InProp derivative fund slakes thirst for liquid property play

New investors look set to double size of recently launched IPD-tracking fund, reports Jane Roberts

The team behind the UK’s first IPD-tracking derivatives fund has had a good nine months since the product went live. InProp Capital has delivered what the founders promised for their three cornerstone investors and is in due diligence with more investors that could double the fund at least.

The UK Commercial Property Fund aims to give an ungeared, market-tracking, beta property return efficiently, relatively cheaply and with monthly liquidity, by accessing the IPD all-property return through derivatives. It operates at a tradeable net asset value with no bid-ask spread and no subscription or redemption fee.

It was taken up initially by the managers of two daily priced, authorised property unit trusts: SWIP Property Trust and Skandia Property Fund, managed by ING REIM. Prupim is also an investor. Altogether the trio invested a total of around £40m.

That notional amount was invested in property futures and with only a fraction of the capital literally tied up in those contracts the rest is invested in UK gilts, which are liquid and can be used as collateral, or if investors should want to redeem.

InProp’s strategy has been to trade ‘off exchange”, ie negotiating a price for an All-Property contract directly, or ‘over the counter’ (OTC), with a counterparty, then clearing the trade through the EUREX exchange to mitigate the counterparty risk.

The OTC market gives users the ability to negotiate a deal’s size and price, and the privacy of off-exchange negotiating suits inProp’s experienced team. “OTC has benefits,” says inProp co-founder Paul Ogden. “You can haggle for days on the price with a broker and/or a bank, unlike in an exchange-traded environment.”

Ogden is the marketing and investor relations partner while Ricardo Pereira is the analyst and Markus Wolfensberger the trader. They formed the business two and a half years ago after their former employer, Bank of America, quit property derivatives.

At the time of the fund’s launch, Prupim director of derivatives Will Robson said: “Rather than an alternative to real estate, this adds another type that provides extra liquidity alongside the alpha of direct investment.” The investors have used the fund to get cash into the market and haven’t yet needed the liquidity it offers in the opposite direction, as none have experienced net outflows from their funds.

Liquidity looks attractive

The likely new investors now in due diligence are property fund managers and multi-asset managers. Ogden says the latter like the fund’s liquidity. “They tend to understand our approach. These people frequently look at things like REITs but  (otherwise) have struggled to use property.”

He sees public pension funds seeking  simple, cheap exposure to property beta  as “an obvious future investor base for us. The key thing is how we work with their consultants. We explain that the fund is a conservative product and is lower risk than many forms of property investing.”

The move away from defined benefit pension schemes with long-term investment horizons to defined contribution schemes should play to inProp’s strategy. “Especially  where the user selects the asset allocation and may want more liquidity,” Ogden points out. “How do you provide that in property?”

As a promoter of efficient beta investing, inProp Capital’s partners express scepticism about others’ expectations of sustainable performance. “Few people demonstrate sustainable alpha and if they do, it may be down to higher risk-taking,” Ogden says. Further down the line, inProp may develop a product where gearing can be introduced. “We are sounding out investor appetite for this type of fund,” Ogden says.

Invested in days, managed over months

InProp Capital invested the UK Commercial Property Fund’s capital “in a matter of days” of going live, says co-founder Paul Ogden, illustrating the relative ease of getting money into the market using derivatives as opposed to buying physical assets.

InProp does not comment on individual contracts, but the market believes the fund was behind two EUREX-cleared trades in September, four days after it launched: a £20m notional trade in March 2011 contracts (equivalent to calendar 2010) and a £20m  March 2012 (calendar 2011) contracts trade.

But inProp will not just sit back until the contracts close out. “To achieve market tracking with IPD and keep the exposure correct, we have to actively manage the portfolio,” Ogden says. The fund has traded “about half a dozen times”, he adds.