What is it that investors hope to achieve by placing capital in closed-end real estate funds? Most would say it is to generate attractive risk-adjusted returns, but relative to what?

In general, closed-end funds are measured by an internal rate of return (IRR) against an absolute target over the lifetime of each fund. This choice of measure is commonly justified to account for the uneven timing of cash flows and typical J-curve profile of returns one expects to see over the life of the fund. Closed-end funds tend to engage in more actively managed, higher-risk and more levered strategies, especially when compared with open-end funds. The exposure of closed-end funds to higher-risk strategies should, all things being equal, come with higher return expectations; many expect closed-end funds to comfortably outperform a broad-based, unlevered benchmark.

During the past 12 months, up until recently, markets had been on the rise, driven by strong performance in industrial an