Tremont Says Lipper Hedge Fund Collapse Reflected In Index

Investors Offshore, London

29 April 2002

The devaluation of hedge funds Lipper Convertibles LP and Lipper Offshore Convertibles LP has highlighted the issue of 'survivorship bias' in hedge fund indices. Some analysts have pointed out that measurement services which analyse only surviving funds are excluding losses which were not necessarily predictable by investors.

Roland Lorenzo, President and Chief Operating Officer of Credit Suisse First Boston Tremont Index LLC, has addressed the issue in a press release: "We have fielded dozens of calls about the recent performance of the CSFB/Tremont Hedge Fund Index Convertible Arbitrage sector in February and March, 2002," said Mr. Lorenzo. "Investors have noted that in February, the Convertible Arbitrage sector index showed its worst monthly performance in more than three years, losing over 3%, and that in March, the sector again showed a negative performance while other indices of convertible arbitrage sector performance showed positive returns. We want to address those questions."

'The philosophy of the CSFB/Tremont Hedge Fund Index,' goes on the release, 'is to present an accurate, objective and unbiased picture of the performance of the entire universe of capital invested in hedge funds. The negative performance of the convertible arbitrage sector during February and March reflects the loss that a well-diversified hedge fund investor would have experienced as a result of the devaluations. It has been suggested that the collapse of the Lipper funds should be excluded, because it is an extraordinary event and does not represent the majority of convertible arbitrage hedge funds. However, CSFB/Tremont maintains that hedge fund collapses have occurred in the past, may occur again in the future, and cannot be overlooked.'

"Investors cannot avoid such collapses by retroactive retraction of their investments. Therefore, it is imperative for an accurate index to account properly for the impact of these kinds of events on hedge fund investment performance. To fail to do so would create survivorship bias," added Mr. Lorenzo.

On February 20, 2002, Lipper Convertibles LP, one of the largest convertible arbitrage hedge funds, reported that it was revising the value of its onshore fund downward by about 40% and its offshore fund by about 8%. Both Lipper funds were components of the CSFB/Tremont Hedge Fund Index's convertible arbitrage sector, and because of their large size, they represented a proportionately large share of the CSFB/Tremont Convertible Arbitrage Sub-Index, and the negative performance had negative impact on the Index.

Although the Lipper revisions were retroactive to December 31, 2001, they were not announced until February 20, by which time the December and January performances of the CSFB/Tremont Hedge Fund Index already had been published. The CSFB/Tremont Index has a longstanding, documented policy of not restating figures once they are published, and the first available opportunity to reflect Lipper's negative performance in the Index was in the February performance release.

On March 26,2002, Lipper further reported that the actual downward revision was being restated to 45% for the onshore fund and 10% for the offshore fund, and that both funds were being dissolved. Because the CSFB/Tremont Hedge Fund Index had already published its February numbers, the first opportunity to reflect these revisions in the Index was for the month of March.

In conjunction with their impending dissolution, the Lipper funds have also stopped reporting monthly returns as of February. In accordance with its policy of removing funds from the Index when performance numbers are not reported for two subsequent months, the two Lipper funds are being removed from the Index as of April 1, 2002.

A number of investors have asked what the CSFB/Tremont Convertible Arbitrage performance would have been without the effect of the two Lipper funds. In response to their inquiries, Tremont has provided the following unofficial, approximate estimates. Tremont emphasizes however that the official performance numbers remain as previously published.

Month Hypothetical CSFB/Tremont Convertible Arbitrage Sector Performance (approx)
February 2002 +0.0%
March 2002 +0.4%

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