ORN Capital launches 1st property derivatives hedge fund

Hedge fund manager ORN Capital has launched the first property derivatives hedge fund, capitalising on the growth in this emerging market. The ORN Property Derivatives Fund will focus initially on the UK where the property derivatives market is more developed. The fund has been seeded internally with ORN proprietary capital and will be open to external investors from March 2007.

The fund will 'pursue a relative value strategy with the flexibility to go long and short and with the intention of generating returns independent of the underlying property market', ORN said in a press release. The company indicated the fund will not invest in physical property in order to remain as liquid as possible and will target returns of at least 15% with 7% volatility. It is directed to traditional hedge fund investors but ORN also believes it may be attractive to traditional real estate investors who up until now have been able to invest on a long only basis.

The company has appointed Chris Iley, a 15-year derivative market veteran, and Joakim Franson, a property index specialist from the Investment Property Databank (IPD), to develop and run the fund. IPD is the research company whose data provides the benchmark for the derivatives market.

ORN Capital's portfolio manager Chris Iley said the derivatives market growth in the UK, which accounted for some £1 bn of deals in 2005 and quadrupled last year. 'There has been huge investor interest globally in the property sector. The growth of property derivatives together with expansion in the listed market, including REITs, has resulted in a sufficient liquidity to launch a dedicated relative value fund', said Iley.

In today's bull market, there are numerous buyers but not enough sellers. 'We wanted to be the first to offer clients a product looking to exploit an enormous market opportunity', added Iley. 'We will follow the market as it expands internationally. We have already seen trades in France, Germany and the US and expect to see a lot more cross-border activity over the next year'.

The property derivatives market in the UK accelerated through the last few years. Two years ago, the authorities loosened the legal and tax bindweed on the growth of a wider derivatives market. This prompted the first property swap between the UK life insurer Prudential and the property group British Land. These swaps are predominantly based on the IPD annual UK All-property index for a fixed period in exchange for the London Interbank Offered Rate (LIBOR), plus a spread. Meanwhile several brokers have joined forces with property agents to work as intermediaries, most recently BGC teaming up with Cushman & Wakefield.