After the equities bubble burst in 2000/2001, investor demand changed significantly. With many experiencing the true risk of this asset class for the first time, as well as the prolonged bear market which followed, investors began to look for other ways to generate returns.

Although still willing to take risk in non-bond assets, investors today are primarily looking to dilute pure equity risk, both in terms of capital market and active manager exposure. This trend has led to greater demand for alternative asset classes, of which real estate is obviously one.

The latest trend in real estate investing is multi-manager. While there are differences in how multi-manager is defined, the basic concept is an approach where an investor gains exposure to a range of managers and funds through a one-stop solution.

The rapidly increasing opportunity set for investors in terms of the number of unlisted funds and the array of managers offering them, means that multi-manager is an ideal opportunity, especially for small to medium sized investors. It is no surprise too that the interest in multi-manager products comes at the same time as the globalisation of the real estate industry. Until recently many institutional investors around
the world focused their real estate strategy on their home country or region. For example, the British stuck predominantly to the UK, and while the more intrepid ventured into Europe and Asia in the 1990s, the majority retreated quickly. The former "home bias" in real estate investing is changing rapidly and there is a clear trend of US, European and Asian investors seeking global exposure to the property markets.

For some time now, investors in equity have recognised the advantages of broadening their opportunity set beyond the local market and why not for property? The same arguments apply - probably more so given the low correlations between regional property markets.

There are two primary ways to invest in real estate - either directly or indirectly. Over the last five years, there has been a significant expansion of options for investing in global real estate on an indirect basis through both the private and public markets. In Europe the market in closed-end funds has grown from €61bn gross assets in 1995 to €319bn in 2006.

The same trend is in evidence in Asia where we are seeing strong growth in the volume of vehicles being launched. Then there is the listed real estate

market including REITs [real estate investment trusts], that is now a US$700bn (€546bn) market.

Multi-manager investing is not a new concept. Some managers have been doing this across all asset classes for decades. In fact real estate is an asset class that is made for multi-manager because property management requires specialist skills. It is not impossible for a large investor to do this in-house of course, but it is hard to do well across all sectors, countries and regions.

For small to medium sized funds wanting diversified exposure to real estate, the multi-manager, indirect option is a powerful combination. For broadly the same reasons that multi-manager is de rigueur in private equity and hedge funds, real estate is ideally suited to this approach.

When selecting a multi-manager investors should consider the following points:

■ Significant resources: A team has to be large enough to research and analyse money managers and funds from around the world. On unlisted funds, there is a significant amount of due diligence required - are the fee arrangements aligned with investors' interests?

Is the key man provision adequate? Are the seed assets any good? A good multi-manager will provide answers to all these questions and provide access to promising new investments. Investors should also bear in mind manager reputation, the size of its client base and the historical level of activity in placing client capital.

■ Know how to assess qualitative and quantitative success factors. Real estate is a specialist asset class with specialist skills. An understanding of the dynamics of the asset class is essential to picking the best managers. Is Indian real estate within your risk-return parameters? Or is eastern Europe a better fit?

■ Monitoring of investments through overview and contact with investment managers and funds. A good multi-manager will ensure the investment strategy and performance are consistent with established objectives. Where appropriate they should be on advisory boards. Where necessary and feasible, they will instigate corrective action on behalf of clients to preserve the value of the investment or to improve control.

An often-cited drawback of multi-manager is the size of fees. In the listed real estate market in particular, the size of the largest multi-managers will mean a more efficient cost and revenue structure for both the multi-manager and the underlying managers. In unlisted funds the specialist knowledge, due diligence and increasingly global nature of the asset class often mean an in-house strategy is at an immediate disadvantage. Access to information is critical in this inefficient asset class - it may mean the difference between average and out-performance.

Derek Williams is a senior research analyst at Russell