Real Estate Securities Expert To Launch Hedge Fund, Sees Market As 'Flat-ish'

Sep 22 2006 | 12:00am ET

The real estate securities sector is in the midst of a seven-year rally, but as pension funds and endowments increase allocations to the asset class and more real estate-focused funds come to market, one expert warns that the honeymoon won’t last forever, and investors should chose property-focused funds with care.

“As real estate continues to do well, you see more and more funds being launched, but after six or seven years of very strong returns for real estate securities, investors should be thinking about a real estate fund that has the ability to react under any market conditions,” said Christopher Pappas, who is preparing to launch a long/short property-focused hedge fund in the fourth quarter.

While he won’t go into specifics, Pappas, a former portfolio manager for a REIT fund at Deutsche Bank and former head of a long/short real estate securities fund at the Praedium Group, believes that, on a risk-adjusted basis, a relative value strategy makes the most sense.

“I wouldn’t expect a strong downdraft, but I wouldn’t be expecting 10-20% returns going forward, either,” he said. “I see the market as flat-ish in real estate securities, which is when investment strategy becomes important.”

Just last week, Morgan Stanley announced that it has raised a whopping $2.24 billion for its Special Situations Fund III, which will invest in real estate debt and equity securities around the world. And while large firms like Morgan Stanley and small boutiques like Pappas’ create new real estate securities funds, demand from institutional investors grows each day.

Recently, the $144 billion California State Teachers Retirement System boosted its real estate allocations to 11%, up from 6%, and just this week, the board of the University of California Regents met to decide whether to move in to more aggressive strategies with their $321 million real estate portfolio, including halving the school’s more conservative core real estate allocation to 25% while plowing 40% into enhanced strategies (up from 25%) and increasing high-return strategies to 25% (up from 15%).

While real estate securities in general are a popular investment, Pappas, who said his fund will focus mainly on the U.S. but have an international element, sees great opportunities abroad.

“Real estate is expanding overseas with the REIT structure being adopted in places like the U.K., Germany and Asia,” he said, adding that there are a lot of IPOs coming out of Asia as their real estate capital markets mature, and that Eastern Europe is just behind that region.

While Pappas touts his specialized investment experience as a competitive advantage, he said that you don’t have to be a real estate guru to invest in the asset class.

“A generalist hedge fund manager can make money in real estate when the market is on the rise,” he said, “But when the momentum weakens, watch out!”


In Depth

Will Liquid Alts’ Performance Sustain Future Asset Flows?

Aug 25 2014 | 10:34am ET

Liquid alternative investment funds saw the highest percentage of capital inflows...

Lifestyle

Hedgies, Economists and Musicians Mingle At Milkin Mixers In Hamptons

Aug 25 2014 | 6:00am ET

Leave it to Michael Milken to bring some gravitas and sweat to the Hamptons -- along...

Guest Contributor

Looking Ahead: What’s In Store For Managed Futures?

Aug 22 2014 | 12:52pm ET

The last five years were phenomenal for investors in equity indices. Will the next...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

July/August 2014 Cover

The time was right

Commodities/Futures magazine launched at the precipice of a revolution in the futures industry—really a revolution in the idea of risk management—that would move it from a small niche industry to ...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.