The Darling Asset of Hedge Funds You Can Easily Buy

Tuesday, 07 Feb 2012 09:53 AM

By Andrew Packer

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Stocks surged to their highest pre-2008 crash levels last week. To some investors, that means we can throw caution to the wind. Happy days are here again.

To me, multi-year highs are the kinds of price levels that suggest caution. It also means that other asset classes may provide better returns during the next few years.

Along that line of reasoning, bonds are out. In today’s zero-interest rate world, there’s no income and little upside. As I’ve mentioned in previous blogs, bonds might even be riskier than stocks at these prices.

If you’ve already owned bonds during the past decade, these prices are a great time to sell. Likewise, it may be a great time to sell growth stocks that have been on a tear since the market rebounded nearly three years ago.

So instead of looking at loved asset classes, let’s focus on an area that investors absolutely won’t even look at right now: housing.

Yes, the housing market remains on life support. President Barack Obama came out last week with a new plan to help underwater homeowners refinance at lower rates and save on monthly payments. While this plan may allow consumers to have some more money to spend and thus stimulate the economy, it still puts housing squarely in a downtrend.

That’s also confirmed by the latest numbers of the Case-Shiller Index, which shows that housing has not only continued to decline, it’s doing so at a faster rate than most economists expected.

So far, that doesn’t sound good for housing. But there’s a silver lining in this cloud. At today’s prices, in markets significantly off their highs, investors can buy houses that provide positive monthly cash flow. During the height of the real estate boom, investors piled in with the expectation of a quick sale. They weren’t concerned with a tenant making monthly rental payments.

Today, that’s flipped. Price to rent ratios are back to pre-housing bubble levels. And hedge funds want in on the game. A few have recently announced their intention to start investing directly in housing. That’s an indication that, despite the bad news, prices are so low relative to rent, that it makes sense to become long-term homeowners to take advantage of a strong rental market.

Yes, real estate is substantially different than other investments. There isn’t a daily market where you can get an ever-changing price for the value of a property. Housing requires maintenance, insurance, and a watchful eye on tenants. Hedge funds can get around this by buying in bulk from banks and the government, and then setting up property management companies.

But for the most part, individual investors can outdo hedge funds. Individuals have superior knowledge of their local markets.

Yes, prices may continue to go lower. Or they may be close to a bottom. Either way, at today’s prices, the right real estate investment can provide consistent, growing cash flow. That’s a far cry above uncertain markets.

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