How Real Estate Hedge Funds Work

Real estate hedge funds are investment funds designed to invest in and trade stock, debt and commodities in groupings that allow for the greatest dividends, payouts, and gain. Real estate hedge funds must take into account both the intricacies of the real estate market and the volatility inherent in them, and ride out the storms of volatility within the trading market as a whole. Hedge funds have been around since 1949 when Alfred W. Jones created the first ” hedged” fund, believing each investment was affected byy the whole market as well as by its own merit and found unorthodox and varied ways of profiting from that belief.

Hedge funds are open to a limited number of select investors, and each hedge fund has specific and detailed investment strategies, geared toward making the greatest profit possible in a relatively short time. Not as constrained as traditional mutual funds, they employ a wide variety of techniques to reach their goals. A hedge fund seeks to minimize risk by spreading the risk over numerous and various investment potentials, using a variety of methods, including short selling and derivatives. Real estate hedge funds work by understanding the market and taking advantage of expected changes in the market, even finding a profit during an economic downturn. The price for their unorthodox methods and skyrocketing success (or plummeting failure) are fees paid by those who would invest through hedge funds, including management fees, performance fees, high water marks, hurdle fees, and withdrawal/redemption fees. Investors are not always free to withdraw or redeem funds at will, but must wait to redeem based on contracted time tables.

Hedge funds use numerous investments in an overall attempt to turn a profit. They buffer potential loss by fanning out the investments for their investors and watch each market carefully for when to by and sell stocks, bonds, commodities, futures, and the like. Short-selling, or shorting, is the practice of selling off borrowed assets, especially securities in the hope of buying them back at a lower price before returning the borrowed assets to the rightful owner. The investor profits by the asset decreasing in price, not by an increase. Loss can be incurred if the price of the security actually goes up. Derivatives are an agreement between two parties based on the estimated future worth of an asset, and involve no real exchange of ownership or property. These can include any securities, including options, futures, and swaps. There is no inherent value in a derivative, as it is not an asset. Its worth is based on an underlying, an asset to which the two parties agree the investment is tied and therefore guides the value of the security. These securities are commonly traded before their expiration much like assets, basing the price on formulas and theoretical calculations drawn from economic modeling.

Returns for investors in hedge funds are expected to be higher than the relative returns within the greater market, due to their varied investments, innovative investing strategies, and methodology. They are based on the performance of the fund as a whole, less fees and losses incurred by any of the methods employed. Returns on hedge fund investments can be expected in both rising and falling economies, and with good management, in volatile economies. Returns over a sustained period of time shows that most hedge funds with competent leadership out-perform equities and bond indexes, avoiding much of the volatility and loss they commonly incur.

In the present economy, hedge funds expect to make major profits through distressed assets, multi-unit and commercial buildings. Distressed assets have a value severely diminished due to the investor or issuer rather than market in general, but distressed real estate is a rampant problem with values nowhere near previous appraisals. Oftentimes the distressed values mean that mortgage owners owe more than their property is worth, leading to major debt concerns. These hedge funds often invest in such assets with the hope of selling once the market regains much of its previous value. The same is true with commercial and multi-unit real estate that due to market conditions, declining neighborhoods, or poor management have lost much of previous worth.

Real estate hedge funds are indeed varied and intricate investments formulated to turn a profit in any economy through manifold strategies and investment tactics. The risks are great and prices are high, but for those privileged to be included in the investment, great possibilities await.