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Feature: Why an LP swapped a direct fund for CBRE Investors’ FoF in Asia

Last week Los Angeles-based CBRE Investors held a $100 million close for its Asian fund of funds, the Asia Alpha Plus Fund. One investor swapped out of a commitment to an Asian country specific vehicle to join the fund. Here Jeremy Plummer, head of CBRE’s multi manager business, explains why.

Diversification via multi-managers is still a strategy finding favour with LPs, it seems.

Though fund of funds have their critics (mainly for charging fees for a service some argue is unnecessary), an example pointing to the benefits of a multi manager strategy arose recently.

Last week Los Angeles-based CBRE Investors held a close on $100 million for its pan Asian fund of funds, CBRE Asia Alpha Plus.Among the investors was a UK pension fund that had made an unfunded commitment to a direct property fund focussed on a single Asian country.

However, given the uncertainty in volatile real estate markets and every country’s financial system, the fund reversed its decision and opted to go with CBRE Investors’ Asia Alpha Plus instead.

Jeremy Plummer, head of CBRE Investors’ global multi-manager division, explained to PERE that the LP, who he declined to name, was exercising a “diversification” strategy. “They saw the greater attraction of the diversification, especially given the volatile world we are moving into,” he said.

Plummer argues that the fund of funds model is currently more robust in Asia than some of the more direct vehicles operating in the region. This, he said, is because of the spread of investments pursued by the fund of funds.

By investing in a fund of funds, the LP in question accepted it would reduce its return potential, but in return it would also reduce the risk profile of its commitment. CBRE’s Asia Alpha Plus is projected to returns of 13-15 percent from an intended investment portfolio of between eight to ten commitments in underlying funds.

The LP did not have to face any cost for pulling its commitment to the original fund. The fund manager, which has not made an investment yet, did not object to the withdrawal either.

This is because the Asia Alpha Plus Fund agreed to cover the commitment itself. The underlying fund manager keeps the commitment, only the name on the cheque has changed to CBRE Asia Alpha Plus Fund.

The commitment to a fund of funds serves to show why a multi manager strategy can be a useful tool for an investor looking to gain exposure to real estate in an area where it has no presence without risking its equity on just one country or strategy.

However, the model still has critics. At the start of the year, David Swensen, head of Yale’s $17 billion endowment told the Wall Street Journal that fund of funds “facilitated the flow of ignorant capital”. Fund of funds, like anything else, has its backers and its detractors.