How do real estate hedge funds work?

A:

A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests that capital in securities and other investments. Hedge funds are different from mutual funds in that they are willing to take on more risk and their leverage is not capped by regulators. While they normally favor liquid assets, hedge funds can invest in different types of investment products, and hedge fund managers lately have been adding real estate to their lists of nontraditional investments. Of all the hedge funds in operation, roughly 40 of them heavily invest in real estate, giving them the name of “real estate hedge funds.”

How a Real Estate Hedge Fund Invests

All real estate hedge funds invest heavily in real estate, obviously, but the way in which they invest varies by managerial investment strategy. For the most part, real estate hedge funds invest in the publicly traded stock of existing real estate companies, mainly real estate investment trusts (REITs). A REIT is a corporate entity – structured similarly to a mutual fund – that invests exclusively in real estate and is given a tax exemption for doing so. In return, REITs are required to disburse at least 90% of their income, although that income may be subject to tax for the REIT’s investors.

A second way a real estate hedge fund invests its money is through the acquisition of actual properties, usually underperforming ones, at low rates. These properties can be purchased in one specific region or around the globe, but they all tend to be up for sale normally due to a lack of liquidity on the part of the seller. So, unlike the REIT-investing hedge fund, these real estate hedge fund actually owns real estate.

Specific Real Estate Hedge Funds

Angelo, Gordon & Company is one of the larger real estate hedge funds with more than $5 billion in real estate assets and more than $27 billion in total assets. The company has adopted a strategy of investing in investment-grade securities that the fund deems to be underpriced.

Blackacre Capital Management LLC, another large real estate hedge fund, does things a little differently. Instead of investing in debt securities in the real estate market, Blackacre Capital purchases larger hotels and similar projects with the aim of developing the properties.

Other hedge funds include Cliffwood Partners LLC and The Praedium Group, both of which have unique strategies of their own. Founded in 2015, The Praedium Group ias the goal of making profits from the differences in indexes in the public and private equity real estate markets. Cliffwood Partners, one of the first real estate hedge funds, has a long-short strategy in the real estate market.

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