Hedge Funds for Accredited Investors: An Alternative, Multifamily Real Estate

Hedge funds allow investors to pool their money and invest in different securities and other types of investments with the hope of generating positive returns. These are attractive to investors because hedge funds are not heavily regulated like mutual funds. Hedge funds also generally have more leeway than mutual funds, allowing investors to try other investment strategies.

You need to be an accredited investor to participate in this type of investment. This means hedge funds are exclusive to those who can meet certain financial requirements, including a minimum level of income or net worth. Accredited investors can afford the higher fees as well as the risks of hedge fund investing. [1]

Despite the potential benefits of hedge fund investing, accredited investors may still be interested in other asset classes and investment strategies such as multifamily real estate investing.

Here we will discuss hedge funds and a few alternative investments that are worth looking into.

What is a Hedge Fund?

If you’re reading this, then you probably already know what a hedge fund is. But here’s a quick recap.

A hedge fund is a limited partnership between private investors. Their funds are managed by professional fund managers who use different investment strategies, such as leveraging or trading of non-traditional assets, to earn high returns. [2]

Hedge funds are typically open to accredited and institutional investors, as well as high-net-worth individuals (HNWIs). This is due to the regulatory requirements and minimum investment thresholds.

Hedge fund managers have considerable flexibility in their investment approach and can employ sophisticated techniques to generate profits.

Unfortunately, hedge funds are often considered risky because they require a high minimum investment and typically pursue risky investment strategies such as leveraging and short selling. These actively managed investments also charge higher fees than conventional investment funds. [2]

Hedge funds are often structured as limited partnerships, with the fund manager serving as the general partner and investors as limited partners. This structure provides the fund manager with the authority to make investment decisions on behalf of the fund.

They also tend to charge a performance fee, known as the “carried interest.” It is a percentage of the fund’s profits earned over a certain threshold. This fee structure aligns the interests of the fund manager with those of the investors since the manager’s compensation is tied to the fund’s performance. [3]

However, hedge funds also employ risk management techniques to mitigate potential losses. They may use portfolio diversification, hedging strategies, or employ proprietary risk models to manage risk exposure.

Investing in hedge funds carries higher risks and requires a more sophisticated understanding of financial markets compared to traditional investment options. Additionally, the performance of hedge funds can vary widely, and past performance is not necessarily indicative of future results.

For investors who are more risk-averse, it is natural to look for alternative investments.

Accredited Investors Are Loving This Non-Traditional Hedge Fund Real Estate Investing Alternative

Even if you are open to the idea of participating in hedge funds, pursuing alternative investments is still a good idea for a couple of reasons.

For example, you can enjoy a diversified portfolio, which can mitigate the impact of individual investments. This helps you with risk management.

It can even help enhance your returns. Traditional investment options like stocks and bonds may have limitations in terms of potential returns, especially during periods of low-interest rates or when markets are highly efficient. Alternative investment strategies, such as private equity, commodities, and real estate, may offer higher potential returns.

One of the best alternative investments that accredited investors are gravitating towards in recent years is multifamily real estate investing—specifically multifamily syndication.

Multifamily syndication allows accredited investors to pool their funds, much like hedge funds, but for the purpose of purchasing a large real estate property. Syndication deals offer diversification, which helps mitigate risk by spreading investments across multiple units or properties.

It is also a passive investment, which makes it an attractive alternative investment for accredited investors. Multifamily syndications are typically managed by experienced real estate professionals who have a track record of success in the industry.

As an accredited investor, you may appreciate the expertise and specialized knowledge these professionals bring to the table, as they handle property selection, acquisition, financing, and tenant management, as well as the  day-to-day operations of apartment complexes.

A professional real estate syndicator will put the deal together and handle everything from acquisition to the property’s eventual resale.

Multifamily real estate syndication offers passive income and a consistent cash flow. Rental income from the properties is distributed to investors, providing a steady stream of income. Depending on the deal structure, they may also earn a percentage of the property’s appreciation upon resale.

Many accredited investors appreciate the opportunity to generate passive income without the need for direct involvement in property management. Syndication allows them to participate in real estate investing without having to become a landlord.

For those who are looking for an alternative asset class, multifamily housing through real estate syndication may be the ideal choice for you.

What Types of Assets Do Hedge Fund Managers Usually Acquire For Investors?

The four most common types of hedge funds include: global macro hedge funds, equity hedge funds, relative value hedge funds, and activist hedge funds.

Global macro hedge funds are actively managed funds that try to generate profit from the broad market swings that are caused by economic or political events. Global macro hedge funds have the flexibility to take both long and short positions, meaning they can profit from both rising and falling markets. [2]

Equity hedge funds can be either global or specific to a particular country. It involves investing in stocks that are lucrative while also hedging against equity market downturns by shorting stock indices or overvalued stocks. [2]

Relative value hedge funds seek to use temporary differences in the prices of related securities in order to take advantage of price inefficiencies.

Finally, an activist hedge fund invests in businesses and takes actions that can boost stock price. This may include demands that companies change their board of directors, restructure assets, or cut costs. [2]

Hedge fund managers typically acquire a wide range of assets on behalf of their investors. These assets may vary depending on the investment strategies employed by the hedge fund. They may acquire equities, bonds, derivatives, commodities, currencies, real estate, private equity, and other alternative investments.

Hedge funds operate with varying strategies and investment philosophies. Therefore the type of assets acquired by hedge fund managers may differ significantly based on the fund’s specialization, risk appetite, and the current market conditions. It is important to choose a hedge fund based on your financial goals and objectives.

Typical Hedge Fund Performance

Hedge fund performance can vary significantly depending on various factors, including the investment strategies employed, market conditions, and the skill of the fund managers.

It is important to note that hedge funds are private investment vehicles, and their performance data is not as readily available or standardized as that of mutual funds or other publicly traded investments.

Historically, hedge funds have aimed to generate positive returns regardless of the overall market direction by employing a variety of strategies such as long/short equity, event-driven, global macro, and arbitrage, among others. These strategies often involve taking both long and short positions in different securities or asset classes, with the goal of capitalizing on market inefficiencies or specific events.

Hedge fund returns can vary widely from year to year. In some years, hedge funds have outperformed traditional investments like stocks and bonds, while in other years, they may underperform. Over the long term, hedge funds have generally targeted higher returns than traditional investments, but this comes with increased risk and volatility.

Hedge fund performance is also inconsistent across all funds. Some hedge funds have consistently generated impressive returns over an extended period, while others have struggled to meet expectations.

Additionally, hedge fund performance can be impacted by external factors such as economic conditions, market volatility, and geopolitical events. For example, during times of market turbulence, hedge funds may face challenges and experience lower returns or losses.

Alternative Asset Classes for Accredited Investors

Because of their high net worth and annual income, accredited investors have the opportunity to explore a wide range of alternative asset classes beyond traditional investments like stocks, bonds, and real estate.

These alternative asset classes often provide diversification, potentially higher returns, and unique investment opportunities.

Private Equity

Aside from hedge funds, accredited investors may also be interested in working with private equity firms. Private equity investing involves investing in privately-held companies or funds that invest in such companies. Private equity investments can provide access to promising startups, growth-stage companies, or mature businesses seeking expansion or restructuring.

We can say that private equities are similar to mutual funds because they are also pooled investment vehicles. The goal of private equity firms is to acquire controlling stakes in public or private companies. They aim to restructure the company and provide capital for accelerated growth. [4]

In order to turn a profit, however, a private equity fund will have to liquidate its stake either by taking a portfolio company public in an initial public offering (IPO) or selling to another company.

Venture Capital Funds

Venture capital firms provide capital for startups and small businesses. This is in exchange for a share of company ownership. It involves investing in early-stage or high-growth companies with significant growth potential. [4]

Venture capital (VC) funds allow accredited investors to participate in the innovation and disruption happening in various industries. While the investment risk for venture capital investments can be significantly higher, some investors like the possibility of huge returns.

Collectible Art and Commodities

Some accredited investors invest in valuable art pieces, rare collectibles, or fine wine. The value of art and collectibles can appreciate over time and may provide opportunities for capital appreciation. This is the ideal investment for art collectors and connoisseurs.

Just keep in mind that collectible art is a relatively illiquid investment asset, and the costs are typically high. That said, the exclusivity and age of a piece can offset these factors. The works of celebrated artists are particularly profitable. [4]

Alternatively, you may also look into investing in physical goods such as gold, silver, oil, natural gas, agricultural products, and other commodities. These can serve as a hedge against inflation while offering diversification benefits.

Equity Crowdfunding

Equity crowdfunding is a method of raising funds for a business or project by offering shares or ownership stakes to a large number of individuals, typically through an online platform. It allows entrepreneurs and early-stage companies to obtain capital from a wide pool of investors who are interested in supporting innovative ventures. [4]

In traditional forms of fundraising, such as venture capital or angel investing, a small group of wealthy individuals or institutions provide funding in exchange for equity in the company. Equity crowdfunding, on the other hand, opens up the opportunity for a larger number of individuals to invest smaller amounts of money in return for shares in the business.

Equity crowdfunding platforms provide a space where entrepreneurs can showcase their projects and business ideas, while potential investors can browse through various opportunities and decide which ones they want to support. The platforms typically facilitate the investment process, including conducting due diligence on the businesses, handling the legal and financial aspects, and providing a secure online transaction environment.

The investors who participate in equity crowdfunding can range from individual retail investors to institutional investors. They invest in the business with the expectation of financial returns, such as dividends and capital appreciation, as the company grows and potentially becomes profitable or goes public through an IPO.

Examples of well-known equity crowdfunding platforms include: Seedrs, Crowdcube, Republic, StartEngine, and Wefunder.

Real Estate

Real estate is one of the most accessible alternative investments open to all types of investors. It is also arguably one of the best alternative investments you can find if you want a diversified portfolio and a strong cash flow. [4]

There are many ways to participate in real estate investing. Investors may obtain real estate rental properties to generate a passive income. This is perfect if you don’t mind being a landlord and handling tenants.

A Real Estate Investment Trust or REIT is another potential investment approach. It allows investors to put money into various real estate holdings without the hassle of property management. However, you need to keep in mind that you are investing in the REIT itself and therefore have no say in the types of real estate properties they invest in. [4]

With REITs, investors receive dividends from the REITs’ taxable income. This dividend is considered a traditional taxable income by the IRS.

Regardless of the alternative investment strategy, you have to carefully evaluate each opportunity, conduct thorough due diligence, and consider consulting with financial professionals or advisors before making any investment decisions.

Why Accredited Investors & Their Investment Advisors Love Multifamily Syndication

All investors have access to real estate investing. But accredited investors who want to become real estate investors have another option available to them, and that is multifamily syndication. This is the perfect way to expand your real estate investment portfolio.

Just like REITs, multifamily syndication deals can spare you from the headaches of property management. But a significant advantage it has over REITs is that you get to decide what syndication deal you want to participate in. Therefore, you can choose an investment based on the real estate property itself. You can check the various multifamily properties being offered by syndicators and decide for yourself which one you want to invest in.

This form of real estate investing also involves pooling the money of multiple investors and investing it in real estate on their behalf. While a syndication deal can be done with almost any type of real estate, multifamily properties are ideal because of their strong and reliable cash flow. [5]

Multifamily properties are larger and, therefore more expensive. They are generally more difficult to obtain for a lone investor, but a syndication deal helps you get over that hurdle.

Multifamily syndication allows accredited investors to access and invest in larger real estate properties that they might not be able to afford or manage individually. By pooling their resources with other investors, they can collectively invest in projects that offer the potential for higher returns.

Multifamily syndications are typically private entities and are not publicly traded. A syndicator puts the deal together and locates passive investors to participate in the deal. The investors will provide most of the capital needed to acquire the property in exchange for a share of the monthly cash flow. These syndication deals are often limited to accredited investors. [5]

Multifamily syndication is a great source of passive income because the syndicator is also in charge of property management. Once the deal is in place, the investors no longer have to worry about running the apartment complex. It is the syndicator’s job to manage everything moving forward.

Syndication offers plenty of advantages, aside from the fact that it is a passive investment. It is also a reliable source of income because people always need a place to live. Even if one or two units become vacant, there are several units to produce a profit. This is unlike single-family homes that become completely empty and stop producing income the minute the tenants move out.

This also means that syndication is perfect for diversification. Instead of investing in a single property, they can participate in multiple properties within a syndication, which spreads the investment risk across different assets, locations, and market cycles.

Real estate investments often come with various tax benefits. Syndication investments may offer tax advantages such as depreciation deductions, capital gains tax treatment, and the potential for tax-deferred exchanges. These benefits can help accredited investors optimize their overall tax strategy.

Multifamily properties even have the potential to appreciate in value over time. Accredited investors can benefit from both ongoing cash flow and potential capital appreciation upon the sale of the property. This combination of current income and long-term growth potential makes multifamily syndication an attractive investment option.

With this alternative investment, accredited investors can just sit back, relax, and collect their checks.

Do keep in mind that just like any other investment, multifamily syndication carries risks, and investors should carefully evaluate the specific syndication opportunity, perform due diligence, and consult with financial professionals before making any investment decisions. Make sure you work with a syndicator you trust. Work with BAM Capital.

Why Private Fund Managers & HNW Individuals Love Working With BAM Capital For Managed Real Estate Ownership

Accredited investors who are looking for a great alternative for hedge funds should look into multifamily syndication. If you are interested in this type of real estate investment, you need to work with a reliable syndicator with a proven track record.

BAM Capital has over $700 million AUM and 5,000+ units. This syndicator has a strong Midwest focus and prioritizes high-quality multifamily properties that are Class A, A-, and B++. It is an Indianapolis-based company that uses an award-winning investment strategy. [6]

By focusing on properties that have in-place cash flow and proven upside potential, BAM Capital can help accredited investors grow their wealth while mitigating risk and creating forced appreciation. [6]

BAM Capital is a vertically integrated company, which means they can handle every step of the process, from purchasing high-quality multifamily real estate to renovations and property management. BAM Capital will guide you from start to finish.

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy passive income and all the other benefits of being in multifamily syndication, look no further than BAM Capital. Schedule a call with BAM Capital and invest today.

Sources:

[1]: https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds

[2]: https://www.investopedia.com/terms/h/hedgefund.asp

[3]: https://www.investopedia.com/terms/c/carriedinterest.asp

[4]: https://www.vinovest.co/blog/alternative-investments-for-accredited-investors

[5]: https://www.bluelake-capital.com/post/the-difference-between-a-reit-and-multifamily-syndication

[6]: https://capital.thebamcompanies.com/