The story of open-end funds sounds a lot like your basic romantic comedy: Boy meets girl, boy gets girl, boy loses girl, boy gets girl back.

Since the first open-end fund made its debut in the 1970s, investors have had a love-hate relationship with the investment structure that promises relative immediate access to the asset class, diversification and prospects of liquidity. These privately securitized, infinite-life pools gained popularity and prominence in the 1970s and 1980s as the main squeeze for pension plans then making their initial forays into the real estate asset class. However, the bloom was off the rose and the love affair fizzled when the real estate market crashed in the 1990s and investors discovered the promise of liquidity worked better in theory than in practice.

As institutional investors once again allocate capital to private equity real estate funds, they have the opportunity to re-think how best to avoid the pitfalls from the previous cycle. Early indications suggest that narrowed fund strategy mandates are among the improvements investors are seeking. Investors’ goals are well-intentioned: They aim to prevent strategy drift, keep a manager focused on his strengths and, most important, avoid the types of poor investments that doomed 2005 to 2007 vintage funds. However, poor investment performance was seldom due to broad strategies. Rather, it resulted from a combination of factors, including: (1) long-only and private market–only strategies (often with excessive leverage); (2) managers without the expertise to invest broadly across sectors and capital structures; and (3) the misalignment of incentives between manager and investor. In our view, enforcing stricter limits on managers’ investment parameters may actually exacerbate the issues of the previous cycle, thereby increasing risk, lowering returns and further misaligning incentives between fund managers and investors.

The landmark Survey of the Plan Sponsor Community commissioned by NAREIM in 1994 pointed out that one of the plan sponsor community’s greatest concerns was the investment management community’s apparent inability to listen, to really understand their needs, and to translate those needs into meaningful solutions that work.