Messaging and Positioning in a Different Risk and Return World

A conversation about real estate with broader implications

I don’t ordinarily write about specific funds under the Altegris umbrella, but a recent meeting with a gatekeeper and Burland East, who is the fund sub-adviser of the Altegris/AACA Real Estate Long Short Fund (RAAIX) produced some more general observations.

Burl has been involved in the real estate business for over 30 years as an analyst, investment banker, direct investor, public securities investor and an advisor and spokesperson in the industry. As CEO of American Assets Capital Advisers (AACA), he has been managing the current fund since its inception as a hedge fund in 2011 through its conversion to a mutual fund in early January 2014, to the present.

The specific investment approach focuses on owning companies in real estate sectors where the tenant is denied choice, exhibited by:

  • Few sector participants
  • High barriers to entry for new owners/developers
  • High barriers to exit for tenants
  • High secular demand

While these characteristics reflect AACA’s long-bias philosophy, it has the ability to take short positions exhibiting opposite characteristics, with the goal to generate alpha, hedge systematic risks, or hedge the current stage of the real estate market cycle. The fund is currently about 120% long and 20% short—half in interest rate and credit spreads and half in specific equity securities. That number can vary day-to-day and, certainly, over time as we move further along in the real estate and interest rate cycle.

At the meeting, Burl said he believed we were in the fourth inning of the current real estate cycle. The gatekeeper response was a view that we may be further along in the cycle; they already had a number of approved real estate funds, although none that were hedged; and there was a concern that exposure in the sector was already high from chasing yield and performance. My expressed thought was there were two ways to deal with this view: 1) suggest to the system that exposures should be cut back, which is a very specific timing call, or 2) deliver the message by introducing a real estate fund that does take a hedged approach, is definitely not a benchmark hugger, and looks for alpha on both the long and the short side of the market. The message would be that straight beta exposure to the sector may be producing higher risk if we are further along in the cycle (even if just the fourth inning), and shifting real estate assets to a manager who is taking a hedged approach may reduce some of the elements of risk in a long only portfolio. Of course, other risks exist in a non-diversified portfolio and past performance is not indicative of future results. However, if one wishes to introduce a sense that risk may be higher in a specific sector such as real estate, recommending a hedged approach may get that message across more clearly than just saying risks are higher without offering such an alternative.

To a great extent, this is a message we have been delivering regarding all of our alternative strategies from managed futures to long/short fixed income. The end of quantitative easing (“QE”) in the US combined with central bank moves elsewhere in the world has increased equity and credit dispersion among sectors and geographies against a backdrop of more systematic currency and commodity trends. This doesn’t necessarily call for a wholesale shift in broad asset allocations. It does suggest that we are moving into an investment climate where active management and absolute return strategies, including long/short management, could become more the core of portfolios with beta plays being the higher-risk shorter-term moves on the margin. The illiquidity premium may reassert itself as dispersion produces opportunities with longer holding periods a requisite for returns.

I will say again, the past performance we have seen during the period of US QE is not indicative of future returns and future measures of risk. Pay Attention to the specific characteristics of every mandate in your portfolio with an eye on the changing environment as the US moves slowly toward “normalization” while much of the rest of the world plays catch-up.



Altegris Advisors, LLC is a CFTC-registered commodity pool operator, commodity trading advisor, NFA member, and SEC-registered investment adviser. Altegris Advisors sponsors privately offered commodity pools and hedge funds, and advises alternative strategy mutual funds that may pursue investment returns through a combination of managed futures, global macro, long/short equity, long/short fixed income and/or other investment strategies.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Altegris/AACA Real Estate Long Short Fund. This and other important information is contained in the Fund’s Prospectus and the Summary Prospectus, which can be obtained by calling (888) 524-9441. Read the prospectus carefully before investing.

The Altegris/AACA Real Estate Long Short Fund is distributed by Northern Lights Distributors, LLC. Altegris Advisors, AACA and Northern Lights Distributors, LLC are not affiliated.


Equity securities such as those held by the Fund are subject to market risk and loss due to industry and company news or general economic decline. Equity securities of smaller or medium-sized companies are subject to more volatility than larger, more established companies. The concentration in real estate securities entails sector risk and greater sensitivity to overall economic conditions as well as credit risk and interest rate risk.

The Fund will engage in short selling and short position derivative activities, which are considered speculative and involve significant financial risk. Short positions profit from a decline in price so the Fund may incur a loss on a short position if the price increases. The potential for loss in shorting is unlimited. Shorting may also result in higher transaction costs which reduce return. The use of derivatives, such as futures and options involves additional risks such as leverage risk and tracking risk. Long options positions may expire worthless. The use of leverage will cause the Fund to incur additional expenses and can magnify the Fund’s gains or losses.

Foreign investments are subject to additional risks including currency fluctuation, adverse social and economic conditions, political instability, and differing auditing and legal standards. These risks are magnified in emerging markets. Preferred stock and convertible debt securities are subject to credit risk and interest rate risk. As interest rates rise, the value of fixed income securities will typically fall. Credit risk, liquidity risk, and potential for default are heightened for below investment grade or lower quality debt securities, also known as “junk” bonds or “high-yield” securities. Any ETFs held reflect the risks and additional expenses of owning the underlying securities.

Funds that are new have a limited history of operations. Higher portfolio turnover may result in higher costs. The manager or sub-adviser’s judgments about the value and potential appreciation or depreciation of a particular security in which the Fund invests or sells short may prove to be inaccurate and may not produce the desired results. The Fund is non-diversified and may invest more than 5% of total assets in the securities of one or more issuers, so performance may be more sensitive to any single economic, business or regulatory occurrence than a more diversified fund.


Alpha. A measure of performance on a risk-adjusted basis. Alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. Beta. A measure of volatility that reflects the tendency of a security’s returns and how it responds to swings in the markets. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. Long. Buying an asset/security that gives partial ownership to the buyer of the position. Long positions profit from an increase in price. Short. Selling an asset/security that may have been borrowed from a third party with the intention of buying back at a later date. Short positions profit from a decline in price. If a short position increases in price, the potential loss of an uncovered short is unlimited.


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