Media and Resources Media and Resources

AlphaShares Monthly Letter: October 2011

AlphaShares Indexes October 2011 2011 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) 17.18% -11.40% -14.34% 23.13%
AlphaShares China Small-Cap Index (NYSE HAO) 17.41% -26.94% -28.22% 25.89%
AlphaShares China Real Estate Index (NYSE: TAO) 19.22% -18.23% -17.80% 22.94%
AlphaShares China Technology Index (NYSE: TAO) 18.11% -12.90% -15.56% 32.03%
AlphaShares Yuan Bond Index (NYSE: TAO) 1.49% NA NA NA
FTSE/Xinhua China 25 Index 16.43% -11.81% -14.57% 16.78%
CSI 300 (A-Shares) 4.80% -9.51% -16.99% 20.25%

China News:

As China's third quarter GDP growth slowed to 9.1% after expanding 9.5% in the second quarter, top Chinese authorities announced a series of pro-growth initiatives geared towards funding rail infrastructure projects and small and medium sized business programs. Chinese inflation cooled slightly in September, as its consumer price index increased 6.1% in September from a year earlier, slower than the 6.2% rise in August. At the end of the month, Premier Wen Jiabao announced the government may fine-tune its economic policies as needed - fueling speculation the central bank is ending a two-year policy tightening campaign, as economic growth slows, inflation eases, and property sales slump. Tax breaks and easier access to loans have already been announced to help smaller companies.

The yuan appreciated 0.42% this month against the dollar after September's depreciation of -0.05%, which marked the first time in over a year that it did not appreciate monthly versus the greenback. The yuan has gained 3.97% against the dollar so far in 2011.

China Equity Markets:

The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), finished October at 34.38, down 27.62% from the month prior's close of 44.34, but not before peaking on October 4th at 53.35 - a level of "fear" not seen in China since March 2009 during the apex of the financial crisis. Anxiety over Chinese equities grew when a controversial bill was approved by the US Senate earlier in the month aimed at forcing China to appreciate the value of its yuan currency. After a violent end-of-summer selloff, local equity markets rebounded sharply as investors were reassured by the government stepped in to buy shares of bank stocks - showing confidence in bank valuations, which had been battered as of late, and essentially setting a short-term floor in a equity market desperately searching for signs of a bottom.

Fears spiked on the last day of trading before the holiday of Chung Yeung on October 4th as the AlphaShares China All-Cap Index (Bloomberg: ACNACTR) cratered to its lowest points since spring 2009 - reaching levels that brought its 2011 year-to-date returns to -30.42% respectively. However, just days after locals returned from the Golden Week national holiday, local stocks were reinvigorated by a unit of China's sovereign wealth fund boosting its holdings in the "Big Four" lenders. Central Huijin Investment, a unit of the $400 billion China Investment Corp, said the purchases were aimed at supporting the state lenders, whose share prices have tumbled due to increased lending restrictions and capital requirements this year. By the end of the month, the Chinese equities were able to stage a most impressive rallying 17.18% in October, bringing their YTD return to -11.40%.

Huijin is already the largest shareholder in the big state lenders: Industrial and Commercial Bank of China (1938 HK), China Construction Bank (939 HK), Bank of China (3988 HK), and Agricultural Bank (1288 HK). Those banks' shares gained 29.61%, 21.56%, 15.36%, and 37.90% respectively in October. The financial sector makes up 31.26% of the AlphaShares All-Cap Index.

China Mobile (941 HK) was the largest detractor from index returns as it slipped -2.96% this month. The world's largest phone company by subscribers reported earnings on October 20th that rose 5.4% in the first nine months of the year amid fierce competition in music downloads and other online businesses. Its profit growth has slowed from double-digit levels following a government-orchestrated reorganization of phone companies in 2008 that created three groups, each with mobile and fixed-line assets. China Mobile said it had 633.5 million subscribers at the end of September, up 3% from the end of June.

Baidu (BIDU US) is China's biggest internet company by market value and was the largest positive contributor to index returns in October gaining 31.12%. It reported that third-quarter profit rose 80% as revenues from search-engine advertising surged. CEO Robin Li, named by Forbes magazine as China's second-richest man, is boosting investments on services, such as wireless and travel features, to meet competition from rivals Alibaba Group (1688 HK) and Tencent Holdings (700 HK).

Large cap stocks (represented by the FTSE China 25 Index) lagged their small capped counterparts (represented by the AlphaShares Small-Cap index: ACNSCTR), gaining "only" 16.43% compared to 17.41%. They have returned -12.90% and -26.94% respectively so far in 2011.

In sum, October 2011 will be remembered for the Chinese government making a strong statement that it is prepared to act to shore up the economy and banks if faced with a sharp slowdown in demand. In a marketplace that was full of anxiety at the start of the month, these words were music to investors' ears as evident by the sharp slide in implied volatilities after reaching its apex on October 4th.


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.