Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Innovation Investing Conference
    • 2022 Defined Contribution East Conference
    • 2022 ESG Investing Conference
    • 2022 DC Investment Lineup Conference
    • 2022 Alternatives Investing Conference
Breadcrumb
  1. Home
  2. Print
November 01, 2004 12:00 AM

Hedge funds getting real

Real estate, that is. The newest twist is hard assets, like Chicago’s Trump deal

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Hedge fund managers are gravitating toward real estate — either by including an increasing amount of it in their funds or by adding dedicated real estate hedge funds to their offerings — to capture the higher returns compared with other asset classes.

    In the process, they are taking advantage of overpriced market niches such as real estate investment trusts.

    At the same time, they're getting a piece of the money flowing into real estate from increased allocations by pension funds, foreign institutional investors and syndicates of high-net-worth individuals.

    Although a few hedge funds had invested in real estate securities for two or three years, what's new is that some are investing in so-called hard assets — offices, apartment buildings and hotels.

    Most are investing in publicly traded securities, mezzanine debt and opportunity fund-type deals, rather than the large core or core-plus real estate deals.

    A recent example: Donald Trump secured $160 million in financing to build a 90-story Chicago skyscraper from a private equity firm and two real estate hedge funds — Blackacre Institutional Capital Management, the real estate subsidiary of hedge fund manager Cerebus Capital Management LP, New York, and Grove Capital LLP, New York, hedge fund titan George Soros' real estate hedge fund.

    New York hedge fund manager Och-Ziff Capital Management Group invests a small portion of its $10 billion hedge fund in real estate. Last year, Och-Ziff hired two executives from Blackstone Real Estate Advisors LP, New York, to form a real estate private equity fund.

    Other hedge fund managers devoting a portion of their hedge funds to real estate include Farallon Capital Management LLC., San Francisco; Perry Capital, New York; ESL Investments, Greenwich, Conn.; and Baupost Partners, Cambridge, Mass.

    A few large managers already have real estate hedge funds that invest mainly in real estate securities, including Lehman Brothers Inc., New York; Gem Investors Inc., Chicago; and Helix Realty, Chicago. Lehman plans to raise another dedicated real estate hedge fund.

    Going other way

    One real estate manager — Apollo Real Estate Advisors, New York — went the other way and started the Claros Real Estate Security hedge fund in April. An initial $30 million came from high-net-worth investors and eight Apollo principals; fund executives hope to raise another $170 million within the next two years from institutional investors.

    Claros is focused primarily on credit-intensive or credit-impaired real estate debt, with particular emphasis on securitized debt, said Richard Mack, managing partner.

    "We believe the market is underserved and relative to core investing, the risk-adjusted returns are better," Mr. Mack said. "We hold securities through the process of resolving the impairment and then we resell it into the market."

    Prudential Real Estate Investors, Parsippany, N.J., in a joint venture with Madison Capital Management LLC, New York, formed a hedge fund earlier this year to exploit inefficiencies of the real estate securities market, said Robert Falzon, a Pru managing director. The fund is trying to take advantage of mispricings in the REIT market vs. the public and private property markets.

    Real estate hedge funds typically are limited partnerships that invest in REITs and other publicly traded real estate securities — both equities and debt — taking long and short positions on the investments, Mr. Falzon said.

    "There are a lot of long-short (investment opportunities) with real estate securities," Mr. Falzon said. "There's a legitimate strategy around hedge funds targeted around REIT securities."

    2 more on way

    Eventually, the Prudential/Madison Capital joint venture will create two more funds. One will invest in opportunity funds on the secondary market, taking advantage of the difference between the price of the limited partnership and the value of the underlying real estate, Mr. Falzon said. Another will invest in smaller, bankrupt real estate companies.

    Many private equity managers also are starting or considering real estate funds, said Sandy Presant, national leader for opportunity funds services with Ernst & Young, New York. The reason is simple: the relatively terrific returns in real estate compared with other asset classes, he said.

    Rick Kleeman, senior managing director at Starwood Capital Group LLC, Greenwich, Conn., agrees. "Real estate has shown very good risk-adjusted returns over other asset classes, many of which are showing negative returns," Mr. Kleeman said. "People tend to pile into whatever's producing yield. There's no yield anywhere in the world, and real estate still offers attractive yields."

    The National Property Index was up 3.42% for the third quarter and 10.8% for the year ended Sept. 30, according to the National Council of Real Estate Investment Fiduciaries, Chicago. The NCREIF index of core properties calculates returns gross of fees and without leverage.

    The good news for investors is all these funds give them more ways to invest in the hot real estate asset class. This is a real boon to pension fund investors, who are lining up to get into more traditional real estate funds.

    It's also a combination of two "sexy" asset classes that are attractive to institutional investors, said Jacques Gordon, managing director, LaSalle Investment Management, Chicago.

    "A second factor is that the classic hedge funds are taking advantage of overpriced and underpriced markets through derivative strategies," Mr. Gordon said. "It's a mystery how hedge funds have raised money on the basis of 15% and 20% returns and have no background in real estate and jumped in and doing direct deals. It's very dubious to me."

    At the same time, several real estate managers are starting to employ hedge fund-like long-short strategies, particularly in REITs, he said. "Long-short will become mainstream, even if they don't call themselves hedge funds," Mr. Gordon said.

    But there is a downside.

    "Now that hedge funds and private equity funds are in the game, there is more competition. The more competition, the lower the returns," Ernst & Young's Mr. Presant said. "They are paying more for the real estate, and (real estate managers) will have to get more creative with the real estate.

    ‘No low-hanging fruit'

    "There's no low-hanging fruit anymore," Mr. Presant said.

    Hedge funds can invest only a small percentage in real estate for fear of endangering their liquidity, said Mr. Presant. Most hedge funds have to be able to give investors back their money within two years, with some on a quarterly return basis, whereas many real estate investments have a four- to 10-year life cycle.

    Also, Starwood's Mr. Kleeman said hedge funds typically do not have performance hurdles to overcome before they earn performance fees. Typical real estate managers must get returns of 9% to 10% before they can command performance fees,he noted.

    Still, real estate is becoming more attractive to hedge funds at a time of enormous growth in the hedge fund industry. "A lot of hedge fund managers are struggling to deploy the amount of capital they have under management," Mr. Kleeman said.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Alternatives: Investing Across the Spectrum
    Sponsored Content: Alternatives: Investing Across the Spectrum

    Reader Poll

    May 9, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Are Factors a Thing of the Past?
    Q2 2022 Credit Outlook: Carry On
    Leverage does not equal risk
    Is there a mid-cap gap in your DC plan?
    Out of the Shadows: The Revolution in Shadow Accounting
    The pivotal role of fixed income markets in the ESG revolution
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    May 9, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Innovation Investing Conference
      • 2022 Defined Contribution East Conference
      • 2022 ESG Investing Conference
      • 2022 DC Investment Lineup Conference
      • 2022 Alternatives Investing Conference