First in our “Hedge Fund Investment” series…
Savvy investors know that some investment vehicles are just better than others when seeking a high return on the investment dollar, even if some risk is involved. Really savvy investors know how to find the great investment opportunity with the significantly minimized risk. Hedging real estate may just be the perfect storm…
With turmoil in the global markets running rampant, many investors have turned back to hedge funds for their investment vehicles. Many more are hedging real estate today. Similar to a REIT, a real estate hedge fund is a pool of private capital, managed by an investment advisor, that engages in various types of real property investments.
Hedge funds historically invest in all kinds of things, including bonds and securities, however the real estate hedge fund has gained popularity because positive returns often continue even when traditional investment markets fall. Hedge funds are private, so their structures are typically less restrictive than many other public investment platforms.
When hedging real estate, the fund buys and holds real property for both income and appreciation. The hedge fund may buy raw land, triple net commercial property, or pools of residential real estate. Some funds buy and hold, however others engage in fix and flip or distressed properties, with the purpose of restoring and selling those for a profit.
In the real estate hedge fund, investors must be accredited, as defined by the Securities Act of 1933. All this means is that the investor must maintain a minimum level of net worth. The investor may be an individual, a trust, a corporation, or other type of acceptable entity.
Hedge funds that engage in securities trading are organized under a strict structure, and those that hedge real estate have similar constraints. The significant benefit is that, as long as the hedge fund is not dealing in securities of any type, the U.S. Investment Company Act of 1940 typically does not apply, resulting in a less restrictive investment structure. As a result, the fund can have an unlimited number of accredited investors.
Hedging real estate is a complex endeavor, however it is an avenue worth exploring for the serious real estate investor.
Next up, the “side pockets” of hedging real estate…
NOTE: We pride ourselves on bringing you the most informative, up-to-date, and accurate information possible about the often-confusing world of real estate investing. Nothing we post however is intended to be taken as legal advice. You should always contact a licensed legal professional for information and advice about your own unique investment scenarios.
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