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AlphaShares Monthly Letter: April 2011

AlphaShares Indexes April 2011 2011 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) 2.50% 7.17% 16.98% 3.04%
AlphaShares China Small-Cap Index (NYSE HAO) 3.36% -0.10% 12.52% 9.80%
AlphaShares China Real Estate Index (NYSE: TAO) 1.76% -0.01% 19.22% 0.89%
AlphaShares China Technology Index (NYSE: TAO) 7.36% 16.63% 17.76% 18.82%
FTSE/Xinhua China 25 Index 0.94% 4.53% 9.36% -3.05%
CSI 300 (A-Shares) -0.03% 3.68% 7.83% -5.07%

China News:

The yuan closed April at 6.4922 - appreciating beyond 6.50 per dollar for the first time since 1993. The People's Bank of China (PBoC) set the yuan's reference rate at 6.4990 per dollar, its highest since July 2005. The currency is allowed to trade up to 0.50% on either side of the declared exchange rate. The yuan gained 0.86% during the month to bring its 2011 appreciation versus the US dollar to 1.77% YTD. With a depreciating US dollar, strong local currency performance enhances US investor returns in international equities.

The surprisingly fast pace of the yuan gains is confirming the belief among many economists that the yuan is being used to fight inflation. China's Consumer Price Index (CPI), a main gauge of inflation, rose at its fastest pace in 32 months, increasing 5.4% in March from a year ago. The Producer Price Index (PPI), the main gauge of inflation at the wholesale level, rose 7.3% in March from a year ago - a 30 month high. The government aims to hold inflation at 4% for the full year.

In response to surging headline inflation and property prices, the central bank has raised its benchmark interest rate four times and the reserve requirement seven times since last October. At a mid-month meeting of the State Council, China's equivalent of a cabinet, Premier Wen Jiabao listed "strengthening the flexibility" of the yuan's exchange rate as another one of several tools the government should use to control prices - an argument that less senior officials have made before, but Wen's remarks were unusual for a top leader. He also said that fighting the "inflation tiger" is China's top economic priority this year.

Ironically on April 9th, China reported its first quarterly trade deficit in seven years - an event that would typically ease pressure on the world's largest exporter to allow faster appreciation of the yuan, as has been called for by its major trading partners who argue that they are being put at an "artificial" disadvantage. Still, the National Bureau of Statistics (NBS) reported that China's overall economy expanded at 9.7% in Q1 from a year earlier and 2.1% from the quarter prior.

China Equity Markets:

The AlphaShares China All-Cap Index (Bloomberg: ACNACTR Index) gained 2.50% in April to bring its YTD return to 7.17%. Small cap stocks (represented by the AlphaShares Small-Cap index: ACNSCTR) gained 3.36% this month, outperforming the local megacap stocks small gain of 0.94% (measured by the FTSE China 25 Index).

The AlphaShares Chinese Volatility Index, or "CHIX", finished the month of April down -8.52% to close at 18.01 - its lowest monthly close since October 2006. It was surprising to see options traders shrug off March's concerns so quickly, seeing that the China "Fear Gauge" had traded as high as 27.21 just six weeks prior in the wake of the Japanese earthquake and corresponding nuclear crisis.

China Unicom (762 HK) is China's 2nd largest mobile-phone company and was the best performing megacap stock in April and third largest contributor to index returns, gaining 22.46%. The stock traded at highest levels since August 2008, after reports that the telecom operator added 9.6 million subscribers in Q1 to increase its total to 320.9 million. It is the only carrier in China with the right to sell Apple Inc's iPhone.

Three of the four other largest positive April contributors came from the Internet Industry: Tencent (700 HK; up 16.78%), Baidu.com (BIDU US; up 7.77%), and Sina Corp (SINA US; up 25.89%. So far in 2010, those names have gained 30.95%, 53.86%, and 95.80% respectively. Technology (ACNITTR) was the best performing sector in China, gaining 7.36% this month.

Meanwhile, the energy sector was the biggest negative contributor to index returns, falling -1.52% in April. PetroChina (857 HK) and CNOOC (883 HK) were the worst and 3rd largest detractors to index returns, as their shares fell -5.13% and -2.11% respectively. PetroChina, the nation's largest oil company, reported a 14% gain in Q1 earnings, missing analyst estimates after increases in state-controlled fuel prices lagged behind gains in crude oil costs. CNOOC, China's largest offshore driller, shut operations at some oilfields after rough seas conditions caused difficulties at floating production storage and offloading vessel in Bohia Bay. Oil futures fell late in the month after the International Monetary Fund (IMF) said that prices above $100 a barrel are starting to hurt the global economy, and Goldman Sachs forecast a "substantial" correction.

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.