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AlphaShares Monthly Letter: April 2010

AlphaShares Indexes April 2010 2010 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) 0.06% -0.49% 44.21% 10.78%
AlphaShares China Small-Cap Index (NYSE HAO) -0.32% 3.19% 67.96% 4.00%
AlphaShares China Real Estate Index (NYSE: TAO) -6.26% -7.16% 37.76% 0.57%
FTSE/Xinhua China 25 Index -0.44% -2.54% 33.88% 7.07%
CSI 300 (A-Shares) -8.31% -14.20% 16.90% -0.91%

China News:

Chinese President Hu Jintao officially opened the Shanghai’s $44 billion World Expo on April 20th. The first World Fair was held in 1851 at London’s Crystal Palace to showcase the wealth and technological prowess of the world’s industrialized nations.

The property prices in China surged 11.7% in March from a year earlier—the most since records began in 2005. The State Council raised mortgage rates and down payment ratios for second homes, in order to cool the market and dampen inflation expectations. There are also ongoing concerns over a China policy tightening that may further target property prices, and/or slow down fixed-asset investment in response to the central government’s earlier restrictions on new projects. The CBRC (China Banking Regulatory Commission) requested that local banks achieve a more balanced lending program this year to smooth out the volatilities that bank lending brings on China’s economic growth—which expanded 11.9% from a year earlier in the first quarter, suggesting that tighter policies are indeed needed.

Of course, on the same day the government stepped up efforts to cool a property bubble on April 26th by requiring real-estate developers to submit fundraising plans for review, central bank governor Zhou Xiachuan announced in a statement to the International Monetary Fund that China will keep its “relatively easy” monetary policy and pledged to maintain “proactive” fiscal measures. Before the trading markets opened for May, the People’s Bank of China (PBoC) announced its third required reserve ratio (RRR) hike, further stoking yuan revaluation expectations.

China Equity Markets:

The AlphaShares China All-Cap Index managed to squeak out a 0.06% gain this month, but is still down for the year with its -0.49% return. The index hit its 52-week high on April 9th, before selling off -4.61% from that level in a month that saw global markets get spooked by the growing credit crisis in Greece and news of a SEC probe of Goldman Sachs. Meanwhile, the large-cap dominated FTSE Xinhua index’s -0.44% April return brought its YTD return to -2.54%. The AlphaShares Small-Cap index is up so far on the year with a 3.19% gain, despite slipping -0.32% this month.

Contagion fears spread globally as multiple sovereign credit downgrades hit Europe (Moody’s downgrade of Greece, and S&P’s downgrade of Greece, Portugal, and Spain). Stronger-than-expected first quarter earnings reports from China’s two largest banks, ICBC (1398 HK) and China Construction (939 HK), were not enough to ease investor concerns as the financial sector was the largest contributor to negative returns, falling -4.25%. On the global front, financials sold off on news that the SEC has initiated both civil and criminal fraud investigations against Goldman Sachs. While financials make up nearly 60% of the Hang Seng Index and nearly 45% of the FTSE/Xinhua China 25 Index, they are only 31% of the AlphaShares China All-Cap Index.

Health care stocks led monthly sector returns with a 11.44% gain (1.20% index weight), followed by the technology sector’s 3.79%. WuXi PharmaTech (WX US) rose to its highest price since 2008 when Charles River Laboratories agree to buy the company for $1.6 billion. The US-based acquirer seeks to expand in China, where revenue from drug-testing services is growing as much as 30% a year. Meanwhile, Baidu (BIDU US) was again the largest April contributor up 15.46% after hitting an all-time high of $709.87 on April 29th—the day the company reported 1Q10 results that beat market expectations and announced a 10-for-1 stock split.

Inflation wise, China’s March CPI (Consumer Price Index) rose at a slower than expected 2.4% from a year earlier, after coming in at 2.7% in February. Currency and fixed income traders continue to monitor the CPI numbers as they are seen as crucial in regards to future interest rate hikes, as many believe that inflationary pressures will force the central bank’s hand. Others debate that a currency appreciation would be a more effective tool to manage domestic inflationary pressures. Some think that China may let the yuan gain over the summer as the government seeks to demonstrate progress on its exchange rate policy to its trading partners, especially with Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton traveling to Beijing on May 24th for the second US-China Strategic Economic Dialogue. Others think that any appreciation will be delayed in the wake of the meltdown of European sovereigns, perhaps showing that China has been justified in wanting the global economic recovery to be entrenched before it makes any move in the currency.

Jonathan J. Masse, CFA Dr. Burton G. Malkiel
Senior Portfolio Manager Chief Investment Officer

Disclaimer text

Past performance is no guarantee of future results. The information presented in this letter is for background purposes only and is subject to updating, revision and amendment, and no representation or warranty, expressed or implied, is made, and no liability is accepted by AlphaShares, LLC in relation thereto. This letter is neither an offer to sell nor a solicitation of any offer to buy interests in the Fund. Any such offering is made only pursuant to the Fund’s Private Placement Memorandum and subscription agreement, which should be read in their entirety. No offer to purchase shares in the Fund will be accepted prior to receipt by the offeree of the aforementioned documents and completion of all appropriate documents. These materials have been sent to you in a confidential manner. The information contained herein may be proprietary. No part of these materials may be reproduced in any manner without the Investment Manager’s prior consent.