BRIEFING: Property funds should learn from innovative hedge fund industry

Real Estate funds can learn a lot from the hedge fund industry, which is good at creating innovative structures and tailored models, delegates heard at PropertyEU’s Future of Real Estate Funds Briefing which was held in London this week.

‘The hedge fund industry is 50 years old, much older than real estate, so it is instructive to study what happened to it in order to see the future of real estate,’ said Ian Laming, chief operating officer at Tristan Capital Partners.

‘Hedge funds went through extreme fragmentation, creating thousands of strategies and incredibly creative instruments. So alongside the big firms I foresee a proliferation of smaller real estate managers and creative solutions, if regulators will allow it.’

Quality is crucial
The relatively young real estate sector offers great opportunities to control your investment and increase the value of the asset, to craft products and change the market, according to Laming: ‘As a manager you must align interests and expertise, do what you do best and find investors you can work well with.’

The quality of managers is crucial to a successful long-standing relationship with investors. Another way real estate funds can learn a precious lesson from hedge funds is to avoid the ‘reincarnation issue’, as Laming put it: ‘In the hedge fund industry if you die you do not come back, while in real estate the model is broken and people who have failed come back again and again. More supply and demand of good managers is needed. But it is a structural issue that will normalise over time.’

Like hedge funds have prime brokers, real estate funds could incubate some upcoming managers, Laming said, and ‘investors would be hugely appreciative of that. Basically you can buy talent and bring it under your umbrella.’

Evolution
As the real estate fund industry evolves, ‘structures can be adjusted but managers should stick to what they can deliver, bank on their expertise and never compromise on the basics,’ said Tizian Galassini, COO and head of product development for the client capital group at LaSalle Investment Management.
Experts agreed that if you have a core identity and a demonstrable track record, then you will have no problem raising capital or persuading investors to come back for more.

For example there is a trend for funds getting renewed, but ‘I am not a fan of fund extensions, even if now investors may agree to them,’ said Duncan Owen, head of real estate at Schroders. ‘I think it is best practice to wind them up, deliver on the time scale agreed at the outset and give people their money back. If they think you have done a good job they will invest again.’

Laming agreed: ‘You have no choice if you want to build a franchise and have a good track record: bring the fund to its natural end, then start again. Investors will follow you, provided you have set up your stall very clearly and explained what the partnership involves.’