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.