Next in our “Hedge Fund Investment” series…

The complex nature of hedge fund investing has inspired volumes of theoretical explanation on the directional nature of investing and event-driven strategies.  Warren Buffett himself has devoted much attention to the topic.  Arbitrage and equity markets and risk parity are buzzwords that economists use when debating the merits of hedge funds.

In the hedge fund paradigm, investments that lack liquidity are place into a separate account by the hedge fund manager, known as a “side pocket account.”  In essence, this investment is tracked separately from the other investments in the fund.  Provisions for side pocket investments are established in the offering documents for the fund.  A limit is usually placed on side pocket investments, based on a percentage of the total assets of the fund.

So what do side pockets have to do with hedging real estate?  Everything…

An investor who chooses to withdraw from a hedge fund cannot receive any portion of an asset held in a side pocket account nor can he force the manager to sell an asset held in a side pocket.  If the property must be held for a variety of reasons to stabilize value, this will prevent the asset from having to be sold before the fund is able to realize the full potential value of the property.  The departing investor will be paid out on the side pocket asset at such time as the asset is liquidated.

In the real estate hedge fund, it is often a reality that a piece of property cannot be accurately valued or is not currently liquid for some reason.  The hedge fund manager is paid based on the valuation of investment, using a side pocket account will prevent the overvaluation of a property and the subsequent overpayment to the manager.

A word about valuation…  when hedging real estate, the investor must remember that there is not an easy liquid exchange methodology for real estate (unlike securities, bonds, or other assets that are more traditionally liquid).  Valuation is a critical part of real estate hedge funds, and this is where many funds got out of hand in the mid 2000s.  Consequently, side pocket assets are a cleaner method of approach unless the fund does not allow for withdrawals or the payment of performance fees until there is a disposition event.  Various methods of valuation are used when hedging real estate, depending primarily on the nature of the property.  We will discuss these in a future article.

Next up, costs and fees involved with hedging real estate… 

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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.

Artisan Real Estate Group is one of the top boutique real estate firms in Arizona.  We provide an end-to-end suite of services to our investor clients, including a full range of residential and commercial real estate services, income property location service, investor services, property remodeling, restoration, and rehabilitation, real estate finance consultation, REO and bank-owned property services, trustee sale consultation and bidding representation, and new home builder services.   Our international team specializes in helping investors from all over the world with their Arizona real estate transactions.  Our goal is to find the best properties with the highest cap rate and ROI for our investor clients.  Contact us today to find out how we can help you grow your personal wealth and investment portfolio.  Artisan Real Estate Group, http://www.artisanrealestategroup.com/  or call us at (602)644-1280.  Email: info@artisanrealestategroup.com

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.

Artisan Real Estate Group is one of the top boutique real estate firms in Arizona.  We provide an end-to-end suite of services to our investor clients, including a full range of residential and commercial real estate services, income property location service, investor services, property remodeling, restoration, and rehabilitation, real estate finance consultation, REO and bank-owned property services, trustee sale consultation and bidding representation, and new home builder services.   Our international team specializes in helping investors from all over the world with their Arizona real estate transactions.  Our goal is to find the best properties with the highest cap rate and ROI for our investor clients.  Contact us today to find out how we can help you grow your personal wealth and investment portfolio.  Artisan Real Estate Group, http://www.artisanrealestategroup.com/  or call us at (602)644-1280.  Email: info@artisanrealestategroup.com