Thames River proves long/short strategy can work, despite the casualties, reports Jane Roberts
Of the six European long/short property equities funds launched in 2006 and 2007, only one is still trading. While an 84% attrition rate is terrible, the one that survived, Thames River Capital’s Longstone Fund, delivered positive returns in 20 out of 24 calendar months (see table). And there is more good news: IdB Real Estate Equity Fund, a long/short fund launched in October 2003, has returned 34% in 2009. Furthermore, Reech CBRE Alternative Real Estate is set to launch a long/short property equities fund
The funds that closed were the Rock Real Estate Securities Fund, New Star Real Estate Hedge Fund, Henderson’s Property Equities Alpha Plus Fund and the Kempen Property Hedge Fund. Most recently, Portland Capital, the property hedge fund set up by Apax founder Sir Ronald Cohen, is said to be winding down its Portland Capital Real Estate Hedge Fund (see below).
All were rocked by property shares’ high volatility in late 2007 and through 2008, and never came near to meeting their absolute return targets. Hedge funds generally offer investors monthly liquidity, and many voted with their feet, hastening the funds’ closure. “It is the nature of our [hedge fund] industry,” says one long/short fund manager. “Our investors won’t stomach volatility in returns.” This is perhaps not surprising, as theoretically, funds that can go long and short should have beneﬁted from market volatility. But as another manager says: “If your net position was wrong in 2008 (when the market fell) or after Q1 2009 (when equity markets rallied) you were toast.
“The rally from the March 2009 low was the EPRA Index’s strongest ever and in 2008 if you were net long, or long on the wrong companies, you got killed. It was a brutal.” Longstone managers Christian Roos and Marcus Phayre-Mudge didn’t get it wrong. Since its launch in November 2007, the €85m fund is up 18.1% while its benchmark, the EPRA index, is down 42.6% (see graph). The fund also has low annual volatility – 2.4%, compared with 29.5% for EPRA – which Roos says its investors particularly like.
Longstone’s investors include absolute return funds, real estate funds looking to ﬂatten volatility and family ofﬁces. “Initially we had a lot of hedge fund of funds, but a lot of them exited in Q4 2008,” says Roos. Longstone had a couple of months of net outﬂows in Q4 2008, but otherwise, money has come in steadily. Investment director Mike Warren says: “While property funds have been shunned in recent years, we have seen monthly inﬂows of €3m to €4m.”
The IdB Real Estate Equity Fund, run by Dutch asset manager Insinger de Beaufort, now a subsidiary of BNP Paribas, had a far tougher time in 2008, when its total return for the year was -14.4%. But it has performed very strongly this year, especially in April and August, when it returned 9.34% and 13.1%. Volatility in the fund is correspondingly higher, at around 19%; its net positions catch more of the underlying market, both on the upside and the downside, making IdB’s a different product to Longstone’s.
Longstone’s strategy is to generate uncorrelated returns “which we get by the spread on the long book versus the short book”, Roos says. “There is a 13% monthly spread of returns between the bottom and top 10 liquid stocks in the EPRA Index. There is scope to return this pure Alpha, rather than being net long or net short. This is the long-term rationale for our kind of fund.”
The fund invests in central Europe, Russia and Turkey, as well as the developed European markets, and sees €200m as the maximum size it could grow to, taking into account the liquidity in the stocks. For the past few months, the fund has been net long on UK companies, in the 20%- 30% range, after being more or less neutral until summer. Roos says: “We were too slow in understanding the full impact of central banks’ policy decisions to push money out into the system and reﬂate risky assets.”
Guy Morrell, HSBC’s head of property, multi-manager, says: “Long/short property securities funds have their place, but careful due diligence is required before investing. We held the Insinger Real Estate Equities Fund in the HSBC Open Global Property Fund, but sold our holding earlier this year. Its strategy dampened exposure to European property equities markets, which helped when the market was falling. The fund also provided a high level of liquidity.”
HSBC Global Asset Management’s Multimanager team has more than $45bn of assets under advice. Roos is an analyst by background, but his colleagues have direct property experience, including Chris Turner, head of the property business and Thames River Property Investment Trust, the largest and best-performing property equities closed-ended fund. “There is no magic formula,” Roos says. “We went into an environment where risk management is very important. Then it is about knowing Europe’s underlying real estate markets well, and there’s deep knowledge here.”