Commodities and Natural Resources

Deriving Long-Term Strategic Commodity Return Expectations: The Energy Complex

Q M S Advisors .

This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.

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Av. De la Gare, 1 | 1003, Lausanne | CH tel: 078 922 08 77 e-mail: info@qmsadv.com website: www.qmsadv.com

Long-Term Energy Markets Returns Main Significant Factors Main Factors Driving Our Energy Commodity Forecast: We ath e

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Long-Term Energy Commodity Returns Expectation

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Global Growth

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Global Economic Growth indicators Global Energy Intensity factors Supply Capacity: Oil and Gas Extraction, Refinery capacity Term-Structure: Commodity Futures and Global Interest Rates Global Commodity Inventories and SPR builds Producers, Consumers, Exporters and Importers Flows (IEA) US Dollar Currency Basket Global Risk Aversion Parameter Wet freight index Capital Expenditures in the energy complex – Exploration Spending CFTC reports - Hedgers and Speculators positions Global weather trends OPEC Policies and Discipline

Q.M.S Advisors Evaluates All Aspects of the Energy Complex to Derive Long-term Expectations

Q.M.S Advisors

Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com

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Long-Term Energy Returns A Structural Approach to Deriving Energy Commodity Approach

Global Macroeconomic Activity Module

Global Energy Demand Module

Global Energy Products Demand Module

Oil and Gas Supply Module

Integrating Module

Transmission and Distribution Module

Refinery / Conversion Module

Source: Q.M.S Advisors, IEA, EIA These materials do not contain any recommendation to buy or sell or a solicitation of an offer to buy or sell any securities or investment services. Credit Suisse Asset Management, LLC provides no determination of suitability or assurances or guarantees regarding the performance of any investment or investment strategy. You are responsible for conducting your own independent investigation and analysis, taking into account your particular circumstances, before deciding upon a particular investment or investment strategy. Investments in certain asset classes, including hedge funds, carry significant additional risks that you should consider prior to investment. You accept complete responsibility for any investment decisions you may make as a result of your use of this material.

Q.M.S Advisors

Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com

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Long-Term Energy Returns A Structural Approach to Deriving Energy Commodity Approach Main Factors Driving Our Energy Commodity Markets Forecast

Our model is a composite of seven modules that cover demand, supply, conversion, distribution as well as transmission constraints. Following are the most significant signals that explain our forecast of the likely future developments in the Energy markets:

On the demand side: Demand from institutional investors for assets providing hedges against unexpected inflation.

Demand growth for energy products. The emergence of China and India as major commodity consumers with low energy-efficiencies leads to increased energy demand sensitivities.

Low price-elasticity in developed markets, resulting in little demand destruction through price increases.

Limited number of substitutes and underdeveloped alternative sources of energy.

A weaker US Dollar, supporting global demand by making international purchases relatively cheaper.

Q.M.S Advisors

Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com

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Long-Term Energy Returns A Structural Approach to Deriving Energy Commodity Approach Main Factors Driving Our Energy Commodity Markets Forecast

On the supply side: • Lack of marginal capacity of production in the Energy complex which affects the short-term supply/demand equilibrium.

• Limited incremental supply and distribution capacity due to past under-investments across the energy complex (Lack of oil and gas exploration and R&D expenses, under-investments in global refinery capacity and distribution channels).

• Long-term supply is essentially a lagged response future price signals. High marginal costs of production require high future price levels to provide incentives to commit firms’ capital to volatile long-term investments.

Market derived signals: The current contango in the NYMEX WTI, Gasoline, Heating Oil and IPE Brent and Gasoil forward curves supports our assumption of price appreciation in the short run and substantial roll-yield in the longer run.

Other factors: Migration of speculative and institutional capital into the complex, heightened geopolitical risks, vulnerability of oil infrastructure leading to potential supply disruptions, lack of transparency resulting in market price manipulation.

Q.M.S Advisors

Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com

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Long-Term Industrial Metal Returns Main Significant Factors Approach Main Factors Driving Our Industrial Metals Commodity Markets Forecast

Most significant signals in the likely future developments in the Industrial Metal markets: On the demand side: Strong relative demand growth for Base Metal products. The emergence of China and India as major consumers of Base Metals increased Base Metals demand sensitivities. (Massive investments in local infrastructure).

Lack of price-elasticity, negligible demand destruction through price increases Limited number or lack of substitutes for Base and Precious Metals.

A weaker US Dollar, supporting global demand by making international purchases relatively cheaper.

On the supply side: Lack of marginal production capacity in the short-term in the Base Metals complex (Aluminum, Copper, Zinc, Nickel).

Depleted inventories (Copper, Nickel).

Limited incremental supply and distribution capacity due to past under-investments across the Base Metals complex (Depleted mines, lack of specialized labor, limited dry freight capacity).

Upward cost pressures from labor demands and rising input prices.

Q.M.S Advisors

Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com

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Rationale for Investing in Commodities A Holistic Portfolio-Level Approach Clustering helps define groups of assets with high intra-group and low inter-group dependencies

0.8

Source: Q.M.S Advisors, Ibbotson, Matlab. Dendrogram based on unadjusted monthly total returns from January 1991 to December 2008.

0.7

0.6

0.5

0.4

0.3

0.2

U.S. Bonds

U.S. Cash

GS Commodity

DJ-AIG Commodity

U.S. Inflation

Real Estate

Emerging Markets

U.S. Small Cap

0

EAFE 60/40 Unhedged Portfolio

0.1

U.S. Mid Cap

Commodities may not provide attractive alpha in all cycles (contango in commodity markets and negative roll-yield) Investing in commodities entails high volatility and more importantly drawdown risk

0.9

60/40 Portfolio

1

U.S. Large Cap

Caveat

LESS CORRELATED

LESS CORRELATED

correlation distances

Grouping asset classes helps reveal the main sources of diversification Maximum portfolio diversification requires incorporating strategies at both ends of the spectrum Commodities offer maximum distances resulting in greatest diversification

Hierarchical cluster tree based on average correlation matrix distances

Commodities Offer Attractive Returns and Potent Diversification

Q.M.S Advisors

Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com

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Rationale for Investing in Commodities A Holistic Portfolio-Level Approach Rationale

Allow for diversification at two levels

Offer overall no correlation to traditional 60/40 portfolio returns

At the “beta” level, commodities offer fundamentally different market dynamics.

Commodities offer an opportunity to gain exposure to “real assets”, driven by supply and demand imbalances At the “alpha” level, commodities allow for a flexible and efficient use of capital: • Gain exposure to alpha by actively managing the roll of the underlying contracts • Generate incremental returns from collateral redeployed in other investment vehicles • Profit from trading opportunities across commodities by implementing tactical shifts Due to low correlations, 60/40 portfolios and commodities did not generate extreme negative values simultaneously. Periods of large negative portfolio deviations (-2s) were accompanied by slightly negative average monthly commodity returns

Caveat

Investing in commodities should be viewed as a long-term investment to mitigate significant volatility and drawdown risk

Q.M.S Advisors

Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com

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Rationale for Investing in Commodities Breakeven Analysis – Optimal Allocation to Commodities Expected Returns Required On Commodities For Inclusion In The Current Portfolio At Present Risk Level.

12 Efficient Allocation to Commodities with current portfolio allocation

Expected Return (%)

10

8 Expected Return on Current Portfolio

6

4

2

0 0

5

10

15

20

25

30

Allocation to Commodities (% of total portfolio)

Source: Q.M.S Advisors, Ibbotson. Based on current 60% Fixed Income 40% Equity portfolio. Analysis based on Q.M.S Advisors’ Asset Class Assumptions.

These materials do not contain any recommendation to buy or sell or a solicitation of an offer to buy or sell any securities or investment services. Credit Suisse Asset Management, LLC provides no determination of suitability or assurances or guarantees regarding the performance of any investment or investment strategy. You are responsible for conducting your own independent investigation and analysis, taking into account your particular circumstances, before deciding upon a particular investment or investment strategy. Investments in certain asset classes, including hedge funds, carry significant additional risks that you should consider prior to investment. You accept complete responsibility for any investment decisions you may make as a result of your use of this material.

Q.M.S Advisors

Av. de la Gare, 1 | 1003, Lausanne CH | tel: 078 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com

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