.48% 0.33% 0.56% 1.07% 4.40%

0

100

200

300

400

500

600


CS Merger Arb. Index CS Hedge Fund Index MSCI World Index

Aug 2016Until:


23%

-4%

15%5%

-10%

0%

10%

20%

30%


AC World


AC World

% CS Risk Arbitrage returns as percentage of MSCI AC

World returns


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%


80

85

90

95

100

105

110

115

120

CS Merger Arbitrage Index(r.h.s.) MSCI World TR(r.h.s.)


MSCI World TR :

Merger Arbitrage Index :

6.68%

3.86%

(volatality) :

(volatality) :

15.09%

2.71%



Event Driven: Distressed


0

100

200

300

400

500

600

700

800


CS Distressed Index CS Hedge Fund Index MSCI World Index

Aug 2016Until:



October 2016

Exposure to Developed Equities Correlation vs. MSCI World

Volatility of Strategy Returns

8 Event Driven - Distressed Market Exposure





-20

30

80

130

180

230

1991 1994 1997 2000 2003 2006 2009 2012 2015

3%

4%

5%

6%

7%

8%

9%

10%

AUM: ED distressed debt

Net capital flows: ED distressed debt


USD bn % Assets

0

2

4

6

8

10

12

14

16


Standard Deviation of CS Distressed Index returns Long-Term Average of Risk

6M rolling standard deviation, in %

0.10

0.15

0.20

0.25

0.30

0.35

0.40


36m rolling beta

CS Distressed Debt Index Index net long exposure to MSCI AC World


October 2016

Number of Distressed Issuers Default Rate Forecasts

Source: S&P LCD, IS&P Fixed Income strategy, Bloomberg, Credit Suisse / IDC

Speculative-grade bond spreads: Deviation from average levels Upgrades-to-Downgrades Ratio of US and EUR high yield issuers

8 Event Driven - Distressed Return Drivers • The number of issuers under distressed conditions stay near average levels, suggesting a reasonable opportunity set.

• However, performance of distressed strategies continues to benefit from higher valuations of speculative issuers with the fundamental back-drop improving

recently.

• Default rates are expected to rise modestly, adding to opportunity set. However, low recovery rates are a concern. Given strong performance recently, we stay

neutral, awaiting better entry-points.

51






October 2016

CS Distressed Index: Table returns

8 Event Driven - Distressed Performance Review

CS Distressed Index vs. MSCI World

12-month performance vs. CS High yield Index Upside / Downside capture ratios

Source: Bloomberg, Credit Suisse / IDC 52



0

100

200

300

400

500

600

700

800


CS Distressed Index CS Hedge Fund Index MSCI World Index

Aug 2016Until:


71%

-33%

17%

-46%

-80%

-40%

0%

40%

80%

During positive months of CS High

Yield Index

During negative months of CS High

Yield Index

% CS Distressed Index returns as percentage of CS

High Yield Index returns

Since 1999 Last 12 months85

90

95

100

105

110

115

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16

CS Distressed Index(r.h.s.) CS High Yield Index(r.h.s.)


CS High Yield (return) :

Distressed Debt (return) :

12.47%

0.24%

(volatality):

(volatality):

8.49%

3.48%

Tactical Trading


October 2016

Opportunities

• Volatility levels are expected to stay near average

levels.

• The UK vote to leave the EU increases downside

risks to developed market growth with increased

contagion risks, primarily across the EU. Market

distortions may create opportunities.

• Stabilizing commodity prices may translate into

macro trading opportunities related to commodity

importers vs exporters, particularly in EMs.

• US elections and referendums in some European

countries in the coming months could open

opportunities.

• Changing compositions of stimulus programs in

Eurozone and Japan could have cross-asset

implications

Challenges

• Increased uncertainty over US rate hike

trajectory, with frequently changing rate hike

probabilities

• Increased central bank activity may curb

strong trend-strength.

• Commodities could be in a choppy sideways

trading range for the remainder of the year,

which could limit the opportunity set for

trend-followers.

9 Tactical Trading Opportunities and Challenges

54



Global Macro




October 2016


Volatility of Strategy Returns Hedge Fund Assets: Global Macro

9 Global Macro Market Exposure

-50

-40

-30

-20

-10

0

10

20

30

40

1999 2001 2003 2005 2007 2009 2011 2013 2015

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

CS Hedge Fund Index MSCI World Index

CS Global Macro Index 12-month correlation Global Macro vs MSCI


-50

0

50

100

150

200

250

300

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

AUM: Macro Net capital flows: Macro % of industry assets

USD bn % Assets

Net exposure to developed equities and government bonds




0

2

4

6

8

10

12

14

16


Standard Deviation of CS Global Macro Index returns Long-Term Average of Risk


-0.80

-0.60

-0.40

-0.20

0

0.20

0.40

0.60

0.80

1.00


36m rolling beta

CS Global Macro Index net long exposure to MSCI AC World

CS Global Macro Index net long exposure to Barclays Agg. Bond Index (Unhedged)


October 2016

Policy rates in developed economies

9 Global Macro Return Drivers

• Global macro managers should be able to benefit from a good set of trading opportunities – US elections, BREXIT consequences, the timing of the next Fed

rate hike, the future of unconventional monetary policy in Europe, Japan and elsewhere, the stabilization of commodity and emerging markets to name just a

few. The current market combination of sufficient market liquidity and benign volatility is also supportive.

• We have a positive view on the style and see its tactical nature and low exposure to market directionality as additionally appealing.



0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Feb 05 Feb 07 Feb 09 Feb 11 Feb 13 Feb 15

United States Canada Australia Japan Denmark Eurozone Sweden UK Switzerland

0

2

4

6

8

10

12

14

16

18

20

Aug 05 Aug 07 Aug 09 Aug 11 Aug 13 Aug 15

Brazil Russia Indonesia Turkey India South Africa China Mexico Korea

%

Policy rates in emerging economies


Probability of Fed Funds rate hike by December 2015



October 2016

-200

-150

-100

-50

0

50

100

150

200


US 10Y generic yield - Germany 10Y generic yield

Bps

Correlation between equities, bonds and commodities

9 Global Macro Return Drivers: Equities and Bonds



US vs Germany 10Y spread evolution

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Jun 02 Jun 04 Jun 06 Jun 08 Jun 10 Jun 12 Jun 14 Jun 16

Correlation of CSCB and the S&P 500

Correlation of CSCB and JPM Global Aggregate Bond Index

Correlation of JPM Global Agg. and the S&P 500

6-month rolling correlation between daily returns

10Y Yields in advanced economies

FOMC dots vs. Fed fund futures



-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Sep 16

USA Germany Switzerland UK

%


October 2016

Speculative positioning in major instruments

USD performance before/ after rate hikes EM FX interest rate differential (carry)

9 Global Macro Return Drivers: FX

FX Fair Value vs. EUR

-60

-40

-20

0

20

40

60

S&P 500

2YR T-Note

5YR T-Note

10YR T-Note OIL

COPPERGOLD

SILVEREUR

USDCHF

JPY

30.09.2016 02.09.2016

%




-15

-10

-5

0

5

10

15

20

25

NO

K

JP

Y

SE

K

GB

P

CA

D

US

D

NZ

D

AU

D

CH

F

30-Sep-16

Overvaluation vs. EUR

Undervaluation vs. EUR

Deviation in %


October 2016

Correlation between commodities and equities / bonds

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Jun 02 Jun 04 Jun 06 Jun 08 Jun 10 Jun 12 Jun 14 Jun 16

Correlation between the Credit Suisse Commodity Benchmark and the S&P 500

Correlation between the Credit Suisse Commodity Benchmark and JPM Global Aggregate Bond Index

6-month rolling correlation between daily returns

Cross-commodity correlations

Commodity fair value

-4.0

-3.0

-2.0

-1.0

0

1.0

2.0

Gaso

line

WTI C

rude o

il

Nic

kel

Copper

Bre

nt C

rude o

il

Wheat

US

Nat

ura

l gas

Alu

min

um

Corn Tin

Lead

Gold

BC

OM

Coff

ee

Cotton

Pla

tinum

Silv

er

Pal

ladiu

m

Soyb

eans

Coco

a

Sugar

Zin

c

30-Sep-16 -1 Stdev +1 Stdev

Overvalued

Undervalued

Deviation from fair value in number of standard deviations

9 Global Macro Return Drivers: Commodities

Gold speculative positioning vs price




-20

-10

0

10

20

30

40

50

60

70

Feb 91 Feb 95 Feb 99 Feb 03 Feb 07 Feb 11 Feb 15

30-day avg. pairwise correlation between GSCI sectors (agriculture, energy, industrial metals, preciousmetals)1-year moving average

in %

'900

1'000

1'100

1'200

1'300

1'400

1'500

Oct 13 Feb 14 Jun 14 Oct 14 Feb 15 Jun 15 Oct 15 Feb 16 Jun 16

0

50

100

150

200

250

300

350

Net speculative position (rhs) Gold price

USD/oz 000 contracts


October 2016

CS Global Macro Index vs. MSCI World CS Global Macro: Table returns

Upside / Downside capture ratios 12-month performance vs. MSCI World

9 Global Macro Performance Review

-200

0

200

400

600

800

1000


-15

-10

-5

0

5

10

15

Returns: CS Global Macro Index (r.h.s.) CS Global Macro Index CS Hedge Fund Index MSCI World Index

Aug 2016Until:




33%3%

8%

-27%

-40%

-20%

0%

20%

40%


AC World


AC World

% CS Global Macro Index returns as percentage of

MSCI AC World returns


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%


85

90

95

100

105

110

115

CS Global Macro Index(r.h.s.) MSCI World TR(r.h.s.)


MSCI World TR :

CS Global Macro Index :

6.68%

-2.03%

(volatality) :

(volatality) :

15.09%

4.36%



Managed Futures

100

110

120

130

140

150

160

170

180

190


CS Managed Futures Index CS Allhedge Managed Futures Index

Index



October 2016

Correlation vs. MSCI World Crisis Alpha: Managed Futures

Volatility of strategy returns Hedge Fund Assets: Managed Futures

10 Managed Futures Market Exposure

50

100

150

200

250

300

Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15

CS Managed Futures Index Crisis period CS Managed Futures (w/o Crisis) 3m Treasury yield

Index

-50

-40

-30

-20

-10

0

10

20

30

40

1999 2001 2003 2005 2007 2009 2011 2013 2015

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8


CS Managed Futures Index 12-month correlation Managed Futures vs MSCI


-50

0

50

100

150

200

250

300

1991 1994 1997 2000 2003 2006 2009 2012 2015

2%

4%

6%

8%

10%

12%

14%

16%

AUM: Systematic diversified

Net capital flows: Systematic diversified


USD bn % Assets




0

2

4

6

8

10

12

14

16


Standard Deviation of CS Managed Futures Index Returns Long-Term Average of Risk



October 2016

Directional Strength across major asset classes* Performance of long- and short-term managed futures sub-strategies

30-day GSCI Sector Correlations vs. 1yr mov. average Rolling correlation of USD/ EM FX with US 10Y Treasury yield

-0.8

0.2

1.2

2.2

3.2

4.2

5.2


1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

EMEA-UST ASIA-UST LATAM-UST US 10Y Treasury yield (r.h.s)

Rolling correlation of 10Y US Treasury yield with USD/ EM currency basket in %

10 Managed Futures Return Drivers • With the exception of long-dated US treasuries, trend strength stays at the weakest levels for the year in most financial instruments. This, coupled with low

trading ranges has resulted in limited opportunities for managers over the past couple of months.

• While Chinese data has been better, we believe the Fed may hike in December, which is not fully priced into the markets yet. An eventual repricing could spur

higher volatility levels and directional movement. Brexit risks too are unfolding gradually which may have an impact on GBP assets.

• We view managed futures positively since they are typically less correlated to other strategies and can benefit from an increase in volatility.




Last datapoint: 30.09.2016 * For major traded instruments

-20

-10

0

10

20

30

40

50

60

70

Feb 91 Feb 95 Feb 99 Feb 03 Feb 07 Feb 11 Feb 15

30-day avg. pairwise correlation between GSCI sectors (agriculture, energy, industrial metals, preciousmetals)1-year moving average

in %


Average directional strength across major traded instruments

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16

FX 32.2 27.0 25.9 27.7 24.9 23.3 23.2 17.2 16.6

Commodity Futures 25.1 23.6 25.2 24.9 25.8 27.4 26.4 22.2 18.5

Equity Futures 35.8 33.3 25.7 20.6 19.6 22.3 20.8 21.6 18.5

Bond Futures 26.6 42.2 34.6 19.2 18.2 25.1 25.9 15.5 19.7


October 2016

Directional strength and trading range: Commodity futures

10 Managed Futures Return Drivers

Directional strength and trading range: Currencies


* Minor changes in directional strength reflect historical data changes from the provider




October 2016

Directional strength and trading range: Bond futures

10 Managed Futures Return Drivers

Directional strength and trading range: Equity futures






October 2016

CS Managed Futures Index vs. MSCI World CS Managed Futures: Table returns

36-month rolling performance 12-month performance vs. MSCI World

10 Managed Futures Performance Review

-20

-10

0

10

20

30

40

50

Jan

97

Jan

99

Jan

01

Jan

03

Jan

05

Jan

07

Jan

09

Jan

11

Jan

13

Jan

15

Managed Futures 3 YR Rolling Performance (up)

Managed Futures 3 YR Rolling Performance (down)

3YR rolling performance (in %)



-100

0

100

200

300

400

500

600


-10

-8

-6

-4

-2

0

2

4

6

8

10

Returns: CS Managed Futures Index (r.h.s.)CS Managed Futures IndexCS Hedge Fund IndexMSCI World Index

Aug 2016Until:


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%


85

90

95

100

105

110

115

CS Managed Futures Index(r.h.s.) MSCI World TR(r.h.s.)


MSCI World TR :

CS Managed Futures Index :

6.68%

2.27%

(volatility) :

(volatility) :

15.09%

11.16%

Relative Value


October 2016

Opportunities

• Convertible bonds benefit from the search for

yield. Equity market deltas are reasonable, while

implied volatility levels are comparably attractive.

• ECB purchases of corporate bonds, ABS may

lead to robust issuance and increased

opportunities. Spread widening risks appear more

contained in the Eurozone than elsewhere.

• Since large share of German bonds have become

ineligible for ECB purchases, a potential change

in ECB QE program parameters to address the

‘scarcity issue’ may open attractive opportunities

in beneficiary countries

• Given better fundamental backdrop, the risks of a

very large, detrimental spike in volatility is low,

supportive of arbitrage and market neutral

strategies

Challenges

• After a strong rally across the fixed-income

spectrum, returns may be more idiosyncratic

going forward with reduced tailwinds from

benchmarks

• Liquidity remains a key factor, and

conditions have deteriorated post-Fed hike,

especially in the credit space.

• Limited directionality in equities limit return

expectations of convertible bonds

• Prepayments may rise if US rates continue

to decline for a sustained period.

11 Relative Value Opportunities and Challenges

69



Fixed Income Arbitrage

60

70

80

90

100

110

120

130

140

150

160


CS Fixed Income Arbitrage Index CS Allhedge Fixed Income Arbitrage Index

Index



October 2016

Fixed income volatility

Net exposure to developed equities and government bonds Correlation vs. MSCI World

-50

-40

-30

-20

-10

0

10

20

30

40

1999 2001 2003 2005 2007 2009 2011 2013 2015

-0.4

-0.2

0

0.2

0.4

0.6

0.8

DJ CS Hedge Fund Index MSCI World Index

DJ CS FI Arbitrage Index 12-month correlation FI Arbitrage vs MSCI

Return (in bps) Correlation

11 Fixed Income Arbitrage Market Exposure

Volatility of strategy returns

0

50

100

150

200

250

300

Dec 02 Dec 04 Dec 06 Dec 08 Dec 10 Dec 12 Dec 14

MOVE (FI volatility) Index

Index




0

2

4

6

8

10

12

14

16


Standard Deviation of CS Fixed income Arb. returns Long-Term Average of Risk

-0.20

-0.10

0

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80


36m rolling beta

CS Fixed Income Arbitrage Index Index net long exposure to MSCI AC World

CS Fixed Income Arbitrage Index Index net long exposure to Barclays Agg. Bond Index

(Unhedged)



October 2016

Bond performance by sector

US Aggregate Bond performance by maturity Fixed-income broad benchmarks

11 Fixed Income Arbitrage Fixed-Income Benchmarks

US Aggregate Bond performance by rating







October 2016

11 Fixed Income Arbitrage Return Drivers

• Repricing of Fed rate hike expectations, ECB easing, as well as negative rates in several economies provide opportunities for classical fixed income arbitrage

strategies. The BoJ’s ‘yield curve control’ policy provides an anchor to nominal long-term yields and seeks to dampen market volatility

• The search for yield and continued ECB/BoJ easing is supportive of credits.

• We are positive on Fixed-Income Arbitrage strategies, preferring corporate arbitrage and structured credit related styles over classic fixed income arbitrage funds

which are vulnerable to a potential volatility spike.

73 Source: IS Fixed Income Strategy, Bloomberg, Credit Suisse/IDC

US Yield Curve FOMC projections vs. futures curve

Investment grade bonds fair value 2Y Government Bond yields in advanced economies



-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16

USA Germany UK Japan Switzerland

Yield in %

-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

3.0


10Yr-2Yr Yield Spread (US Treasuries)

%


October 2016

30Y mortgage rates Home prices across major US cities

Refinancing applications vs. 30Y mortgage rates US speculative yield vs. US 10Y yield

11 Fixed Income Arbitrage Return Drivers

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2000 2002 2004 2006 2008 2010 2012 2014 2016

30 Year Mortgage Current Coupon (FNMA)

Yield / Bid




-20

-15

-10

-5

0

5

10

Aug 06 Aug 07 Aug 08 Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Aug 16

US existing home prices (%YOY)


October 2016

CS Fixed Income Arb. Index vs. MSCI World CS Fixed Income Arbitrage: Table returns

Upside / Downside capture ratios 12- month performance vs. Barclays Global Agg.

11 Fixed Income Arbitrage Performance Review

-100

0

100

200

300

400

500

600


-15

-10

-5

0

5

Returns: CS Fixed Income Arb. Index (r.h.s.)CS Fixed Income Arb. IndexCS Hedge Fund IndexMSCI World Index

Aug 2016Until:




42% 12%2%

27%

0%

40%

80%

During positive months of Barclays

Global Agg.

During negative months of Barclays

Global Agg.

% CS Fixed Income Arbitrage Index returns as

percentage of Barclays Global Agg.Index returns


-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%


92

94

96

98

100

102

104

106

108

CS Fixed Income Arbitrage Index(r.h.s.) Barclays Global Aggregate Total Return(r.h.s.)


Barclays Global Agg. (return) :

Fixed Income Arbitrage :

7.19%

1.20%

(volatality) :

(volatality) :

2.25%

2.49%



Convertible Arbitrage

60

70

80

90

100

110

120

130

140

150

160

Sep 04 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15

CS Convertible Arbitrage Index CS Allhedge Convertible Arbitrage Index

Index



October 2016


12 Convertible Arbitrage Market Exposure

-60

-40

-20

0

20

40

60

1999 2001 2003 2005 2007 2009 2011 2013 2015

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1.0


CS Conv. Arbitrage Index 12-month correlation Conv. Arbitrage vs MSCI


Net exposure to developed equities and HY bonds

Volatility of strategy returns Convertible Index

80

100

120

140

160

180

200

Sep

11

Mar

12

Sep

12

Mar

13

Sep

13

Mar

14

Sep

14

Mar

15

Sep

15

Mar

16

Sep

16

ML Global 300 Convertible (TR) Barclays Global Aggregate (TR)

MSCI World (TR)




0

2

4

6

8

10

12

14

16

18

20


Standard Deviation of CS Convertible Arbitrage Index Returns Long-Term Average of Risk


0

0.20

0.40

0.60

0.80

1.00

1.20


36m rolling beta

CS Convertible Arbitrage Index Index net long exposure to MSCI AC World

CS Convertible Arbitrage Index Index net long exposure to Barclays Global HY Bond Index


October 2016

Global convertible bond issuance

12 Convertible Arbitrage Return Drivers

• The valuation case for convertible bonds is attractive given lower implied volatilities and greater yield differentials compared to traditional bonds. Equity market

delta is at reasonable levels. The search for yield is supportive for convertible bond valuations.

• However given the strong rally recently and limited return expectations from equities, we prefer to stay neutral and wait for better entry opportunities.

78 Source: Bloomberg, Thomson Reuters, Credit Suisse/IDC

Convertible bond index performance

Convertible bond index implied volatility YTM differentials between convertible bonds and aggregate

bonds





October 2016

Convertible bond index equity sensitivity (delta)

12 Convertible Arbitrage Return Drivers




October 2016

12 Convertible Arbitrage Performance Review


Performance vs. MSCI World

12-month performance vs. Thomson Reuters Convert. Index

CS Convertible Arb.: Table returns



45%

-13%

49%

-25%-40%

0%

40%

80%

During positive months of Global

Convertible Index

During negative months of Global

Convertible Index

% CS Convertible Arbitrage Index returns as % of

Thomson Reuters Global Convertible Index returns


-100

0

100

200

300

400

500

600


-15

-10

-5

0

5

10

Returns: CS Convertible Arb. Index (r.h.s.)CS Convertible Arb. IndexCS Hedge Fund IndexMSCI World Index

Aug 2016Until:


85

90

95

100

105

110

115

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%


CS Convertible Arbitrage Index (r.h.s) Thomson Reuters Global Convertible (r.h.s)


CS Convertible Arbitrage Index

Thomson Reuters Global Convertible

Return: -0.05% / Standard Dev.: 4.28%

Return: -3.21% / Standard Dev.: 9.47%



Equity Market Neutral

70

80

90

100

110

120

130

140


CS Equity Market Neutral Index CS Allhedge Equity Market Neutral Index

Index



October 2016

-10

0

10

20

30

40

50

60

1991 1994 1997 2000 2003 2006 2009 2012 2015

1%

3%

5%

7%

9%

AUM: Equity market neutral

Net capital flows: Equity market neutral


USD bn % Assets

Net exposure to developed equities

-50

-40

-30

-20

-10

0

10

20

30

40

1999 2001 2003 2005 2007 2009 2011 2013 2015

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1.0


CS Eq. Market Neutral Index 12-month correlation Market Neutral vs MSCI


13 Equity Market Neutral Market Exposure


Hedge Fund Assets: Equity Market Neutral S&P 500 inter-stock correlations




0

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50


36m rolling beta

CS Equity Market Neutral Index Index net long exposure to MSCI AC World


October 2016

CS Equity Market Neutral Index vs. MSCI World CS Equity Market Neutral: Table returns

13 Equity Market Neutral Performance Review

Upside / Downside capture ratios 12-month performance vs. MSCI World



• Very low net exposure to broad equity indices enables much lower drawdowns and more uncorrelated returns. The currently low inter-stock correlations are

supportive for the strategy.

• Volatility looks set to remain close to average levels and a detrimental volatility spike seems unlikely at this stage. We thus have a positive on the strategy.

24%

-13%

6%

-24%-30%

-20%

-10%

0%

10%

20%

30%


AC World


AC World

% CS Equity Market Neutral Index returns as percentage

of MSCI AC World returns


-100

0

100

200

300

400

500

600


-50

-40

-30

-20

-10

0

10

Returns: CS Eq. Market Neutral Index (r.h.s.) CS Eq. Market Neutral Index CS Hedge Fund Index MSCI World Index

Aug 2016Until:


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%


85

90

95

100

105

110

115

CS Market Neutral Index(r.h.s.) MSCI World TR(r.h.s.)


MSCI World return :

Market Neutral return :

6.68%

-2.03%

(volatility) :

(volatility) :

15.09%

4.18%

Appendix


October 2016

14 Appendix Global Activity

Global economy – Inflation and interest rates

Inflation forecasts Inflation: Current vs. averages

Rates expectations (derived from OIS) 5-year real rates

85 Source: PMI Premium, Bloomberg, Datastream, Credit Suisse/IDC




-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

Eur

ozon

e

Fra

nce

Ger

man

y

Italy

Spa

in

Uni

ted

Kin

gdom

Sw

itzer

land

Uni

ted

Sta

tes

Can

ada

Japa

n

Aus

tral

ia

Current inflation 7Y historical avg.

-3

-2

-1

0

1

2

3

4

5

6

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 18

USA Euro area USA forecast Eurozone forecast

%YoY

-3

-2

-1

0

1

2

3

4

5

Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16

5Y EM real rates 5Y US real rates 5Y G3 real rates

5Y real rates (in%)

-60

-40

-20

0

20

40

60

Fed ECB BoE SNB BoJ BoC RBA RBNZ

Expected change in short-term interest rates over 12 months, current

7 days ago

1 month ago

basis points*


October 2016


Global economy – GDP and inflation

Forecast GDP 2016 Forecast GDP 2017

Forecast Inflation 2016 Forecast Inflation 2017

86 Source: Credit Suisse Macro Research Credit Suisse/IDC



October 2016


US homebuilder confidence and housing starts US car sales

Unemployment rates US consumer confidence

0

40

80

120

160

2000 2002 2004 2006 2008 2010 2012 2014 2016

40

60

80

100

120

US Consumer Confidence, Conference Board US U Michigan Consumer Confidence Index, rhs

Index Index

0

5

10

15

20

25

30

1990 1994 1998 2002 2006 2010 2014

%

Spain

Greece

USA

Switzerland

Germany




8

10

12

14

16

18

20

22

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

US car sales (monthly) US car sales (3mma)

in million units


US economy


October 2016


Eurozone PMIs Eurozone IP momentum

Eurozone unemployment rates Eurozone new car registrations

25

30

35

40

45

50

55

60

65

Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16

Germany France Italy Spain

Index

600

700

800

900

1'000

1'100

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-10

-5

0

5

10

15

3M/3M growth rate (rhs) New passenger car registrations (Eurozone)

1'000 units % 3M/3M

-2.0

-1.0

0

1.0

2.0

3.0

2010 2011 2012 2013 2014 2015 2016

Germany France Italy Spain Netherlands Austria Others Eurozone

% QoQ

0

5

10

15

20

25

30

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Eurostat Unemployment Eurozone Germany Unemployment Rate SA

Unemployment Rate France Unemployment Rate Spain

%




Eurozone


October 2016

14 Appendix Correlations among Hedge Fund Strategies

Correlations among Hedge Fund Strategies (Broad)



Past 10Y Returns CorrelationsCS Hedge

Fund

CS

Long/Shor

t Equity

CS

Emerging

Market

CS Global

Macro

CS

Managed

Futures

CS Merger

Arbitrage

CS

Distressed

CS

Convert.

Arbitrage

CS Market

Neutral

CS Fixed

Income

Arbitrage

CS Multi-

strategy

CS Short

bias

Bonds

(Barclays

Global

Aggregate)

Equities

(MSCI AC

World)

CS Hedge Fund 1.00

CS Long/Short Equity 0.92 1.00

CS Emerging Market 0.89 0.87 1.00

CS Global Macro 0.70 0.53 0.60 1.00

CS Managed Futures 0.29 0.17 0.12 0.54 1.00

CS Merger Arbitrage 0.68 0.70 0.68 0.46 0.07 1.00

CS Distressed Debt 0.89 0.81 0.78 0.44 0.02 0.60 1.00

CS Convertible Arbitrage 0.77 0.67 0.76 0.52 -0.07 0.55 0.73 1.00

CS Market Neutral 0.42 0.29 0.26 0.04 -0.04 0.20 0.43 0.20 1.00

CS Fixed Income Arbitrage 0.73 0.59 0.70 0.49 -0.07 0.46 0.69 0.86 0.36 1.00

CS Multi-strategy 0.93 0.84 0.84 0.57 0.11 0.62 0.86 0.85 0.44 0.79 1.00

CS Dedicated Short bias -0.55 -0.66 -0.58 -0.14 0.05 -0.44 -0.57 -0.38 -0.21 -0.36 -0.46 1.00

Bonds (Barclays Global Aggregate) 0.29 0.27 0.42 0.38 0.20 0.51 0.14 0.22 0.00 0.22 0.18 -0.17 1.00

Equities (MSCI AC World) 0.80 0.87 0.84 0.38 0.02 0.66 0.75 0.63 0.33 0.60 0.72 -0.77 0.43 1.00


October 2016

Risk warning Every investment involves risk, especially with regard to fluctuations in value and return. If an investment is denominated in a currency other than your base currency, changes in the rate of exchange may have an adverse effect on value, price or income. For a discussion of the risks of investing in the securities mentioned in this document, please refer to the following Internet link: https://research.credit-suisse.com/riskdisclosure This document may include information on investments that involve special risks. You should seek the advice of your independent financial advisor prior to taking any investment decisions based on this document or for any necessary explanation of its contents. Further information is also available in the information brochure “Special Risks in Securities Trading” available from the Swiss Bankers Association.

Past performance is not an indicator of future performance. Performance can be affected by commissions, fees or other charges as well as exchange rate fluctuations.

Financial market risks

Historical returns and financial market scenarios are no guarantee of future performance. The price and value of investments mentioned and any income that might accrue could fall or rise or fluctuate. Past performance is not a guide to future performance. If an investment is denominated in a currency other than your base currency, changes in the rate of exchange may have an adverse effect on value, price or income. You should consult with such advisor(s) as you consider necessary to assist you in making these determinations. Investments may have no public market or only a restricted secondary market. Where a secondary market exists, it is not possible to predict the price at which investments will trade in the market or whether such market will be liquid or illiquid.

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Where this document relates to emerging markets, you should be aware that there are uncertainties and risks associated with investments and transactions in various types of investments of, or related or linked to, issuers and obligors incorporated, based or principally engaged in business in emerging markets countries. Investments related to emerging markets countries may be considered speculative, and their prices will be much more volatile than those in the more developed countries of the world. Investments in emerging markets investments should be made only by sophisticated investors or experienced professionals who have independent knowledge of the relevant markets, are able to consider and weigh the various risks presented by such investments, and have the financial resources necessary to bear the substantial risk of loss of investment in such investments. It is your responsibility to manage the risks which arise as a result of investing in emerging markets investments and the allocation of assets in your portfolio. You should seek advice from your own advisers with regard to the various risks and factors to be considered when investing in an emerging markets investment.

Alternative investments

Hedge funds are not subject to the numerous investor protection regulations that apply to regulated authorized collective investments and hedge fund managers are largely unregulated. Hedge funds are not limited to any particular investment discipline or trading strategy, and seek to profit in all kinds of markets by using leverage, derivatives, and complex speculative investment strategies that may increase the risk of investment loss. Commodity transactions carry a high degree of risk and may not be suitable for many private investors. The extent of loss due to market movements can be substantial or even result in a total loss. Investors in real estate are exposed to liquidity, foreign currency and other risks, including cyclical risk, rental and local market risk as well as environmental risk, and changes to the legal situation.

Interest rate and credit risks

The retention of value of a bond is dependent on the creditworthiness of the Issuer and/or Guarantor (as applicable), which may change over the term of the bond. In the event of default by the Issuer and/or Guarantor of the bond, the bond or any income derived from it is not guaranteed and you may get back none of, or less than, what was originally invested. Volatility Volatility is a measure for variation of price of a financial instrument. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realized. .

90

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Please contact your Credit Suisse representative for more information

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October 2016

Investment Strategy Department

Investment Strategists are responsible for multi-asset class strategy formation and subsequent implementation in CS’s discretionary and advisory businesses. If shown, Model Portfolios are provided for illustrative purposes only. Your asset allocation, portfolio weightings and performance may look significantly different based on your particular circumstances and risk tolerance. Opinions and views of Investment Strategists may be different from those expressed by other Departments at CS. Investment Strategist views may change at any time without notice and with no obligation to update. CS is under no obligation to ensure that such updates are brought to your attention. From time to time, Investment Strategists may reference previously published Research articles, , including recommendations and rating changes collated in the form of lists. All Research articles and reports detailing the recommendations and rating changes for companies and/or individual financial instruments are available on the following internet link: https://investment.credit-suisse.com For information regarding disclosure information on Credit Suisse Investment Banking rated companies mentioned in this report, please refer to the Investment Banking division disclosure site at:

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