The fund's riskiness is compounded by Orkin's use of margin borrowing to boost returns. This is common among hedge funds, and all but non-existent in conventional mutual funds. Leverage is wonderful on the upside, but can be devastating on the downside, compounding losses. For a variety of reasons, these funds are no longer sure-fire bulwarks in a Wall Street slump. Consider gold, which is proving that an asset class can have a low correlation to the equity market and still be a lousy defensive bet.
Gold has two big problems.
Because most investors think inflation is dormant, the metal's traditional role as a hedge against inflation seems irrelevant. One thing hurting publicly traded realty investments is, ironically, the robustness of the commercial real-estate market in many areas of the nation, which has forced them to pay high prices to buy new properties. Since, in the current low-inflation environment, they can't fully pass the costs of these acquisitions onto tenants, operating margins have come under pressure. In their view, the price drops only make good REITs more attractive. Matt Avery, who helps run the Franklin Real Estate Securities fund, remains positive on the hotel sector, including Starwood.