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AlphaShares Monthly Letter: July 2009

AlphaShares Indexes July 2009 2009 1 Year 3 Year
AlphaShares China All-Cap Index 11.37% 61.07% 1.51% 23.38%
AlphaShares China Small-Cap Index 16.09% 86.46% 22.54% 12.03%
AlphaShares China Real Estate Index 10.62% 81.15% 12.24% 14.44%
FTSE/Xinhua China 25 Index 10.34% 50.37% -5.06% 19.69%
CSI 300 (A-Shares) 17.92% 105.21% 33.16% 49.88%

The AlphaShares China All-Cap Index gained +11.37 in July. China Mobile weighed on index returns this month gaining only 4.90%, as June subscriber additions were weaker than May, but the pace of the decline was moderating.Information Technology led sector returns gaining 22.40%. Consumer Discretionary increased by 19.70%, benefiting from strong auto sales and improving domestic demand. The Chinese government released details of the $700 million auto replacement and subsidy program. Chinese automobile sales maintained their strong momentum in June as 1.14 million cars were sold, up 36.5% year-on-year, outpacing the US once again.

In contrast to the critical tone set during the presidential campaign, the Obama administration held its first high-level discussion with Chinese officials. The US-China Strategic and Economic Dialogue was held to improve bilateral cooperation, and to resolve issues concerning the global economic crisis, climate change, and nuclear proliferation.

Similar to a banker visiting an overextended borrower, Chinese economic leaders reiterated to their hosts the importance of managing the growing US debt. China has more than $2 trillion in reserves that are held in US Dollar assets. While China’s leadership looked for assurances on US inflation, the American team, co-chaired by Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton, continued to press China to turn its economy away from a reliance on exports and more towards domestic consumption. Geithner did not address China’s currency, despite his comments in January that China was keeping the Yuan artificially low to keep its exports more competitive. The Obama administration warned that there has been a fundamental shift in the US economy, noting that household saving is increasing, and spending will not reach 2006-07 levels (as a percentage of income). Chinese officials indicated a desire to make their economy less dependent on exports, however many Chinese citizens are still inclined to save their money—as the country lacks social safety nets such as: comprehensive health-care, social security, and a formal pension system.

US volatility eased -1.63% to 25.92 (VIX) as domestic companies posted strong earnings, while China Volatility, as measured by the AlphaShares Chinese Volatility Index (CHIX) climbed 5.86% to finish at 38.49 as markets experienced large price swings at the end of the month. During the expiry roll on July 17th, FXI near-the-money calls yielded 3.88%, versus SPY calls that yielded only 2%.

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.