September 2008

KEY factors

• The month of September exposed a gloomy outlook for the U.S. economy battered by market events. The CPI Urban Consumer All Items (SA) Index was down 3 basis points, non-farm unemployment stayed flat from the month prior at 6.1%, and retail sales fell by 1.23%. In addition, home starts fell 6.31% while home sales rose an unexpected 2.65%.
• Major events during the month of September continued to focus on the Russian-Georgian conflict as well as bombings on the U.S. embassy in Yemen and the Marriot Hotel in Pakistan.
• The events that have transpired in the U.S. markets in September were monumental and could prove to be the final catalyst to push the U.S. economy over the edge and into a recession. Nine major U.S. financial institutions have gone bankrupt, sought federal capital, undergone major restructuring, or been bought out by stronger competitors. During the malaise the DJIA experienced its largest intra-day point decline in history of 777 points.
• Non-U.S. equity markets posted large losses for the month of September as news of further banking and credit crises contributed to rapid equity sell-off.
• The U.S. yield curve experienced a general downshift in yield rates as investors sought the safety of government securities.

MARKET COMMENTARY

Equity markets in the United States experienced significant losses in September with the S&P 500 Index (TR) down 8.91%. Small cap stocks (Russell 2000 Index (TR)) were down 7.97% and large cap stocks (Russell 1000 Index (TR)) were down 9.53%. The Russell 1000 Growth Index (TR) was down 11.58%, underperforming the value component (Russell 1000 Value Index (TR)) which was down 7.35%.

Many non-U.S. equity markets experienced double digit losses in September with the MSCI World Index (U.S. Dollar TR) down 11.89%. The MSCI EAFE Index (U.S. Dollar TR) was down 14.46%, the MSCI Emerging Markets Free Index (U.S. Dollar TR) was down 17.50%, and the MSCI Europe 15 Index (U.S. Dollar TR) was down 15.08%. The Nikkei 225 Price Index (JPY) was down 13.87% and finally the FTSE 250 Price Index (USD) was down 15.92%.

U.S. government and credit quality fixed income markets were predominantly negative in September. The U.S. yield curve continued to shift downward with the largest decline occurring at the 3-month yield rate. The Lehman U.S. Corporate High Yield Index was down 7.98%, the Lehman U.S. Aggregate Index was down 1.34%, and the Lehman U.S. Government/Credit Index was down 2.53%.

The U.S. Dollar experienced mixed performance against most major currencies in September. The U.S. Dollar was up 3.96% against the euro, up 2.23% against the pound, but down 2.53% against the yen.

Hedge Fund Index Commentary

The CASAM/CISDM Equal Weighted Hedge Fund Index was down 6.50% for the month of September. The negative performance of the index is in line with the negative performance of all component hedge fund strategies. The largest negative performance was posted by the emerging markets strategy for the second month in a row, down 10.05%.

The CASAM/CISDM Convertible Arbitrage Index was down 8.35% for the month of September. Widening of credit spreads coupled with rapid deleveraging caused convertible prices to decrease and contribute to losses for the strategy. The Merrill Lynch Convertible Bonds Index – All Qualities was down 9.88%.

The CASAM/CISDM Distressed Securities Index was down 4.40% for the month of September. A deteriorating market environment, fear of a global economic recession, and increasing number of defaults has put pressure on high yield securities. The Lehman U.S. Corporate High Yield Index was down 7.98%.

The CASAM/CISDM Emerging Markets Index was down 10.05% for the month of September. A large majority of emerging market economies have been heavily affected by the precedence of a global recession due to reliance on foreign investment capital. The MSCI Emerging Markets Free Index (U.S. Dollar TR) experienced its largest decline since August 1998, down 17.50%.

The CASAM/CISDM Equity Long/Short Index was down 5.40% for the month of September. U.S. equity markets experienced negative returns across all capitalizations with the Russell 3000 Index (TR) down 9.40%. Small cap stocks (Russell 2000 Index (TR)) were down 7.97%, outperforming large cap stocks (Russell 1000 Index (TR)) which were down 9.53%. Value names (Russell 3000 Value (TR)) and their growth counterparts (Russell 3000 Growth (TR)) were down 7.13% and 11.56%, respectively.

The CASAM/CISDM Equity Long/Short Asia Index was down 4.73% for the month of September, reflective of the negative direction of the Nikkei 225 Price Index (JPY), down 13.87%.

The CASAM/CISDM Equity Long/Short Europe Index was down 4.39% for the month of September. European markets slid substantially after predictions of looming recessions in major European economies became conceivable amid European banking failures. The MSCI Europe 15 (U.S. Dollar TR) Index was down 15.08%.

The CASAM/CISDM Equity Market Neutral Index was down 2.10% for the month of September. High market volatility presented a tough environment for the strategy in particular for highly levered funds. Intra-month market volatility increased (the VIX rose from 20.70% in August to 30.24% in September).

The CASAM/CISDM Event-Driven Multi-Strategy Index was down 7.31% for the month of September. Deterioration of credit markets intensified default activity. The Lehman U.S. Corporate High Yield Index was down 7.98%.

The CASAM/CISDM Fixed Income Arbitrage Index was down 4.60% for the month of September. Though the U.S. yield curve experienced a general downshift in yield rates, default fear in the capital markets has propped up yield rates, in turn decreasing prices.

The CASAM/CISDM Global Macro Index was down 17 basis points for the month of September. A rally in the U.S. Dollar has helped to buoy losses in equities, fixed income, and commodities. The MSCI World Index (U.S. Dollar TR) fell 11.89%.

The CASAM/CISDM Merger Arbitrage Index was down 2.63% for the month of September. A declining equity market caused in large part by the selling of equity to meet increasing investor redemptions, coupled with banks’ unwillingness to provide financing for deals, contributed to the negative performance of the strategy.

The CASAM/CISDM Mortgage-Backed Securities Index was down 2.00% for the month of September. Continued tightness in credit continues to make it difficult for homeowners to refinance their properties and potential buyers to receive mortgage loans negatively impacting prices of mortgage based products. The Lehman Fixed Rate Mortgage Backed Securities Index was up 0.75%.

The CASAM/CISDM Sector Index was down 8.84% for the month of September. All major S&P 500 industry sectors were negative for the month with the majority in double digit territory. The largest losses were experienced in materials, information technology, and telecommunications, down 17.24%, 12.75%, and 12.69%, respectively.

The CASAM/CISDM Sector Technology Index was down 7.10% for the month of September. The positive performance of the strategy was reflective of the negative performance experienced by the CBOE Technology Index, down 15.36%.

The CASAM/CISDM Fund of Funds Index fell 5.87% for the month of September. The negative performance of the index reflected the negative results seen across all hedge fund strategies in September.

CTA Index Commentary

The CASAM/CISDM CTA Equal Weighted Index rose 24 basis points for the month of September. The CASAM CISDM CTA Equal Weighted Systematic Index was up 1.65%, while the CASAM CISDM CTA Equal Weighted Discretionary Index was down 8.10%. Physical and financial CTA managers posted positive performance with the CASAM CISDM CTA Equal Weighted Physicals Index up 1.42%, and the CASAM CISDM CTA Equal Weighted Financial Index up 85 basis points. The CASAM CISDM CTA Equal Weighted Currency Index was up 12 basis points and the CASAM CISDM CTA Equal Weighted Diversified Index was up 1.27%. Finally, the CASAM CISDM CTA Equal Weighted Equity Index posted a loss of 8.66%. Many commodity sectors continued to post heavy losses in September. The GSCI TR Index was down 12.13%, the GSCI Energy Index was down 12.56% and GSCI Agriculture Index was down 15.57%. Additionally, metals posted negative performance with the GSCI Metals Index down 13.53% though precious metals posted a gain of 3.87% as proxied by the GSCI Precious Metals Index.