(the “Index”) was created by Credit Suisse Alternative Capital, Inc., as Index sponsor (the “Index Sponsor”). The level of the Index reflects the return of a dynamic basket of various market measures (the “Market Factors”), each described below. The Index is not a managed hedge fund and does not track the performance of any hedge fund or group of hedge funds. Instead, the Index is designed to correlate to the historical performance of the Credit Suisse Tremont Long/Short Equity Hedge Fund Index (the “Target Index”) by tracking the performance of non-hedge fund, transparent market measures such as the Market Factors. The Market Factors will be selected and weighted in accordance with an algorithm that seeks to approximate the returns of the Target Index. The calculation of the Index takes into consideration holding costs associated with the Market Factors and costs associated with calculating the Index.
The Index was established on October 16, 2009 with an initial value of 1,000. The Market Factors selected for inclusion in calculating the Index, as well as their respective weightings, are determined on each Rebalancing Date (as defined below) pursuant to an algorithm, which involves a process of iterative regressions, as more fully described below under “—Index Rebalancing Process—Iterative Regression Process.” Through this algorithm, the Market Factors are selected and weights for Market Factors (“Factor Weights”) are established so as to result in the highest correlation between changes in the Index and the Target Index for specified periods and subject to certain conditions as described below. However, any return on the ETNs will be determined by changes in the level of the Index (which is determined by the levels of the Market Factors), and not the Target Index. The return on the securities will not be based on changes in the Target Index, except to the extent a correlation exists between the Index and the Target Index. For more information on the Target Index, see “—The Credit Suisse Tremont Long/Short Equity Hedge Fund Index” below.
The Credit Suisse Tremont Long/Short Equity Hedge Fund Index
Data and information regarding the Credit Suisse Tremont Long/Short Equity Hedge Fund Index (the “Target Index”) are derived from sources prepared by Credit Suisse Tremont Index LLC.
The Target Index is an asset-weighted hedge fund Index, as opposed to an equally weighted Index, which track hedge funds that invest on both long and short sides of equity markets, generally focusing on diversifying or hedging across particular sectors, regions or market capitalizations. Managers of these respective constituent hedge funds have the flexibility to shift from value to growth; small to medium to large capitalization stocks; and net long to net short. Additionally, managers of these respective constituent hedge funds can also trade equity futures and options as well as equity related securities and debt or build portfolios that are more concentrated than traditional long-only equity hedge funds.
The methodology utilized in the Target Index starts by defining the universe it is measuring. Credit Suisse Tremont Index LLC uses the Credit Suisse/Tremont database, which tracks more than 4,500 funds. The Target Index Universe is defined as only the funds with a minimum of US$50 million assets under management (“AUM”), a minimum one-year track record, and current audited financial statements. Hedge funds are separated into ten primary subcategories based on their investment style. The Target Index in all cases represents at least 85% of the AUM in each respective category of the Target Index Universe. Credit Suisse/Tremont Index LLC analyzes the percentage of assets invested in each subcategory and selects funds for the Target Index based on those percentages, matching the shape of the Target Index to the shape of the universe of long/short hedge funds. The Target Index is calculated and rebalanced monthly. Constituent hedge funds are reselected on a quarterly basis as necessary. To minimize survivorship bias, constituent hedge funds are not removed from the Target Index until they are fully liquidated or fail to meet the financial reporting requirements. As of January 29, 2010, the Target Index was comprised of 153 constituent hedge funds.
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