Hedge funds are opportunistic, and invest where the most profit potential is seen. Some hedge funds are designed to invest in real estate while others take advantage of opportunities in property as they arise. A real estate hedge fund can focus on domestic opportunities or be willing to invest overseas. Either way, there are lofty fees attached to investing with a hedge fund.
Hedge fund Pershing Square not only invests in real estate because values are expected to increase, but also takes advantage of properties that are falling in value. According to Reuters, William Ackman, who runs the fund, took a short position in a commercial property. This investment was a bet that the value of the property would fall and Ackman was attempting to profit on that. Ackman has a history of investing in distressed property including the bankrupt mall operator General Growth Properties.
Conditions in the housing market can change abruptly. In 2010, John Paulson, who runs a hedge fund that bears his name, said he expected to see growth of 8 to 10 percent in the U.S. housing market. By 2011, Paulson reversed course because of new U.S. financial legislation that he felt crippled the housing market. As a result of the new laws, Paulson saw a threat of stagnation in housing and did not expect pricing recovery in the near term, according to Forbes.
It is not always in the property itself that hedge funds seek to buy, but instead the loans or debt held by property owners. According to Tampa Bay Online, hedge funds are particularly interested in purchasing distressed commercial mortgages as opposed to home loans. Hedge funds might only circle when they can invest cheaply and earn profits. In 2009, hedge funds were buying up troubled mortgages for 50 cents on the dollar, and earning profits hand-over-fist, according to the article.
Hedge funds are lightly regulated investment vehicles that are paid lofty fees to deliver excessive profits. A typical hedge fund fee model has two layers, including a 2 percent management fee and a 20 percent performance fee. If investment performance falters and profits drop, the hedge fund cannot continue to charge investors the performance fee until the fund regains any losses that were incurred. Some funds include a hurdle rate, which is a minimum profit the fund must earn before investors pay performance fees.