The American real estate market may be underwater, but a new buyer is stepping into the ring to boost market prices – hedge funds.
Historically, hedge funds have been limited to investments in the stock and bond markets. In fact, their name is derived from a market strategy (hedging) where fast traders move in and out of a position to profit on minute differentials in security pricing from market to market. Recently, high frequency trading has made hedge funds even more profitable.
But now hedge funds want a piece of main street. The new asset class of the hedge fund universe is the single family home.
Real Estate Needs Hedge Funds
Asset backed loans are quickly becoming the only way to borrow. While on the personal side there are personal loans on car titles and home equity loans, businesses are also finding that asset backed loans are the way to go. Previously, we discussed how small business credit cards are virtually non-existent.
It is our job as analysts to see how changes in lending trends grow or shrink the prospects for economic recovery. Recently, banks have taken to “riskier loans,” but only in the context that they are backed by hard assets—accounts receivables for businesses and real property for individuals and companies.
Asset Backed Lending
There’s plenty of talk in investing circles about the attractive yields to be had in real estate investment trusts with what is a relatively low-risk (at least at these prices) investment. But while REITs may seem to be attractive at eye-level, you may be buying into one of the most toxic investment strategy ever.