Persistent Edge offers hedge fund expertise to CIC

All of Persistent EdgeÆs funds are up in 2008. Now the funds of funds house is setting its sights on helping China Investment Corporation manage its money.
Persistent Edge has been AsiaÆs most successful fund of hedge funds provider in the past three years. During the good times, they outperformed the rest of the funds of funds market by a considerable margin, and now, remarkably, in the downward cycle they have succeeded in preserving capital at a time when global funds of hedge funds are down nearly 20% on-average.

Now, it are setting its sights on helping China Investment Corporation (CIC) manage its money. CIC has not had a good year with its cross-border investments û and thatÆs putting it mildly. ItÆs the fact that they have passed the acid test of 2008 that is now prompting Persistent Edge to think laterally about how it could participate in the management of sovereign wealth money.

ôWe have now proven through the last few years that Persistent Edge has been successful in getting returns in all types of market conditions," says Eric Xu, the managing director of Persistent EdgeÆs Hong Kong office and the chief risk officer. ôThat contrasts with the experience of ChinaÆs sovereign wealth investments this year. So we hope we can offer our help in advising them constructively in the future.ö

Any collaboration with CIC would not likely see sovereign money being credited to Persistent EdgeÆs existing funds, but instead constitute an advisory arrangement with the view to investing money actively in hedge funds.

Running through the funds that they currently offer, the flagship is the $500 million Persistent Edge Asia Partners Fund, which was up 1.8% at the end of November. Second, the $200 million Persistent Edge China Partners Fund, which is up 1.3% for the year, and third, the $120 million Persistent Edge Global Partners Fund, which is currently up 0.2%.

In 2007, the same three heavy-hitting funds produced stellar returns of 47%, 76% and 30% respectively.

The secret of their success has been difficult for competitors to decipher, and before you jump to a false conclusion, Persistent Edge is audited by Ernst and Young, and all of its underlying funds employ major prime brokers and are audited by a big four accountancy firm.

Some speculated that their success in previous bull years was due to leverage. But Persistent Edge says thatÆs not the answer, and it doesnÆt use leverage. Instead it attributes its performance to being swift at moving in and out of themes at the right time. Until late-2005, it was overweight in Japan, then switched into long-bias China for 2006 through to the autumn of 2007. Then it moved out of its long bias China funds into trading oriented China funds with net exposure parameters of plus-to-minus 20%, typically funds that would use ADRs and H-shares for shorting purposes.

Before taking profits, Persistent Edge waits until any penalty for redemptions has passed by. However, Persistent Edge wonÆt invest in funds that demand lock-ups and looks for monthly liquidity. So if there is any growth in a trend of hedge funds imposing lock-ups in order to prevent investors accessing and moving around their money, then Persistent Edge wonÆt be investing. On the other side of the coin, Persistent Edge offers different liquidity depending on its investor terms, typically though their standard terms offer quarterly liquidity.

Persistent Edge has a pipeline of $200 million from new investors lined up for 2009 and plans to keep the same investment themes, but may weight their allocations differently. There are concentrations at the top end of some of the funds, caused by organic growth within those hedge funds. The new investor funds flowing into new hedge fund investments will serve to partially dilute concentrations. If there are still concentrations evident, then Persistent Edge says they will alleviate those by taking chips off the table.

The hedge funds that comprise their current portfolio are not public information, in order not to lose their edge on their competitors. However, their investors know their identity, and so does AsianInvestor (though we promised to keep it quiet).
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