May 2008

KEY factors

• The economy in May began to show signs of further weakening, a reversal from last month’s positive outlook, making it difficult to gauge the magnitude of a looming recession. The CPI Urban Consumer All Items (SA) Index was up 65 basis points and non-farm unemployment increased from 5.0% to 5.5%. Furthermore, new housing sales and starts both decreased by 2.48% and 3.27%, respectively. Retail sales increased by 1.04% despite consumer confidence levels hovering around all time lows.
• Major events during the month of May included an earthquake in the Chinese province of Sichuan which caused major damage and casualties and the democratic primaries in the United States.
• U.S. equity markets experienced mostly positive performance in May. Investors continued to be pleasantly surprised by steady corporate 1st Quarter performance results. The U.S. Federal Reserve helped to buoy the financial sector by auctioning $24.12 billion in Treasuries to help ease the credit shortage.
• Non-U.S. equity markets also experienced mostly positive performance in May, despite record setting crude oil prices. Global firms were able to record profits in the face of a world economic slowdown.
• The entire U.S. yield curve shifted upwards in the month of May.

MARKET COMMENTARY

U.S. and global equity markets posted generally positive performance in May with the S&P 500 Index (TR) up 1.30% and the MSCI World Index (U.S. Dollar TR) up 1.52%. In the United States, small cap stocks (Russell 2000 Index (TR)) were up 4.59% and large cap stocks (Russell 1000 Index (TR)) were up 1.83%. The Russell 1000 Growth Index (TR) was up 3.67%, outperforming the value component (Russell 1000 Value Index (TR)) which was down 16 basis points.

Performance in non-U.S. equity markets in May was positive for the most part with the MSCI EAFE Index (U.S. Dollar TR) up 97 basis points, the MSCI Emerging Markets Free Index (U.S. Dollar TR) up 1.86%, and the MSCI Europe 15 Index (U.S. Dollar TR) up 44 basis points. The Nikkei 225 Price Index (JPY) was up 3.53%, while the FTSE 250 Price Index (USD) was down 72 basis points.

U.S. government and credit quality fixed income markets were mostly negative in May. The U.S. yield curve experienced a parallel upward shift with the 3-month yield rate experiencing the largest move of 50 basis points. The Lehman U.S. Aggregate Index was down 73 basis points, the Lehman U.S. Government/Credit Index was down 1.03%, and the Lehman U.S. Corporate High Yield Index was up 36 basis points.

The U.S. Dollar continued its upward trend in May. The U.S. Dollar was up 44 basis points against the euro, up 1.51% against the yen, and up 22 basis points against the pound.

Hedge Fund Index Commentary

The CASAM/CISDM Equal Weighted Hedge Fund Index was up 1.97% for the month of May reflective of the positive performance of all component hedge fund strategies. The sector strategy experienced the best performance, up 3.42%, followed by sector technology, up 2.05%, and event driven multi strategy, up 2.00%.

The CASAM/CISDM Convertible Arbitrage Index was up 75 basis points for the month of May. Further tightening of credit spreads contributed to positive performance for the strategy. The Merrill Lynch Convertible Bonds Index – All Qualities was up 2.00%.

The CASAM/CISDM Distressed Securities Index was up 79 basis points for the month of May. The fragile state of certain sectors due to increasing crude oil prices and the unwinding of leverage, combined with the tightening of credit spreads contributed to positive performance for the strategy. The Lehman U.S. Corporate High Yield Index was up 36 basis points.

The CASAM/CISDM Emerging Markets Index was up 1.44% for the month of May. The positive return reflected the positive performance of the MSCI Emerging Markets Free Index (U.S. Dollar TR), up 1.86%.

The CASAM/CISDM Equity Long/Short Index was up 1.80% for the month of May. U.S. equity markets experienced mostly positive returns across all capitalizations with the Russell 3000 Index (TR) up 2.05%. Small cap stocks (Russell 2000 Index (TR)) were up 4.59%, outperforming large cap stocks (Russell 1000 Index (TR)) which were up 1.83%. Value names (Russell 3000 Value (TR)) and their growth counterparts (Russell 3000 Growth (TR)) were up 12 basis points and 3.82%, respectively.

The CASAM/CISDM Equity Long/Short Asia Index was up 90 basis points for the month of May, reflective of the positive performance of the Nikkei 225 Price Index (JPY), up 3.53%, and the MSCI Far East Index, up 2.02%.

The CASAM/CISDM Equity Long/Short Europe Index was up 1.29% for the month of May. The generally positive direction of the European equity markets, combined with the continued strengthening of the U.S. dollar, contributed to the positive performance of the strategy. The MSCI Europe 15 (U.S. Dollar TR) Index was up 44 basis points.

The CASAM/CISDM Equity Market Neutral Index was up 94 basis points for the month of May. The strategy continued to be supported by positive equity market performance resulting from stable earnings announcements. Expected market volatility decreased (the VIX fell from 20.79% at the end of April to 17.83% at the end of May).

The CASAM/CISDM Event-Driven Multi-Strategy Index was up 2.00% for the month of May. The positive direction of equity markets and an increased dollar amount of deal announcements contributed to the positive performance of the strategy. The Lehman U.S. Corporate High Yield Index was up 36 basis points.

The CASAM/CISDM Fixed Income Arbitrage Index was up 1.04% for the month of May. The entire U.S. yield curve experienced a unilateral upward shift with the short term yield spectrum experiencing slightly higher increases than the rest of the yield curve.

The CASAM/CISDM Global Macro Index was up 55 basis points for the month of May. The main contributors to the positive performance of the strategy during the month continued to be equities and commodities. The MSCI World Index (U.S. Dollar TR) was up 1.52%.

The CASAM/CISDM Merger Arbitrage Index was up 1.58% for the month of May. Globally, a total of $282 billion in deals were announced, an increase from the prior month’s total of $251 billion. Among the largest announcements was an offer of $39.6 billion for Calpine by NRG Energy.

The CASAM/CISDM Mortgage-Backed Securities Index was up 1.09% for the month of May. The positive performance of the strategy can be attributed to the tightening of mortgage spreads. Furthermore, TBA mortgage securities provided upside trading opportunities for the strategy. The Lehman Fixed Rate Mortgage Backed Securities Index was down 53 basis points.

The CASAM/CISDM Sector Index was up 3.42% for the month of May. Nine of the ten major S&P 500 industry sectors were positive for the month with information technology, materials, and telecommunications posting the highest performance, up 5.45%, 4.61%, and 3.35%, respectively. The financials sector suffered losses of 6.37%.

The CASAM/CISDM Sector Technology Index was up 2.05% for the month of May, reflective of the positive performance of the CBOE Technology Index, up 8.62%.

The CASAM/CISDM Fund of Funds Index rose 1.61% for the month of May. The positive performance of the index reflected the positive results seen across all hedge fund strategies in May.

CTA Index Commentary

The CASAM/CISDM CTA Equal Weighted Index rose 2.11% for the month of May. The CASAM CISDM CTA Equal Weighted Systematic Index was up 2.05% and the CASAM CISDM CTA Equal Weighted Discretionary Index was up 2.53%. Physicals and equity CTA managers posted the highest performance among CTAs with the CASAM CISDM CTA Equal Weighted Physicals Index up 3.93% and the CASAM CISDM CTA Equal Weighted Equity Index up 3.61%. The CASAM CISDM CTA Equal Weighted Diversified Index was up 1.91%, and the CASAM CISDM CTA Equal Weighted Financials Index was up 2.72%. Finally, the CASAM CISDM CTA Equal Weighted Currency Index remained relatively flat, up 7 basis points. The broad commodity markets posted mixed results in May. The GSCI TR Index was up 9.10%, the GSCI Metal TR Index was down 7.67%, and the GSCI Agriculture TR Index was down 3.16%. The energy sector continued to outperform, with the GSCI Energy Index once again reaching double digit performance of 13.02%.