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AlphaShares Monthly Letter: August 2011

AlphaShares Indexes August 2011 2011 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) -9.59% -7.31% 3.82% 5.25%
AlphaShares China Small-Cap Index (NYSE HAO) -11.86% -19.94% -6.17% 11.16%
AlphaShares China Real Estate Index (NYSE: TAO) -9.59% -10.62% 2.39% 6.87%
AlphaShares China Technology Index (NYSE: TAO) -10.02% -7.57% 5.08% 14.84%
FTSE/Xinhua China 25 Index -8.79% -8.94% 0.56% -0.80%
CSI 300 (A-Shares) -3.30% -4.74% 3.90% 8.37%

China News:

China's Trade surplus rose sharply to a record high of $31.48 billion in July from June's $22.27 billion, and the $28.7 million US dollars from the same period a year ago. July exports rose 20.4% year-on-year to reach $175.128 billion - a record monthly high and up from June's 17.9%. However, external global instability continues to worry Chinese exporters as the sovereign debt crisis in the EU and credit down grade in the US has generated more uncertainty about the recovery of the global economy. The route in global equities has triggered a sharp increase in risk aversion as investors pulled back from riskier assets.

China's yuan strengthened during August to finish at 6.3781 per US dollar, the strongest level since the country unified official and market exchange rates at the end of 1993. The 0.92% gain in August has brought the yuan's 2011 appreciation to 3.60% against the dollar so far this year - supported by the US Federal Reserve's pledge to keep interest rates at a record low at least through 2013 and signs that China will use currency gains to help rein in inflation. China's headline CPI and PPI inflation numbers came in at 6.50% and 7.50% respectively, with the former reaching a new cycle high.

China Equity Markets:

Global equities sold off violently during the month as fears spiked in early August following the announcement that Standard & Poor's was lowering its US credit rating from AAA to AA+. It was the first time in 70 years that US treasury debt has not received the highest rating from S&P. The AlphaShares China All Cap Index (Bloomberg: ACNACTR) fell as low as -16.31% during the month before paring losses to finish August at -9.59%. Year-to-date, the index slipped into the red at -7.31%.

Small cap stocks (represented by the AlphaShares Small-Cap index: ACNSCTR) fared worse than their large cap counterparts (represented by the FTSE China 25 Index) this month, falling - 11.86% and -8.79% respectively. They have returned -19.94% and -8.94% YTD. The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), finished August at 28.14, an increase of nearly 43% from the end of July. Fears peaked on August 8th as the CHIX reached 51.48.

In stock specific news, China Life Insurance (2628 HK) was the largest negative contribution to index returns, dropping -24.70% in August. The nation's biggest insurer reported first half profits that slid 28%. The company announced it may be considering a bond sale in Hong Kong to bolster its capital after stock and debt market declines eroded its profitability margin. Its AShares listing (601628 CH) hit its lowest levels since it began trading in Shanghai in January 2007.

Telecom was the only sector to post a positive return in August, gaining 2.24%. China Unicom (762 HK) is the nation's second largest mobile phone carrier and it reported Q2 profits that surged 50% to $388 million, beating analyst expectations of $152 million in earnings. It is currently the only carrier that offers Apple's iPhone with a service contract, and added 5.41 million 3G subscribers in Q2 for a total of 23.95 million. Unicom chairman Chang Xiaobing could not comment as to when the company will be able to offer Apple's new iPhone 5, however, he did note that his company's cooperation with Apple has, "a beautiful past and a bright future." The stock gained 6.38% this month.

China Unicon still lags the 35 million 3G users of China Mobile (941 HK), and its total customer base of 181.6 million remains less than a third of China Mobile's 621.8 million. China Mobile, the world's biggest phone carrier by users, also reported during August. Its Q2 profits increased 7% after data traffic rose on demand for smart phone games and videos. Shares of China Mobile gained 1.93% in August, and were the largest positive contributor to index returns.

Sincerely,

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.