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AlphaShares Monthly Letter: September 2012

AlphaShares Indexes September 2012 2012 1 Year 3 Year
AlphaShares China All-Cap Index (NYSE: YAO) 6.59% 7.70% 16.87% 1.57%
AlphaShares China Small-Cap Index (NYSE HAO) 5.44% 3.13% 11.34% -2.86%
AlphaShares China Real Estate Index (NYSE: TAO) 9.06% 36.44% 49.70% 6.28%
AlphaShares China Technology Index (NYSE: TAO) 8.57% 6.02% 10.39% -0.37%
AlphaShares Yuan Bond Index (NYSE: TAO) 0.72% 2.11% 2.57% NA
FTSE/Xinhua China 25 Index 6.01% 3.41% 13.35% -2.62%
CSI 300 (A-Shares) 5.17% 0.07% -7.85% -5.47%

China News:

In the local A‐Share market, the CSI Shanghai/Shenzhen 300 Index (Bloomberg: SHSZ300) traded at a 42‐ month‐low on September 26th. The next day, a senior People’s Bank of China (PBoC) official said that stocks were at a level where “value investment kicks in” though he also cautioned that the market faced a “difficult situation”. This follows a summer warning by the China Securities Regulatory Commission (CSRC) that once again cautioned local investors against panic selling while appealing for confidence in the local stock market. Such commentary by such high officials would be described by foreign analysts as very “uncharacteristic” for a central bank and a securities watchdog – adding to yet another unique characteristic of comparing China versus elsewhere. It is worth noting that investors take note, as the CSI 300 managed a rally that put the mainland index up 5.17% on the month. Such an endorsement by such high ranks is also helping to dampen investor fear in Chinese stocks trading elsewhere across the globe as evident by the cooling of the AlphaShares Chinese Volatility Index (ASCNCHIX) – which finished September at its lowest level since May 2011 when it closed at 17.57 ahead of the holiday week celebrating the National Day of the People’s Republic of China.

In addition to talking up stocks locally, officials from the Shanghai Stock Exchange completed a ten‐day road show in North America to brief investors on China’s capital markets. China is accelerating the approval of quotas allowing foreign investors to buy mainland securities as part of its opening its markets to Qualified Foreign Institutional Investors (QFII). The CSRC said the government will cut the minimum requirements on assets under management from $5 billion to $500 million – lowering the entry barrier for companies seeking a license under the QFII program. Zhang Yujun, assistant chairman at the regulator, said the CSRC would implement measures to boost investor returns (!) (Again, almost unheard of in road shows done in North America, where the focus tends to be investor education centering on what the company does, versus what the stock will do) (!).

China Equity Markets:

The AlphaShares China All Cap Index (Bloomberg: ACNACTR) rose 6.59% in September to bring 2012 returns to 7.70% so far this year. Equities were propelled higher during a month that saw: the US Federal Reserve announce its plans for its third quantitative easing cycle; the European Central Bank unveil an expansive bond‐buying plan to stabilize markets; the Bank of Japan unexpectedly increase its asset purchase fund; and China approve 55 infrastructure investment projects totaling over $157 billion US dollars.

The wave of expansionary monetary policies by central banks in developed markets, combined with larger fiscal spending out of emerging market governments is providing a backstop to the world’s equity markets. These institutions that are continuing to throw money to alleviate the global slowdown are giving investors confidence that any bumps in the road will continue to be smoothed by world governments – hence the extremely low “fear” in the marketplace (as implied volatility indexes are commonly referred to as “fear gauges”).

Tensions between China and Japan came to a head earlier in the month over a territorial dispute that has been the worst diplomatic crisis between the two countries since 2005. The clash over a group of islands saw anti‐Japan protests spread from Beijing to Guangzho, and to cyberspace. Baidu (BIDU US), China’s largest search‐engine, and Tencent (700 HK), the nation’s biggest internet company, placed patriotic banners on their websites. Clicking the image above the Baidu search box took users to a separate webpage with the message, “The Diaoyu Islands belong to China!” with an image of China’s flag over the islands. The banner on the Tencent webpage read, “Never forget national humiliation. Enrich the people and build a powerful nation”.

Baidu’s ADR gained 4.83% in Nasdaq trading during September, while Tencent was the largest positive contributor to China equity market returns in September, gaining 11.52%. The China All‐Cap Index (ACNACTR Index), includes both companies with in weights of 5.64% and 4.65% respectively, as the technology sector represents 14.06% of the index. The tech sector does not get a lot of weight in the traditional China H‐shares benchmarks, as the FTSE China 25 Index excludes it entirely, and the Hang Seng holds only Tencent as its sole technology name at a 2.22% weight. As a sector, China techonology names (as measured by the AlphaShares Technology Index: ACNITTR) gained 8.57% this month.

All ten sectors finished positive in September, led by materials, jumping 15.94% this month. The Zhaojin Mining Industry Company (1818 HK) posted the best one‐month return, gaining 37.29%. The company holds interests in eastern China and explores, mines, and produces gold. After the US Fed’s announcement of its QE3 plans, commodities producers, especially gold stocks, rose sharply on speculation that a flood of US dollars would boost demand for the precious metals as a way to maintain asset values. Spot Gold touched USD $1,778 an ounce, its highest level since February 29th. Real estate stocks, who many speculate to hold their value in inflationary times, shot up 9.06%, and are up 36.44% year‐to‐date (as measured by the AlphaShares China Real Estate Index: ACNRET).


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.