Money is flowing out of hedge funds...

Money is flowing out of hedge funds... And into real estate... Private equity is getting in on the action... The best chance for 100% gains in the next two years...
 

 We're about to see a waterfall of money flow into real estate...

 

Alternative-asset managers (like private-equity firms and sovereign-wealth funds) are repositioning themselves into real estate as hedge funds continue to underperform the broad market.

 

According to research firm Hedge Fund Research, the average hedge fund is up 2% in 2014, versus the S&P 500's 10% return. But that's nothing new. According to HSBC Bank, the majority of hedge funds have underperformed the S&P 500 for the past five straight years.

 

We've previously discussed our skepticism toward hedge funds, which generally charge "2 and 20," or 2% of assets under management and 20% of performance. Alternatively, investors can buy exchange-traded funds (ETFs) that cover entire industries for as low as 0.05%. It's no wonder why more than 460 hedge funds closed in the first half of 2014, according to Bloomberg, citing Hedge Fund Research.

 

 Certain hedge-fund strategies – like the "carry trade," where firms borrow short-term money at a low rate and buy higher-yielding, longer-term assets – are more difficult with record-low interest rates.

 

Since quantitative easing first began, interest rates have been pushed so low that the carry trade requires taking on extreme levels of risk.

 

 Hedge funds have underperformed for so long that America's largest pension fund – the California Public Employees' Retirement System ("Calpers") – will no longer invest in them.

 

In September, Calpers announced its divestiture of the entire $4 billion it held in hedge funds, saying they're too complex and expensive.

 

In the fiscal year ended June 30, Calpers earned 7.1% investing in hedge funds... Yet the S&P 500 returned 22% over the same period. Despite this underperformance, Calpers paid these hedge funds $135 million in fees.

 

 As more money flows out of hedge funds, it's starting to flow into real estate.

 

Norway's $660 billion sovereign-wealth fund is hiring a ton of new staff in preparation for major new real estate investments in cities like London, Paris, and New York.

 

The fund's target is for 5% of its assets to be held in high-end office and retail properties. Right now, it holds just 1.2% of assets in real estate.

 

The fund plans to invest an additional $11 billion in U.S. real estate... mostly in large cities like New York, Washington D.C., and Boston.

 

 Singaporean sovereign-wealth fund GIC is also on a shopping spree for real estate.

 

GIC is leading a consortium to buy warehouse operator IndCor Properties from private-equity giant Blackstone. IndCor's portfolio includes 95 industrial properties located primarily in California, Texas, and Arizona.

 

 Plus, GIC paid $1.7 billion for office space in downtown Tokyo last month, noting that the deal provided "a combination of stable income and the potential for capital appreciation over the long term."

 

 Thanks to years of near-zero-percent interest rates, everyone is scrambling to find return. Mortgage rates are at record lows, making it easier to finance. Real estate is a hard asset that can provide rental income year after year. As a result, some of the world's smartest investors are turning to real estate.

 

Even private-equity shops like Blackstone (BX) are getting in on the action.

 

Blackstone is the world's largest private-equity firm. The company – which Steve Sjuggerud recommended to True Wealth subscribers in November 2012 – is always on the cutting-edge of investment trends.

 

Private-equity companies like Blackstone thrive in today's low-interest environment, as we explained in the July 29 Digest...

 

Private-equity firms typically buy companies (using investors' money and debt), reorganize and improve them, and then sell them for a profit – often through initial public offerings.   Private-equity firms thrive in today's economic environment... They're able to borrow lots of money at record-low interest rates to buy high-quality assets. And they can take advantage of rising asset prices to sell their portfolio companies into a willing market – and mark up the value of the assets on their books.

 

 Last month, at the Bloomberg Commercial Real Estate Conference in New York, Blackstone's head of global real estate, Johnathan Gray, said that "real estate offers higher yields than government bonds, along with a hedge against inflation."

 

 In October, Blackstone reported that its largest segment was in real estate ($80 billion), up 50% in the last two years alone. Real estate now represents 28% of Blackstone's assets under management. A quick look at its earnings reveals why...

 

Total revenue in real estate rose 19% to $493 million in the third quarter of 2014 versus the same period a year ago. Economic income – a key accounting metric within private equity – also rose 19% over the same period. In total, Blackstone derived 45% of its earnings from real estate in the first nine months of 2014.

 

 Blackstone was investing in real estate, including buying individual homes. From April 2012 to March 2014, Blackstone invested $8 billion to buy 43,000 homes in 14 cities... becoming the largest landlord of single-family homes in the U.S., according to Bloomberg.

 

 Last year, Blackstone took the strategy global... buying up distressed commercial property in Europe.

 

It invested in Spanish real estate 40% below the 2007 peak, buying a low-income-housing portfolio from Madrid in July 2013 for $170 million. (Financial giant Goldman Sachs also bought 3,000 low-income apartments in Madrid for $269 million.)

 

And now, Blackstone is looking to buy up even more real estate... The company is in the process of raising financing for a new $13 billion global real estate fund, according to Reuters. Back in 2012, Blackstone raised more than $13 billion to create a real estate investment fund... which is already up 27%.

 

On a call last month, Blackstone President Tony James said he saw even more promising real estate opportunities in Europe and emerging markets like Asia.

 

 Steve Sjuggerud has been bullish on real estate for years. Last month, citing former Fed Chairman Ben Bernanke's comments that he couldn't refinance his own mortgage, Steve told DailyWealth readers that housing has big upside...

 

This is just one of many factors that make me excited about U.S. housing... The story is powerful... Mortgage rates (at 4%!) are once again near record lows. Housing is still incredibly affordable (when you look at the median income versus the median mortgage payment). There's still not much supply out there yet. The list goes on.   When the former Fed Chairman can't get a mortgage, you know things are NOT working "optimally" right now. But things will undoubtedly get better on this front... Banks want to lend you money. And regulators don't want to keep you out of a home. There's still plenty of upside in U.S. housing. Take advantage of it, if you haven't already.

 

 Blackstone is Steve's favorite "one click" way to profit off the long-term trend in housing. His True Wealth subscribers are up 153% since his recommendation in November 2012.

 

 But real estate isn't the only sector Steve is bullish on today. In the October issue of True Wealth, Steve explained why Chinese stocks offer "the best chance for 100% gains in the next two years" in the stock market...

 

As regular True Wealth readers know, the "perfect" investment to me is one that is 1) cheap, 2) hated, and 3) in the start of an uptrend.   Chinese stocks meet all three of these criteria right now – better than anywhere else on the planet. Asset prices in most of the world have soared since the bottom of the financial crisis in 2009. U.S. stocks have doubled. But Chinese stocks have lost money.   The huge bust in China's stock market has made China an incredible value relative to the rest of the world's stock markets today. Chinese stocks are cheaper today than they were before the past two triple-digit booms (including the 2005-2007 rally) in the last decade. Take a look:

 

 Out of fairness to Steve's subscribers, we can't share the name of Steve's favorite way to profit when Chinese stocks soar. True Wealth subscribers can access the name of this opportunity in the October issue.

 

If you'd like to get started on a four-month, risk-free trial subscription to True Wealth – which will give you access to what Steve calls "the best chance for triple-digit gains in the world today" – click here.

 

 New 52-week highs (as of 11/7/14): American Financial Group (AFG), Brookfield Asset Management (BAM), Berkshire Hathaway (BRK), Chubb (CB), CDK Global (CDK), Discover Financial Services (DFS), Nuveen Quality Preferred Income Fund 2 (JPS), 3M (MMM), Altria (MO), ONE Gas (OGS), Procter & Gamble (PG), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra S&P 500 (SSO), Constellation Brands (STZ), Travelers (TRV), and Alleghany (Y).

 

 On Friday, Porter asked subscribers to send in the questions they'd ask legendary investor Jim Rogers, who is speaking at our Alliance meeting in the Dominican Republic this week. Below are some of our favorites. What's on your mind? Let us know at feedback@stansberryresearch.com.

 

 "Porter: Jim Rogers said: 'I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.' Ask him which corner the money is lying in now. If he is doing nothing, what is his intuition as to the next corner to look at." – Paid-up subscriber R Bliss

 

 "Wish I was in the DR with you folks this weekend. Perhaps next year. In the meantime. My question to Mr. Rogers would be regarding his recent mention of North Korea uniting economically with South Korea. Investing in the North is forbidden for US citizens. But is there a way to invest via South Korea into this potential massive growth story? Thanks Porter. Enjoying the subscription." – Paid-up subscriber Paul McHale

 

 "What does Jim think of George Soros today?" – Paid-up subscriber Barney Hammer

 

 "How would you advise families with a total net worth under $500,000 to protect themselves against possible economic collapse?" – Paid-up subscriber Jim Royer.

 

 "Hi Porter: I just read your Friday, 7 Nov newsletter. Question for Jim Rogers. Can the U.S.A. back its dollar with oil instead of gold? This would keep the dollar strong and make gold much less important. How could our government back its currency with oil and gas?" – Paid-up subscriber George Knittlel

 

 "If you were buying good agricultural land in what country would you be buying and in what part of that particular country?" – Paid-up subscriber Ken

 

Regards,

 

Bill McGilton

Baltimore, Maryland

November 10, 2014