New Hedge Fund Anticipates Fall In Real Estate Prices

by Phillip Morton, Investors Offshore.com

06 May 2005

Thomas Barrack, founder of Los Angeles-based real estate investment firm Colony Capital LLC, is to form a new hedge fund in anticipation of a fall in property prices in the United States.

In an interview with Bloomberg, Barrack, who has made a name for himself buying everything from Atlantic City casinos to London's Claridge's hotel, revealed that he believes US real estate market is over-priced. The new hedge fund will enable Barrack to sell borrowed assets, or sell short, to profit from a drop in prices.

"When the psychology changes, it really changes," remarked Barrack. "You want to position yourself for these macro waves."

Since 1991, Barrack has spent more than $5 billion buying what he considers to be under-valued properties, and has posted an average annual return of 22%.

Colony is looking to raise $250 million from investors for the new global hedge fund. Led by President Richard Saltzman, the fund will buy and sell assets including shares of real estate investment trusts, or REITs, and homebuilders and commercial mortgage-backed securities.

In addition to the new hedge fund, Colony plans to raise about $400 million for a new fund to invest mainly in office buildings and plants that may need improving, with a goal of returning about 12.5% a year. The firm also is gathering more than $1 billion of commitments for its seventh main fund and related pools for Europe and Asia.

In the five years to the end of 2004, returns from institutionally held real estate in the U.S. climbed at an annual rate of 9.9%, according to the National Council of Real Estate Investment Fiduciaries Index. By comparison, the Standard & Poor's 500 Index fell 2.3% a year during the same period.

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