--Rob McGlinchey
Hedge funds, pension funds and asset managers have been increasingly turning back to using property derivatives in Europe over the past few weeks as they develop a more positive outlook on the real estate market, identifying areas of dislocation for trading. That’s despite the Investment Property Databank releasing statistics last month showing poor first-quarter trading volumes—the lowest since 2006—and observers expecting much the same for the second quarter.
Jon Masters, head of property derivatives at broker BGC Partners in London, told AIN sister publication Derivatives Week that a key strategy for hedge funds has been property index arbitrage. “We’ve seen hedge funds looking to trade the arbitrage between the EPRA [European Public Real Estate Association] and IPD indices and now more funds are looking at alternative, and possibly more specific, real estate equity investments, such as REITs, to trade in a similar fashion.”
He declined to name the hedge funds behind the activity, but said their aim is to even out equity risk in their portfolios, while “minimizing their downside risk and still taking profits presented by the volatile markets.”
Philip Ljubic, senior property derivatives trader at Royal Bank of Scotland in London, added that property linked notes have also become popular. “Pension funds and high net worth individuals are putting up to £15 million ($24.5 million) [each] into property linked notes…These are relatively new products, but people are seeing an improvement in the outlook [for real estate].” A property linked note uses an underlying index and offers a regular coupon, paying the remaining amount at maturity depending on how the index performs. RBS issued a one-year property-linked note last month, but Ljubic declined to give details on whether the bank was set to issue another this month.
According to Phil Barker, a property derivatives broker at GFI Group in New York, there has been a rise in both strategies from end users, but the launch of a new IPD U.S. index three weeks ago to accompany its French and U.K. counterparts means traction is gaining faster in the U.S. “The IPD is more wisely understood on an international level, and now more people are taking a harder look at the property derivatives market in the U.S. as well.”
This article was originally published in Alternative Investment News.