1. WINTER 2003/04
HEDGE FUND
INVESTMENTS GROUP
AN INTRODUCTION FOR
INSTITUTIONAL INVESTORS
KEY POINTS
• CSAM’s Hedge Fund Investments Group (HFIG) is
one of the leading institutional managers of funds of
hedge funds globally, with approximately $5 billion in
assets under management, over 30 actively managed
portfolios and investment in 150-200 individual
hedge fund managers.
• CSAM has been developing specific solutions for
challenges intrinsic to hedge funds—issues such as
transparency, liquidity and leverage—since 1994.
• A major portion of the value added by HFIG is in its
ability to combine strategies and managers in order
to achieve each fund-of-hedge-fund portfolio’s
defined risk and return objectives.
• The HFIG investment process incorporates three
critical steps: strategy allocation, manager selection
and risk management.
This overview of Credit Suisse Asset Management’s fund of hedge funds
investments capabilities is for informational purposes only and does not
constitute an offer of any interest in any fund or any security or any investment
advisory services. The information contained herein is as of June 30, 2003
unless otherwise indicated.
2. 2
THE HEDGE FUND INVESTMENTS GROUP
Credit Suisse Asset Management, LLC (“CSAM”) is the institutional and mutual fund asset management arm
of Credit Suisse First Boston, which is part of Credit Suisse Group, one of the world's largest financial
organizations. CSAM provides a broad array of investment products and portfolio management services to
institutional and private clients in fixed income, equities, balanced accounts, alternative investments,
derivatives and advisory assets. It possesses a unique blend of size, global reach and capabilities, and
operates in three key regions: the Americas, Europe and Asia Pacific.
CSAM’s Hedge Fund Investments Group (HFIG) was formally created in 2003 by consolidating the expertise,
resources and methodologies of three predecessor groups to construct a world-class platform for the
development and management of fund-of-hedge-fund portfolios. The predecessor groups included:
1. A group headed by Thomas Gimbel that initially offered funds of hedge funds at Donaldson, Lufkin and
Jenrette (DLJ)’s Asset Management Group in 1994 (Credit Suisse Group purchased DLJ in 2000);
2. Credit Suisse First Boston’s Fund-Linked Products Group, headed by James Vos, which initially offered
principal-protected fund-of-hedge-fund products in 1998; and
3. A team that initially offered funds of hedge funds at Garantia, the Brazilian investment bank, in 1994
(Credit Suisse Group purchased Garantia in 1998).
HFIG is one of the leading institutional managers of funds of hedge funds globally, with approximately
$5 billion in assets under management, over 30 actively managed portfolios and investments in 150-200
individual hedge fund managers.
CHART 1. ORGANIZATIONAL STRUCTURE OF CSAM’S HEDGE FUND INVESTMENTS GROUP
Source: Credit Suisse Asset Management, LLC
INVESTING IN FUNDS OF HEDGE FUNDS
WITH CSAM
Head of Product
Development,
Alternative Investments
James Vos
HFIG Co-Head
Thomas Gimbel
HFIG Co-Head
Strategies
Advisory
Committee
CEO,
Alternative Investments
Risk ManagementManager Research
Portfolio
Construction
Strategy Analysis
10 professionals 5 professionals 3 professionals 9 professionals 9 professionals
Quantitative and
Index Management
Middle Office Investor Relations
Marketing
Reporting
HFIG is one of the
leading institutional
managers of funds of
hedge funds globally,
with approximately
$5 billion in assets
under management,
over 30 actively
managed portfolios
and investments
in 150-200 individual
hedge fund managers.
3. 3
THE CSFB/TREMONT HEDGE FUND INDEX
The CSFB/Tremont Hedge Fund Index* is one of the financial industry's leading benchmarks of hedge fund
performance. Established in 1999 as a joint venture between Credit Suisse First Boston and Tremont
Advisers, the Index tracks approximately 450 funds representing more than $200 billion in investor capital--
roughly a third of all hedge fund assets believed to be in existence. It is the first asset (i.e., capitalization)-
weighted hedge fund index, an important distinction versus unweighted hedge fund indices in that it allows
the CSFB/Tremont Hedge Fund Index to capture the weighted performance of capital invested in the hedge
fund universe.
Using the Tremont TASS database, the CSFB/Tremont Hedge Fund Index comprises ten sub-indices
tracking specific hedge fund investment strategies. Index performance data date back to January 1994,
the inception date of the TASS database, and are available on Bloomberg, Reuters and the Internet
(i.e., at www.hedgeindex.com).
Qualified investors have the opportunity to invest in passive index-tracking and Investable Index products
through Credit Suisse First Boston and its affiliates. These products allow passive exposure to the world of
hedge funds, thereby avoiding the risks normally associated with manager selection and fund valuation.
WHY CSAM?
The following are among the fundamental advantages that CSAM offers investors in funds of hedge funds:
Extensive industry experience. Unlike the many firms in the fund-of-hedge-fund business that have
started up only recently, CSAM and its predecessor organizations have been creating and managing fund-of-
hedge-fund portfolios since 1994. The co-heads of HFIG, James Vos and Thomas Gimbel, and several
other HFIG professionals, have been involved with the selection of hedge fund investments and the
construction of hedge fund portfolios during much of that time. Given the comparative newness of the
hedge fund industry in its current form, such experience is both unusual and advantageous.
Resources of Credit Suisse Group. As part of one of the world’s largest financial organizations, HFIG
utilizes existing Credit Suisse Group resources that other fund-of-hedge-fund managers can neither access
nor replicate. These resources include wide-ranging and experienced trading talent from Credit Suisse First
Boston that provides our investment professionals with unparalleled insight into financial markets, trading
conditions and security valuations; and a commitment to quality in the form of people, technology and
controls that small boutiques simply cannot match.
Global perspective. Credit Suisse Group currently operates in over 50 countries worldwide. HFIG is in
contact with these locations on an ongoing basis in order to identify new managers in untapped hedge fund
markets and provide on-the-ground intelligence about local market conditions. Consequently, many of our
funds of hedge funds have a significant allocation to non-U.S. managers, with several portfolios dedicated to
them exclusively.
Strength of investment and risk management processes. As we will describe in considerable detail,
HFIG brings a disciplined and practiced investment methodology to the creation and management of its
portfolios. This methodology is permeated throughout by an emphasis on risk management at all stages of
manager due diligence and portfolio management.
Access to established and emerging managers. As a result of its professionals’ longstanding ties within
the hedge fund business, HFIG is currently investing in over 100 individual managers that are closed to
assets from new investors. The combination of these relationships and the extensive network of contacts
generated through Credit Suisse Group helps HFIG versus its peers with respect to developing information
on and gaining access to newer, emerging managers. HFIG is thus frequently able to begin working with
newer managers before they become well-known in the hedge fund community.
Deep operational capabilities. Given its sizable asset pool and lengthy experience with investors, HFIG is
well-positioned to manage the operational and business side of the fund-of-hedge-fund business. This is an
area in which even the best-intentioned fund-of-hedge-fund groups have encountered meaningful obstacles.
HFIG has at its disposal the extensive legal/compliance, accounting and client service resources of the
broader CSAM organization to provide investors with high-quality reporting and service.
Unlike the many firms
in the fund-of-hedge-
fund business that
have started up only
recently, CSAM and
its predecessor
organizations have
been creating and
managing fund-of-
hedge-fund portfolios
since 1994.
4. 4
Ability to customize portfolios to meet client objectives. HFIG offers consulting and hedge fund
investment advisory services for institutional investors seeking to allocate approximately $50 million to a
fund-of-hedge-fund portfolio. For such investors, HFIG may create a customized portfolio specifically tailored
to their risk and return objectives and unique constraints. The portfolio is subject to all of the processes
employed for our existing commingled funds of hedge funds, with the added benefit of management to a
single investor’s goals and requirements. Reporting and portfolio reviews may be customized to investor
specifications, and liquidity terms may be targeted to match institutional requirements. Fees are negotiable
and will reflect the significant mandate size of the client.
OUR INVESTMENT PROCESS
The use of non-traditional strategies in the hedge fund universe means that issues such as transparency,
liquidity and leverage present an intrinsic set of challenges to investors that differ from those found in
traditional asset classes. CSAM has been developing specific solutions for such challenges since 1994.
As shown in Chart 2, our investment process is multi-faceted and dynamic.
CHART 2. THE HFIG FUND-OF-HEDGE-FUND INVESTMENT PROCESS
Source: Credit Suisse Asset Management, LLC
PORTFOLIO CONSTRUCTION
For a fund-of-hedge-fund manager such as HFIG, the construction of portfolios—via the key steps of
strategy allocation, manager selection and risk management—is a complicated task whose ultimate goal is
the optimal blend and synchronization of many moving parts. Investors who have invested directly in
underlying hedge funds (rather than as part of a fund-of-hedge-fund approach) often find that their objectives
fail to be achieved not because of poor selection of managers, but because their mix of managers is
unbalanced in terms of strategies and correlations. A major portion of the value potentially added by HFIG is
thus its ability to combine strategies and managers in order to achieve each fund-of-hedge-fund portfolio’s
defined risk and return objectives.
Each of the portfolios that HFIG manages is assigned to the corresponding sector team member (see next
section) for day-to-day supervision, subject to the oversight of HFIG’s Investment Committee. Each portfolio
has specific objectives and constraints that are set forth in a Risk Guidelines and Targeted Portfolio
Characteristics document. The initial document and any subsequent changes to it must be approved by the
Investment Committee. Within the indicated strategy ranges, the portfolio rebalancer is required to consult
with and defer to the other sector teams when selecting managers within each strategy.
A major portion of
the value potentially
added by HFIG is its
ability to combine
strategies and
managers in order to
achieve each fund-of-
hedge-fund portfolio’s
defined risk and
return objectives.
PORTFOLIO CONSTRUCTION
PORTFOLIO MANAGEMENT
Portfolio
Objectives
Strategy
Allocation
Manager
Selection
Risk
Management
Dynamic strategy rebalancing
Termination and replacement
Monitoring and transparency
Global
Macro
Event-
Driven
Equity
Market-Neutral
Convertible
Arbitrage
Multi-
Strategy
Long/Short
Equity
MGR. K
MGR. J
MGR. E
MGR. F
MGR. D
MGR. G
MGR. H
MGR. I
MGR. C
MGR. B
MGR. A
5. 5
Step 1: Strategy allocation. Many in the hedge fund industry have a perspective that can be characterized
as “manager-centric.” In other words, they believe that choosing successful individual managers will
automatically lead to outperformance at the portfolio level. This approach, however, ignores the vital role that
strategy allocation plays in achieving fund-of-hedge-fund portfolio objectives. Having an overweight
allocation to well-run individual funds, after all, is unlikely to result in success if the individual funds utilize
strategies that are decidedly out of favor or face other obstacles.
We note in this context that the hedge fund universe is often misunderstood and mistakenly treated as a
single asset class. On the contrary, hedge funds may be categorized into at least ten distinct strategies,
each with investment characteristics that are quite dissimilar from each other. As a result, fund-of-hedge-
fund managers must pay close attention to strategy allocation, depending on the risk/return profile they seek
to achieve. Chart 3 demonstrates this point visually by illustrating the rotation of annual performance
leadership among strategies from 1994 through 2002.
The significant differences among hedge fund strategies—and the historical volatility in their annual returns—
underscore the importance of strategy diversification and attention to strategy weightings within a fund-of-
hedge-fund portfolio. HFIG recognizes the need for strategy-specific expertise, and has therefore organized
its investment team into strategy specialists known as sector team members. They interact extensively with
individual managers in their respective sectors (i.e., strategies) and thus, for each strategy, become intimately
familiar with current opportunities, risks, trades and flow activity. In the process, they enable HFIG to develop
a critical bottom-up view on each strategy.
Top-down input is added to the mix by a Strategies Advisory Committee consisting of six high-level traders
drawn from Credit Suisse Group’s proprietary trading desks worldwide. These traders provide market
insights that are not necessarily available to the hedge fund industry in general, and allow our sector
managers to approach the strategies and individual managers they cover with an enhanced understanding
of marketplace conditions.
HFIG recognizes
the need for strategy-
specific expertise, and
has therefore organized
its investment team into
strategy specialists
known as sector
team members.
CHART 3. THERE IS A HIGH DEGREE OF VARIABILITY AMONG THE TOP-PERFORMING HEDGE FUND STRATEGIES FROM YEAR TO
YEAR (Annual returns of sub-indices within the CSFB/Tremont Hedge Fund Index, 1994-2002)
Source: CSFB Tremont Index, LLC
CSFB/Tremont
Dedicated Short Bias
14.91
CSFB/Tremont
Global Macro
30.67
CSFB/Tremont
Emerging Markets
34.50
CSFB/Tremont
Global Macro
37.11
CSFB/Tremont
Managed Futures
20.64
CSFB/Tremont
Long/Short Equity
47.23
CSFB/Tremont
Convertible Arbitrage
25.64
CSFB/Tremont
Global Macro
18.28
CSFB/Tremont
Managed Futures
18.33
1994 1995 1996 1997 1998 1999 2000 2001 2002
CSFB/Tremont
Emerging Markets
12.51
CSFB/Tremont
Long/Short Equity
23.03
CSFB/Tremont
Global Macro
25.58
CSFB/Tremont
Emerging Markets
26.59
CSFB/Tremont
Long/Short Equity
17.18
CSFB/Tremont
Emerging Markets
44.82
CSFB/Tremont
Dedicated Short Bias
15.76
CSFB/Tremont
Convertible Arbitrage
14.58
CSFB/Tremont
Dedicated Short Bias
18.14
CSFB/Tremont
Managed Futures
11.95
CSFB/Tremont
Event Driven
18.34
CSFB/Tremont
Event Driven
23.06
CSFB/Tremont
Long/Short Equity
21.46
CSFB/Tremont
Equity Market Neutral
13.31
CSFB/Tremont
Event Driven
22.26
CSFB/Tremont
Equity Market Neutral
14.99
CSFB/Tremont
Event Driven
11.50
CSFB/Tremont
Global Macro
14.66
CSFB/Tremont
Event Driven
0.75
CSFB/Tremont
Convertible Arbitrage
16.57
CSFB/Tremont
Convertible Arbitrage
17.87
CSFB/Tremont
Event Driven
19.96
CSFB/Tremont
Global Macro
-3.64
CSFB/Tremont
Convertible Arbitrage
16.04
CSFB/Tremont
Global Macro
11.67
CSFB/Tremont
Equity Market Neutral
9.31
CSFB/Tremont
Equity Market Neutral
7.42
CSFB/Tremont
Fixed Income Arbritage
0.31
CSFB/Tremont
Fixed Income Arbitrage
12.50
CSFB/Tremont
Long/Short Equity
17.12
CSFB/Tremont
Equity Market Neutral
14.83
CSFB/Tremont
Convertible Arbitrage
-4.40
CSFB/Tremont
Equity Market Neutral
15.33
CSFB/Tremont
Event Driven
7.26
CSFB/Tremont
Fixed Income Arbritage
8.04
CSFB/Tremont
Emerging Markets
7.36
CSFB/Tremont
Equity Market Neutral
-2.00
CSFB/Tremont
Equity Market Neutral
11.04
CSFB/Tremont
Equity Market Neutral
16.60
CSFB/Tremont
Convertible Arbitrage
14.48
CSFB/Tremont
Event Driven
-4.87
CSFB/Tremont
Fixed Income Arbritage
12.11
CSFB/Tremont
Fixed Income Arbritage
6.29
CSFB/Tremont
Emerging Markets
5.84
CSFB/Tremont
Fixed Income Arbritage
5.75
CSFB/Tremont
Global Macro
-5.72
CSFB/Tremont
Managed Futures
-7.10
CSFB/Tremont
Fixed Income Arbritage
15.93
CSFB/Tremont
Fixed Income Arbritage
9.34
CSFB/Tremont
Dedicated Short Bias
-6.00
CSFB/Tremont
Global Macro
5.81
CSFB/Tremont
Managed Futures
4.24
CSFB/Tremont
Managed Futures
1.90
CSFB/Tremont
Convertible Arbitrage
4.05
CSFB/Tremont
Convertible Arbitrage
-8.07
CSFB/Tremont
Dedicated Short Bias
-7.35
CSFB/Tremont
Managed Futures
11.97
CSFB/Tremont
Managed Futures
3.12
CSFB/Tremont
Fixed Income Arbritage
-8.16
CSFB/Tremont
Managed Futures
-4.69
CSFB/Tremont
Long/Short Equity
2.08
CSFB/Tremont
Dedicated Short Bias
-3.58
CSFB/Tremont
Event Driven
0.16
CSFB/Tremont
Long/Short Equity
-8.10
CSFB/Tremont
Emerging Markets
-16.91
CSFB/Tremont
Dedicated Short Bias
-5.48
CSFB/Tremont
Dedicated Short Bias
0.42
CSFB/Tremont
Emerging Markets
-37.66
CSFB/Tremont
Dedicated Short Bias
-14.22
CSFB/Tremont
Emerging Markets
-5.52
CSFB/Tremont
Long/Short Equity
-3.65
CSFB/Tremont
Long/Short Equity
-1.60
6. 6
The result of these bottom-up and top-down inputs is a dynamic and continuing reassessment of the
outlooks for individual strategies. Based on a combination of their own due diligence and a quarterly meeting
with the Strategies Advisory Committee and the Investment Committee, sector team members are required to
formally adopt an outlook for their strategy on a quarterly basis. The Investment Committee reviews these
outlooks and responds with target weightings for strategies across various portfolios.
For multi-strategy portfolios, these weightings are compared to the current weightings of the CSFB/Tremont
Hedge Fund Index to determine whether HFIG is consciously adopting an over- or underweight stance for
each strategy versus the Index. For single-strategy portfolios, the sector team members will decompose the
Index’s corresponding sub-index into further categories to compare weightings.
CHART 4. THE CSAM STRATEGY ALLOCATION PROCESS
Source: Credit Suisse Asset Management, LLC
Step 2: Manager selection. Once we have allocated portfolio assets to strategies, we then select individual
managers for each strategy. Unlike traditional asset fund managers, whose performance deviation from that of
an index-based benchmark tends to be relatively small, the dispersion of returns among hedge fund managers
is much wider. As a result, manager selection is a key driver of investment returns in funds of hedge funds.
CHART 5. THE WIDE DISPERSION WITHIN STRATEGY-SPECIFIC RETURNS MEANS THAT MANAGER
SELECTION IS CRITICAL TO SUCCESS WHEN INVESTING IN HEDGE FUNDS (Dispersion of returns of
hedge fund managers by strategy in 2002*)
Source: Managed Accounts Reports/Hedge, Feb. 2003
* Includes a total of 1,264 hedge funds as tracked by Managed Accounts Reports/Hedge with strategies determined by Managed Accounts
Reports/Hedge
Quarterly Strategy Report
Targeted portfolio
characteristics
Risk Management Group
Input on weightings based
on factor model analysis
of strategies
RISK OVERLAY
Strategies Advisory
Committee
Quarterly meeting of
top trading talent in
Credit Suisse Group
TOP-DOWN
HFIG Sector Teams
Continuous conversations
between HFIG sector teams
and fund managers
BOTTOM-UP
-60%
-40%
-20%
0%
20%
40%
60%
80%
ShortSellers
Technology
Sector
Market-Neutral
GlobalMacro
GlobalInternational
GlobalEstablished
GlobalEmerging
Event-Driven
Unlike traditional asset
fund managers, whose
performance deviation
from that of an index-
based benchmark
tends to be relatively
small, the dispersion of
returns among hedge
fund managers is much
wider. As a result,
manager selection is
a key driver of
investment returns in
funds of hedge funds.
7. 7
Our sector team members are responsible for recommending individual managers within their respective
strategies for inclusion in our portfolios. Accordingly, sector team members are evaluated primarily for their
ability to select a roster of managers in their strategy that outperforms a strategy-specific peer group such
as the relevant CSFB/Tremont Hedge Fund Sub-Index. Formal approval of such recommendations comes
from the Investment Committee. While individual managers are assessed based on a variety of criteria
that are both qualitative and quantitative, we believe that the manager selection decision is ultimately one
that is as much art as science.
The due diligence process utilized to evaluate individual managers is extensive, and emphasizes the
identification of both the manager's potential addition of returns (i.e., alpha) and potential risks. HFIG’s
head of research is responsible for overseeing the sector team members in the completion of their due
diligence responsibilities.
CHART 6. THE CSAM MANAGER SELECTION PROCESS
Source: Credit Suisse Asset Management, LLC
The key factors that we seek to determine for each individual manager are his/her integrity, market
prowess, experience and risk controls. Managers need to demonstrate a focused and disciplined
investment approach and also be able to clearly articulate the greatest risks to their success. Quantitative
analysis of historical returns, volatility and correlation with similar funds and the portfolio is used as a
screening tool, but is a secondary part of the final decision-making process, especially for funds that hold
illiquid underlying securities or securities with non-linear return characteristics. We pay particular attention
to a manager’s stop-loss limits and other self-defined parameters to maintain control over his/her portfolio
in both up and down market environments.
Other important considerations relate to the integrity and experience of key employees, realistic
management targets and external influences. We prefer that hedge fund managers be willing to offer
significant transparency; have reasonable liquidity given their trading strategy; not have long-term
redemption lock-ups; have separate front- and back-office personnel; and have a reputable administrator,
prime broker, auditor and legal counsel.
Due diligence
questionnaire
Independent
reference
checks
On-site
visit(s)
New manager
approval
documentation
Vote by
CSAM HFIG
Investment
Committee
Third-party
background
investigation
Risk
management
scenario
analysis
Operational
due diligence
Strategy
decomposition
analysis
ALPHA IDENTIFICATION
RISK ASSESSMENT
The due diligence
process we utilize to
evaluate individual
managers is extensive,
and emphasizes the
identification of both
the manager's potential
addition of returns
(i.e., alpha) and
potential risks.
8. 8
Step 3: Risk management. The traditional mean/variance approach to risk management in mainstream
long-only portfolios—which uses value at risk and similar analytical methodologies—does not work when
applied to hedge funds. Several factors account for this, including the use of long/short investment
strategies, whose returns are not typically statistically normal; the use of portfolio leverage and short-selling;
the low degree of portfolio transparency; the lack of readily available, consistent data for most individual
managers; the operational risk involved with running a hedge fund business; and a number of liquidity-related
restrictions to which hedge funds are generally subject.
At CSAM, we actively manage the risk in our funds of hedge funds via a multi-dimensional and continuous
approach. We focus on individual hedge fund risk at the due diligence stage, we quantitatively assess the
effect it may have on an overall portfolio, and we utilize scenario-based “stress-testing” to evaluate the
potential impact of abnormal market conditions. Chart 7 shows the risk management steps taken by HFIG
on the manager and portfolio levels.
CHART 7. THE CSAM RISK MANAGEMENT PROCESS
Source: Credit Suisse Asset Management, LLC
The risk assessment of a potential hedge fund investment carries equal weight in the approval process with
the identification of the manager’s trading edge. This assessment focuses on the risks inherent in the hedge
fund manager’s investment strategy, as well as those involved in the operation of the manager’s business.
Scenario analysis
Operational due diligence
Background check
Strategy decomposition analysis
Outlier data
Review of manager's disclosed
portfolio characteristics
Comparison to index and peers
Monitor risk guidelines
Monitor portfolio characteristics
Attribution analysis
Factor model analysis
Pre-set targeted portfolio
characteristics
Pre-set risk guidelines
MANAGER LEVEL
PRE-INVESTMENT
DUE DILIGENCE
POST-INVESTMENT
MONITORING
PORTFOLIO LEVEL
The risk assessment
of a potential hedge
fund investment
carries equal weight in
the approval process
with the identification
of the manager’s
trading edge. This
assessment focuses
on the risks inherent in
the hedge fund
manager’s investment
strategy, as well as
those involved in the
operation of the
manager’s business.
THE IMPORTANCE OF IDENTIFYING THE NEXT WAVE OF MANAGERS
In order to compete effectively, HFIG believes that a manager of fund-of-hedge-fund portfolios must excel at two seemingly
contradictory objectives.
1. The first is to have access to established hedge fund managers that are no longer willing to accept capital from new sources.
HFIG currently invests in over 100 fund managers that are closed to investment by new investors.
2. The second is to establish relationships with the next wave of investment talent entering the hedge fund industry. Various HFIG
predecessor groups made it a priority to invest in such emerging managers at the beginning of 2001.
Having long experience and a wide network of industry contacts are vital elements in the ability to get “first looks” at new managers.
Many of the most recent hedge fund start-ups are, in fact, spin-offs from existing, well-established hedge fund firms.
Given HFIG’s investment in 150-200 managers and the experience of our 20 investment professionals in hedge fund investing, it is not
unusual for a member of HFIG to know that a new manager is leaving an existing hedge fund firm or to know the new manager
personally. These contacts provide a well of reference checks from which HFIG can draw in order to evaluate new managers.
9. 9
The risk management team is also responsible for studying the business risks of individual managers.
Because hedge fund management companies can be viewed as small entrepreneurial businesses, CSAM
performs an operational risk due diligence process on new managers prior to approval to ensure that their
controls, systems and staff are sufficient to manage the pricing, reporting, accounting and regulatory sides of
the business. The risk management team meets with not only the portfolio manager, but also the chief
financial officer, chief operating officer, head trader and head of risk to get a complete understanding of the
firm. The team examines trading execution, portfolio controls, reconciliation of positions, custody and,
perhaps most important, pricing of positions.
At the portfolio level, HFIG’s head of risk management sits on the Investment Committee and leads the
process of adoption of risk guidelines and targeted portfolio characteristics for each portfolio. The risk
guidelines restrict, among other items, the types of hedge funds in which the portfolio can invest, maximum
manager position size, maximum weight for the top five managers, the percentage of new managers in the
portfolio, and drawdown review requirements. The targeted portfolio characteristics focus on the
geographical concentration of the individual managers; the targeted volatility of the fund-of-hedge-fund
portfolio; the correlation to traditional assets and the CSFB/Tremont Hedge Fund Index and sub-indices; and
strategy targets.
After an investment is made, it is the responsibility of the risk management team, as an additional
independent check on the individual managers, to monitor each portfolio and ensure that it remains within its
risk guidelines and targeted portfolio characteristics. The risk management team also interfaces with the
reporting staff and middle office to generate portfolio performance attribution that breaks down portfolio
returns into manager selection and strategy allocation components, including the out- and underperformance
of each strategy in a portfolio versus the relevant CSFB/Tremont sub-index.
HOW HFIG “STRESS-TESTS” A HEDGE FUND MANAGER
HFIG’s risk management team evaluates an individual manager’s portfolio risk by performing a “stress-testing” scenario analysis in
which the manager’s performance is analyzed under three potential market environment scenarios. These three environments are
further broken down into seven different index metrics. The sector team member rates the manager’s performance on each of these
metrics to come up with a total rating for each scenario. The risk management team reviews these ratings so that when managers
are combined into a fund-of-hedge-fund portfolio, the portfolio does not disproportionately add to certain risks in certain environments.
The second scenario out of the three is our “collapse” scenario, described as follows:
“COLLAPSE” SCENARIO
Global equity markets exhibit spikes in volatility along a downward trajectory. Interest rates trend slightly lower with moderate volatility. Corporate
earnings weaken. The U.S. fiscal deficit widens and the U.S. dollar shows high volatility. Commodities (e.g., gold, oil) appreciate. Geopolitical
concerns increase.
Because hedge fund
management companies
can be viewed as
small entrepreneurial
businesses, CSAM
performs an operational
risk due diligence
process on new
managers prior to
approval to ensure that
their controls, systems
and staff are sufficient
to manage the pricing,
reporting, accounting
and regulatory sides of
the business.
Declining equities S&P 500
Volatility spikes Volatility
Slightly lower interest rates / Moderate interest-rate volatility 3-year Treasury yield
Widening credit spreads Corporate spreads
Escalating commodity prices Price of gold (spot)
Escalating commodity prices Price of dated Brent oil
Moderate trading volumes Trading volume
DESCRIPTION BENCHMARK
10. 10
For investment in funds of hedge funds, we believe CSAM’s Hedge Fund Investments
Group should be your advisor. HFIG offers investors several advantages, including:
s A sizable presence in the hedge fund industry encompassing approximately $5 billion
in assets under management, allocated among over 30 actively managed portfolios
that invest in a total of 150-200 individual hedge funds
s Access to well-established hedge fund managers (some closed to new investments)
and sought-after new managers
s The extensive global resources and research available via Credit Suisse Group’s
presence in over 50 countries on six continents
s A deep investment team with significant trading and analytical experience
s A well-developed and systematic investment process that includes the careful
selection and monitoring of hedge funds across a variety of strategies
s A tradition of product innovation and leadership
s Close involvement with the CSFB/Tremont Hedge Fund Index, one of the hedge fund
industry’s leading indices
CSAM: THE RIGHT ADVISOR FOR FUNDS OF
HEDGE FUNDS
11. 11
FUND OF HEDGE FUNDS STRATEGIES AVAILABLE FROM CSAM
AND AFFILIATES
STRATEGY HIGHLIGHTS
Multi-strategy • An investment mandate designed to achieve superior risk-adjusted
returns by investing in a variety of hedge fund strategies through a
well-diversified portfolio
Directional strategies • Provide investors with hedged exposure to the traditional markets
• Emphasis on underlying funds that can buy long and sell short
Absolute-return strategies • Not dependent on equity-market returns
• Low correlation to broad equity and fixed income markets
• Include arbitrage strategies (e.g., risk, equity, fixed income,
convertible bonds) and utilities long/short
• Portfolios are highly diversified to reduce return volatility
International funds • Focus on geographic sector investment themes such as equity
long/short, emerging markets, merger arbitrage, and equity-linked
derivatives
• Provide an excellent opportunity to access highly talented hedge
fund managers and investment opportunities outside the U.S.
• Provide the potential to improve investment diversification through
low- or non-correlated investment strategies relative to U.S.
traditional and hedge fund strategies
Sector funds • Provide industry-specific exposure to high-growth, or high-rate-of-
change industry sectors (e.g., technology, health care)
• Underlying funds invest primarily long and sell short
• Provide investors with access to a select number of sector-specific
managers with particular expertise in any given area of focus
Principal protection • Offers diversified exposure to funds, with the peace of mind of
capital protection
• Provides a structure that meets regulatory requirements in certain
jurisdictions
Structured fund-linked products • Derivative-based portfolios linked to hedge funds as underlying
assets
CSFB/Tremont Index funds • Provide an index approach to the hedge fund asset class
• Include all major strategies contained within the Index
Customized funds of funds • Available to investors who seek tailor-made solutions for their
allocation to hedge funds. CSAM can work with institutional and
high-net-worth clients to create investment programs specifically
tailored to meet their hedge fund investment objectives.
Hedge fund advisory services • Available to institutional and high-net-worth clients with hedge fund
investments of approximately $50 million
12. * The CSFB/Tremont Hedge Fund Index is compiled by Credit Suisse First Boston Tremont Index LLC. It is an asset-weighted hedge fund index based on the size of each fund and
includes only funds, as opposed to separate accounts. The Index uses the TASS database, which tracks over 3,000 funds, and consists of approximately 455 funds as of July 2003,
each of which has a minimum of US$10 million under management, a 12-month track record, and an audited financial statement. However, funds with US$500 million or more under
management that have less than a one-year track record, can be included in the Index if they can supply audited financials or comparable verification of performance and assets. The Index
is calculated and rebalanced on a monthly basis, and shown net of all performance fees and expenses. In addition to the composite index, nine sector indices track major investment
strategies separately. Investors cannot invest directly in an index.
This report is presented for informational purposes only, and does not contain a recommendation to buy or sell or a solicitation of an offer to buy or sell any securities or any investment
advice or recommendations. Past performance is no guarantee of future performance, and individual results will vary. The terms, objectives, strategies, risks and other details of any
particular fund are disclosed exclusively in such fund’s offering materials, which should be read carefully prior to any investment.
The information presented in this report has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable.
No assurances are provided regarding the reliability of such information. All opinions and views constitute judgments as of the date of writing, and are subject to change at any time
without notice.
Investing in hedge fund strategies entails significant risks, including possible complete loss of principal. Investors who have any interest in hedge funds should understand these risks for an
extended period of time before considering an investment in any hedge fund or hedge fund of funds.
466 Lexington Avenue, New York, New York 10017