Demand rises for property hedge funds

Date: Tuesday, January 12, 2010
Author: Phil Craig, Wealth Bulletin

Real estate hedge funds are making a comeback after a difficult period

Asset managers set up a string of property hedge funds for UK and European investors in 2007, most of which were wiped out by the crisis. But after a difficult period that left only a handful of funds for investors to consider, more are set to launch as interest returns.

The most recent closure in the sector was Portland Capital, founded in 2006 by Sir Ronald Cohen and Lord Rothschild, which shut down its fund late last year and is in the process of winding down the company.

It was the latest long/short property fund in Europe to close out of a set that launched around the peak of the property markets in 2006 and 2007. Rock Capital, founded by real estate veteran Roger Smee, launched a vehicle in 2006.

The following year, a joint venture by property agency CB Richard Ellis and hedge fund manager Reech launched its Iceberg fund, and Portland Capital launched a global fund that summer. Thames River, New Star, Henderson and Kempen Capital Management all launched funds focused primarily on Europe.

After an initial period where many outperformed the index, most shut down within two years of launch. Rock Capital and New Star wound up their portfolios in late 2008, and Kempen and Henderson did so early last year, followed by Portland in December.

New Star said its fund failed to raise enough external assets. Henderson’s fund was deemed “uneconomic”, a spokesman said at the time, after it shrank from €3m at launch to €700,000 a year ago.

However, even in the midst of fund closures, there were signs investors were willing to stick with some strategies. Kempen’s fund grew from €75m at launch to €135m when it shut in January 2009, and suffered no redemptions over the period, according to Paul Gerla, chief executive at the asset manager.

The decision to shut the fund came after a double-digit loss in 2008, but Gerla said the fund managers ended the fund because they believed it would not be able to meet its target return of 10% to 12% a year.

Portland Capital also shut its fund after substantial losses, but a spokesman for Cohen said the decision came down to the investment team feeling unable to deliver attractive returns given increased volatility in the sector, rather than economic necessity.

Investors in the funds that survived were well rewarded: Thames River’s €85m Longstone fund, managed by Christian Roos, returned 18% over the two years since it launched to the end of November last year.

Wealth manager Insinger de Beaufort, which launched a property fund in 2003 and has €66m under management, lost 10% in 2007 and 14% in 2008, but rose by a third last year. The $200m Iceberg fund, managed by joint venture CBRE Reech, returned 24% in from May 2007 to the end of the year, 6% in 2008, and 19.5% last year.

Long-only real estate equities funds lost 9% over three years to January 6, according to data provider Morningstar.

Roos said the performance of his fund came down to predicting the difficulties that highly leveraged property companies would face in 2008: “We were bearish on the market that year and saw that companies were really going to suffer from a debt-driven crisis, so companies with big leverage took up a significant part of our short book.”

He cited shorting Spanish property, as well as some highly leveraged German companies, as contributing substantially to performance.

There are signals that investors are coming back to the sector. Robin McDonald is a co-manager of Cazenove Capital Management’s multi-manager strategy, which was a founding investor in Thames River’s fund, and holds a tenth of it today. He said that direct property funds remain unattractive thanks to illiquidity and problems valuing legacy assets.

Other investors are hoping to place money in similar funds, according to Christophe Reech, founder and chief executive of Reech Alternative Investment Management. To take advantage of the trend, the joint venture CBRE Reech is set to launch the Spire fund, a pan-European property hedge fund, this week under the management of Martin Allen, a highly regarded property analyst who joined the company from Morgan Stanley last year.

Reech said the fund received regulatory approval last week, and it will launch with about €20m of assets. He said two new versions of the Iceberg fund within the Ucits framework are set to be launched, which will allow a wider range of investors to place money in the strategy. When Iceberg began, CBRE Reech said it would launch a further five funds. Spire is the second.

Reech said: “We have a one-year delay to the business plan because of the financial crisis and the lack of appetite from investors. We now have two more products in the pipeline, and are hoping to launch them in the second and third quarters.

“There is a momentum right now of interest. We do have an enormous amount of demand from partners to create products with them for clients. There are some large multi-strategy players coming to us asking if they can place money in the fund.”

Separately, another hedge fund set to launch is from Almega Capital Management, a Dutch company set up late last year by Raymond Lahaut, a fund manager who worked at Portland Capital until early last year. The company plans to launch a fund at the end of the first quarter, primarily focused on European stocks, according to its website. Martijn ter Laak, formerly at Kempen Capital Management, will co-manage the fund.

He said investors have committed seed capital.