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AlphaShares Monthly Letter: March 2011

AlphaShares Indexes March 2011 2011 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) 5.92% 4.55% 14.19% 7.45%
AlphaShares China Small-Cap Index (NYSE HAO) 3.48% -3.34% 8.52% 12.26%
AlphaShares China Real Estate Index (NYSE: TAO) 5.83% -1.72% 9.82% 3.65%
AlphaShares China Technology Index (NYSE: TAO) 3.18% 8.63% 10.27% 23.70%
FTSE/Xinhua China 25 Index 5.60% 3.56% 7.87% 1.78%
CSI 300 (A-Shares) -0.14% 3.71% -1.10% -3.57%

China News:

China hosted a Group 20 leaders meeting in Nanjing on March 30th, a sign interpreted by some as the country's first step toward a more flexible yuan that may result in its inclusion in the International Monetary Fund's currency basket. French President Nicolas Sarkozy said the yuan should be included in the IMF's Special Drawing Rights, a unit of account derived from the usable currencies of IMF members. The SDR basket was created in 1969 and is reviewed every five years by the IMF's executive board. The next review is set for 2015.

As leadership in Beijing fends off calls for it to let the yuan currency trade more freely faster amid accusations it is being kept artificially high to boost its own exports, the People's Bank of China (PBoC) raised the bank reserve requirement ratio by 50 bps on March 25th. It is the third time this year that policy makers have announced such a measure, and the move is being interpreted that the tragic events in Japan are unlikely to have significant impact on policy decisions elsewhere in Asia. China's consumer price index (CPI) stayed at 4.9% in February. Premier Wen Jiabao told the country's legislature earlier this month that reining in prices was the government's "top priority" in 2011, as the country strives for a more balanced economic growth rate.

China Equity Markets:

The AlphaShares China All-Cap Index (Bloomberg: ACNACTR) gained 5.92% in March to bring its Q1 return into the black at 4.55%. Small cap stocks, represented by the AlphaShares Small-Cap index (Bloomberg: ACNSC) gained 3.48% this month, underperforming local megacap stocks' return of 5.60% (measured by the FTSE China 25 Index). The yuan touched 6.5488 on the last day of trading this monts - its highest level in 17 years. The currency appreciated 0.36% in March, bringing its 2010 YTD appreciation versus the US dollar to 0.90%. With a deprecating US dollar, strong local currency performance enhances US investor returns in international equities.

The AlphaShares Chinese Volatility Index ("CHIX"), fell -7.03% this month, but March was hardly "uneventful" in the sphere of moves in the often referred to "fear-gauges". The CHIX spiked up 35.98% from the beginning of the month on March 16th following the worst earthquake ever measured in Japan on March 11th, and its aftermath of a tsunami and a nuclear crisis. After closing February at 20.01, the CHIX traded as high as 27.21 midmonth, before closing March at 18.60.

Energy was the best performing sector in March, gaining 9.26%. China National Offshore Oil Corporation, CNOOC (883 HK), is the country's largest offshore energy producer and was the 2nd largest contributor to monthly index returns, gaining 11.03% to close at an all-time high. On March 24th, the company announced its 2010 annual results, and reported an 85% increase in profits. The $8.3 billion record earnings followed a difficult 2009 in which company results were stammered by low oil prices following the financial crisis. The company plans to tap its cash flow to ramp up exploration and acquire more assets. On March 30th, it signed agreements, jointly with France's Total SA (FP FP), to buy stakes in Tullow Oil's Ugandan exploration interests.

Baidu (BIDU US), owner of China's most popular online search engine, was the largest positive contributor to index returns for the second consecutive month, gaining 13.74%. Shares are up 42.76% so far in 2011, and closed the quarter at highest closing price on record of $137.81 after reports about new services the company is developing. It is planning to develop a mobile operating system, and is testing Web browsing software for personal computers - which may put Baidu in direct competition with Microsoft's (MSFT US) Internet Explorer and Google's (GOOG US) Chrome.

China's purchasing managers index (PMI) rose from 52.2 in February to 53.4 in March after three consecutive months of slowdowns. With economic growth only moderating, rather than slowing, many economists are taking the opinion that quantitative tightening is working, and their confidence that China is engineering a soft landing is increasing. Goldman Sachs upgraded its China equity stance to overweight noting that the nation's policy tightening is "beginning to bite", which in turn leads its economists to expect less further policy tightening going forward.

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.