2014 witnessed a noticeable increase in the number of hedge funds launched with a core strategy of real estate; five funds were launched over the course of the year, while 2015 has so far seen three such funds launched. This is compared with 2012 and 2013 when only two funds were launched in each year respectively.
Using Preqin’s custom benchmark tool, it can be seen that these funds have delivered strong annualized returns over the past five years (16.16%), greater than the Preqin All-Strategies Hedge Funds benchmark (7.41%). Managers have likely taken advantage of rising real estate prices in North America and Western Europe, along with the near 0% interest rates that followed the Global Financial Crisis. However, these funds also present greater volatility, with the five-year volatility of such funds standing at 19.59%, compared with All-Strategies’ 4.96%.
Fees charged by funds with a core strategy of real estate are lower than the hedge fund industry average. Funds with this core strategy currently have an average management fee of 1.49% and an average performance fee of 15.88%, compared with the industry’s 1.51% and 18.76%. However, these funds are also less liquid than the rest of the industry, with an average lock-up period of nine months and an average redemption frequency of 53 days, compared to the industry average of a seven month lock-up and an average redemption frequency of 46 days. This difference could be attributed to the longer investment horizon of real estate compared with the credit or equity markets.
As the real estate market continues to strengthen and stabilize, particularly in North America and Western Europe, it will be interesting to see whether more managers seek to follow this path and whether investor appetite for such strategies grows given the relatively low fee structure and strong returns.