Editor’s note: This is a guest market commentary written for Nareit by Sam Sahn, managing partner, portfolio manager at Hazelview Investments.
When a global alternative wealth manager with more than $30 billion in assets under management (AUM) launched a new pooled investment vehicle for their investors, they chose to partner with Hazelview Investments to gain exposure to publicly listed real estate. The client, whose private real estate AUM totals approximately $6 billion, wanted to benefit from the liquidity and diversification REITs offer, while limiting the potential for downside market risk—Hazelview’s alternative real estate strategy matched both of their objectives.
The Hazelview alternative real estate strategy is designed to provide clients with all the benefits REITs offer (real estate exposure, inflation protection, income stability, diversification, liquidity, and capital appreciation potential) while dampening volatility. This was an important consideration expressed by the alternative wealth manager as they sought a liquid real estate investment solution that offered a lower volatility profile, more comparable to that of a private equity real estate portfolio.
Unlike a traditional long-only REIT strategy, which remains nearly fully invested in the market, Hazelview’s alternative real estate strategy combines an actively managed long-only portfolio of REITs with a dynamic beta overlay that tactically shifts capital to a market neutral long-short portfolio of REITs and fixed income opportunities to limit downside volatility.
By successfully reducing market exposure when the probability of downside risk is higher, the strategy is able to achieve an attractive risk adjusted return, particularly for metrics like the Sortino Ratio and Sharpe Ratio. To achieve this outcome, the strategy relies upon a multifactor model which analyzes several quantitative variables and then combines this analysis with a fundamental assessment of current market conditions. A graphic depicting the categories of variables which the model evaluates is provided below:
The model signals to increase REIT exposure when most of the factors screen positively. Similarly, it will signal to reduce REIT exposure when most of these factors are negative and there is a higher probability of future downside risk. Although the model uses multiple factors in its analysis, an example of two of the factors within the “Valuation and Growth Expectations” category are the forward AFFO multiple and the premium / discount to NAV, which historically exhibit mean reversion over time. This consistent mean reversion stems from the stable contractual cash flows inherent to REITs and a sizable private equity market to anchor valuations.
Within the actively managed long-only component of the strategy, Hazelview constructs a concentrated portfolio of their best REIT investment ideas within developed markets. The portfolio is diversified by both geography as well as property type and provides greater exposure to specialty sectors within real estate relative to what investors are often able to achieve in private real estate funds. These investment opportunities include secular growth opportunities such as data centers and senior housing, cyclical plays, deep value, or contrarian investments, mispriced recovery opportunities, and turn-around stories.
As an example, in this case study, the client also has private real estate investments for their investors that are benchmarked against the ODCE index. However, by investing in Hazelview’s alternative real estate strategy, the client was able to considerably enhance the diversification of real estate exposure for their investors as shown in the chart below.
This case study demonstrates how certain strategies can utilize unique investment tools to achieve client objectives and risk preferences to enhance their investment experience with listed real estate.