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AlphaShares Monthly Letter: September 2010

AlphaShares Indexes September 2010 2010 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) 10.67% 7.33% 17.19% -5.17%
AlphaShares China Small-Cap Index (NYSE HAO) 14.73% 13.77% 29.50% -1.46%
AlphaShares China Real Estate Index (NYSE: TAO) 11.11% 7.36% 13.41% -4.45%
FTSE/Xinhua China 25 Index 8.93% 0.58% 6.08% -8.60%
CSI 300 (A-Shares) 3.01% -15.71% 0.28% -15.95%

China News:

On September 29th, the US House of Representatives voted 348 to 79 in favor of the Currency Reform for Fair Trade Act, allowing trade sanctions against its partners for allegedly manipulating their currencies. The measure would effectively allow US companies to petition for duties on imports from China to compensate for the effect of an artificially weak yuan—which economists widely consider undervalued (some as much as 40%), representing a hefty subsidy for Chinese exports.

Before the bill can be passed into law, it still has to be confirmed by the Senate in November. While the impact is likely to be minimal, it does increase the odds of a potential trade war—which would certainly be negative for global growth. Proponents of free-markets are viewing the vote as an alarming sign of US trade protectionism. Many believe this may impair the fragile global economic recovery, and may be seen as the first “shot across the bow” for a potential trade war between the two economic superpowers. Options traders have taken notice as the Put/Call ratio picked up to 2.08 in September after trading less than 1.54 the previous twomonths in the FTSE/Xinhua contracts.

China Equity Markets:

The AlphaShares Chinese Volatility Index (CHIX) finished September down -10.23% to 20.36, while the CBOE S&P 500 Volatility Index (VIX) slipped -9.02% to finish the month at 23.70. As stock prices and implied volatilities are typically negatively correlated, it is not surprising to see both volatility indexes drop as global equity markets experienced an impressive September rally driven by better economic data in the US and China—easing concerns of a “double dip” recession. The S&P 500 Index posted its best September return since 1939, gaining +8.92%, while the AlphaShares China All-Cap Index (Bloomberg: ACNACTR) climbed +10.67% this month.

Smaller Chinese firms, represented by the AlphaShares Small-Cap index (Bloomberg: ACNSC) outperformed larger capitalized counterparts (as measured by the FTSE/Xinhua Index) for the month (+14.73% versus +8.93%) and so far this year (+13.77% versus +0.58% YTD). All China sectors posted positive returns this month led by Materials (+19.81%), followed by Consumer Discretionary (+19.81%) and Technology (+18.85%). Tech shares were buoyed by Baidu.com (BIDU US), +30.84% in September, and was the broad market’s largest positive contributor to index returns this month. It closed at 103.82 on the 27th, marking the ADR’s first ever touch of triple-digit territory.

After a 2-month suspension, Ping An (2318 HK) shares resumed trading on September 2nd and gained +23.38% during the month. The Hong Kong Stock Exchange halted trading in China’s second largest insurer (2.12% of the all-cap index) to give investors time to digest the news of its acquiring a majority stake of Shenzhen Development Bank, whose 300 outlet network will allow the insurer to better serve its customers—whose average age is less than 40, and whose assets are expected to grow substantially in the coming two decades. In March, the China Insurance Regulatory Commission issued a statement that “in principle” any insurance group should not control more than one financial company that operates the same type of core business.

The Chinese Automobile industry makes up 2.12% of the broad market and screamed up +34.63% this month, with Brilliance China Automobile Holdings (1114 HK) posting the best September Chinese equity return, +75.50%. The company partnered with Germany luxury car maker BMW to set up an auto finance joint venture to boost BMW’s sale in the world’s auto market. It would provide service for sale of BMW cars in China including auto loans, finance leasing, and auto insurance.

Another China automobile company, BYD Company Limited (1211 HK), had the second best monthly return in China, climbing +39.45%. Company shares were boosted by news of a visit by billionaire Warren Buffet who was also in China to co-promote “the Giving Pledge” with Microsoft co-founder Bill Gates to persuade the super-wealthy of China to join their American counterparts to donate most of their fortunes to charity. Buffet, who own 10% of BYD through MidAmerican Energy toured the BYD operations for four days, and told China Central Television, “If we’re buying shares, we won’t announce it… I can absolutely promise you we’re not selling.”

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.