When real estate prices in Europe were rising, long-only funds dominated institutional investment in the sector. There are about two dozen aimed at the retail market alone. Now that the slump that began in the U.S. housing market has spread to the other side of the Atlantic, some U.K. institutional funds in the sector have moved to stem outflows by suspending redemptions to prevent forced selling of holdings. Meanwhile, hedge funds and funds of funds are popping up to promise investors a chance to make money on the downside as well.
Among them is U.K.-based $10 billion Thames River Capital, which launched a €24 million ($37.8 million) long-short continental European property hedge fund, Longstone, last autumn. Michael Warren, investment director at Thames River, says long-short real estate strategy is a niche business now, but he believes demand will pick up. Long-stone, which returned 3.18 percent for the first quarter of 2008, is short the Spanish and Irish markets, as well as leveraged real estate companies, but long U.K. and core Europe real estate companies.
Another entry in the field is U.K.-based investment group Tri-Alpha, which has some $2 billion in assets under management. A subsidiary of wealth manager Stonehage Group, which has $24 billion of assets under management, the firm is slated to launch real estate fund of funds Global Property Strategy in early June. TriAlpha joins a small group of competitors, including Dublin-based GAM, which has a €7.6 million multistrategy real estate portfolio, introduced in October 2007. Other firms, including London’s Man Investments, are considering similar offerings.
Global Property Strategy portfolio manager Sean Curry says his fund has a 70 percent core position in stable, liquid managers and strategies and 30 percent in directional plays, including funds that are long emerging markets. Among those are the $100 million Dubai-based TNI Mena Real Estate Active Fund and the $200 million London-based Portland Global Real Estate Fund.
None of the funds TriAlpha uses hold physical property; however, some invest in real estate–related companies, like REITs or homebuilders.
How popular real estate hedge funds and funds of funds will be with investors remains to be seen. Glyn Jones, chief investment officer at PSolve, the investment consultant unit of U.K.-based Punter Southall Group, says that for now his clients are sticking with long-only funds. “Property is a long-term investment, so schemes are prepared to hold on. There are liquidity concerns, but none of my clients are really looking to sell.”
