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AlphaShares Monthly Letter: November 2011

AlphaShares Indexes November 2011 2011 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) -8.55% -18.98% -19.72% 18.83%
AlphaShares China Small-Cap Index (NYSE HAO) -6.32% -31.56% -33.02% 24.13%
AlphaShares China Real Estate Index (NYSE: TAO) -10.76% -27.03% -25.33% 17.05%
AlphaShares China Technology Index (NYSE: TAO) -9.13% -20.85% -21.89% 36.15%
AlphaShares Yuan Bond Index (NYSE: TAO) -0.34% NA% NA% NA%
FTSE/Xinhua China 25 Index -8.44% -19.25% -19.73% 11.08%
CSI 300 (A-Shares) -6.73% -15.60% -16.65% 13.79%

China News:

On the inflation front, China prices slowed by the most in three years, as October Consumer Price Index (CPI) rose 5.5% from a year earlier - the least in five months (after peaking at a cycle high of 6.5% in July). Non-food inflation eased for the second consecutive month to 2.7%; while food prices rose 11.9% in October, after a 13.4% in September. The government has (1) raised subsidies for farmers to increase food supplies, (2) reduced transport charges to limit costs, and (3) told some specific companies to refrain from marking up prices. With CPI easing for the third consecutive month, inflation watchers are a bit more assured that the recently hot inflation prices may be contained.

On November 30th, it was reported that China's official purchasing managers' index (PMI) contracted again in November to register at 49.0 - showing contraction for the first time since February 2009. A reading below the 50 level separates expansion from contraction in the manufacturing sector, and marked a significant fall from the prior month's reading of 50.4.

Also on the last day of the trading month, the People's Bank of China (PBoC) said it would cut the reserve requirement ratio (RRR) for the first time in nearly three years by 0.5%. The central bank had raised interest rates five times from October 2010 and boosted banks' RRR nine times to a then record 21.5% in July for the biggest lenders. In its first RRR reduction since December 2008, the PBoC moved decisively to stimulate its economy; in a move that many analysts say could be the start of a campaign of monetary easing aimed at bolstering China at a time when its trade and real-estate sectors are sagging. The move signals that China has put growth at the top of its priority list, rather than concern about inflation - even at the risk of reigniting a property bubble that it has spent months trying to deflate.

China Equity Markets:

The AlphaShares China All-Cap Index (Bloomberg: ACNACTR) dropped -8.55% in November after its strong rebound of 17.18% in October. Year-to-date (YTD), Chinese equities are down -18.98%. Small cap stocks (represented by the AlphaShares Small-Cap index: ACNSCTR) fared better than their large cap counterparts (represented by the FTSE China 25 Index) this month, falling -6.32% versus -8.44%. They have returned -31.56% and -19.25% YTD respectively.

The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), closed November at 31.82, down -7.45% from October's close, after trading as high as 39.91 on November 23th. Fear gripped markets as equities posted negative returns for ten consecutive days between November 14th and 25th. Global markets were extremely volatile with the rising Euro crisis, the failure of the US congressional budget super committee to reach an agreement, and renewed concerns of a worldwide economic slowdown.

In late November, Vice Premier Wang Qishan said that "global conditions remain grim and that ensuring economic recovery is the overriding priority." Premier Wen Jiabao said that economic policies will be "fine tuned" to protect the economy against global turmoil. Policy makers have already announced tax cuts for companies, trial reform of the value-added tax system, and increased credit for smaller companies.

Before the RRR move, some economists had predicted prices of residential property to fall between -10 to -20% in the months ahead. Real estate investment accounts for about 15% of China's gross domestic product (GDP) and is the main driver of growth. The AlphaShares Chinese Real Estate Sector posted a November return of -10.76%, bringing its YTD return to -27.03%.

Consumer Staples were the second best performing sector in November, returning 0.56% behind the Utilities sector which gained 4.71%. The second and third largest positive contributors to index returns came from the consumer staples sector: Tingyi (322 HK) and Want Want China (151 HK). It was announced on November 11th, that both stocks would be added to the widely followed Hang Seng Index effective December 5th. Both stocks outperformed dramatically during the month of the announcement ahead of the index transition event, gaining up 9.17% and 8.22% respectively.

China Petroleum & Chemical Corp (368 HK), commonly called Sinopec, was the largest positive contributor, as the stock gained 5.91% in November. The company agreed to pay $3.54 billion for a 30% stake in Galp Energia's Brazilian unit, giving it access to the biggest oil discovery in the western hemisphere since 1976. Last year, Sinopec agreed to buy a 40% stake in Spanish oil giant Repsol SA's Brazilian subsidiary for $7.1 billion.

The AlphaShares Technology Index stumbled -9.13% this month. Tencent Holdings (700 HK) was the largest detractor from index returns, as the Chinese online game and social-networking company dropped -20.81% this month. It announced a 14% jump in Q3 profit amid a rise in revenue; however, the results missed analysts' expectations because of maturing products in a slowdown in the once-heady growth of China's online community, the biggest in the world by government measurers.


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.