Hedge funds enjoy the unique freedom of investing in anything and everything, making them much more diverse than your average mutual fund. Recently, managers have been adding real estate to that list of nontraditional investments. There are estimated to be about 40 real estate hedge funds in existence today.
Not to be confused with asset based lending, although similar, real estate hedge funds can employ several different strategies. Some are focused mainly on opportunities in publicly traded securities of real estate companies, primarily Real Estate Investment Trusts (REITs).
A REIT is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90% of their income, which may be taxable in the hands of the investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.
Other real estate hedge funds focus on acquiring sub-performing properties either in one specific geographic location, or spanning the globe. They often purchase these properties at very attractive rates since the seller usually lacks liquidity.
Cliffwood has one of the original real estate hedge funds, launched in 1994. It engages in a long-short strategy and currently has about $100 million under management, along with a long-only fund. Total firm assets are about $586 million.
Blackacre Capital is another big name in real estate hedge funds. They often buy large hotels and projects with the goal of restructuring and developing. Blackacre just recently raised $890 million for their new real estate hedge fund.
Another well-known firm, Angelo Gordon & Co. launched its AG Long Short Realty Fund in 2003. The firm, which has amassed over $5 billion worth of real estate, focuses on investment grade-rated securities that they feel are mispriced. They invest throughout the debt capital structure as well as in lower rated debt where if they see the opportunity for high returns.
Additionally, The Praedium Group recently started to develop their new real estate hedge fund, attempting to profit from the disparities between indexes that track the public and private real estate markets.
As the needs of hedge fund investors continues to grow, the demand for more-specialized investment products, such as those exposed to the real estate sector, should continue to flourish.