(Adds details about fund, background including other funds)
By Ilaina Jonas
NEW YORK, March 19 (Reuters) - Hedge fund firm Farallon Capital Management LLC is raising a new real estate fund of about $350 million to $400 million, the first time Farallon has set up a separate fund exclusively for the asset class, according to two sources familiar with the situation.
Farallon is pitching the fund to its existing investors and is targeting a 20 percent internal rate of return, said one of the sources, who was not authorized to speak publicly.
The fund will have a three-year investment period from closing and will last a total of eight years, although that could be extended to 10 years.
Using about 60 percent leverage and setting aside money for reserves, the fund would have buying power of slightly less than $1 billion, the source said.
San Francisco-based Farallon, which manages more than $20 billion in assets for institutional and high net worth clients, did not respond to an email seeking comment.
Farallon has invested in real estate before through its other funds. It partnered with Simon Property Group Inc (SPG.N) in 2007 to buy mall owner Mills Properties and sold its stake to Simon last year.
But as was the case with many other firms that invested in real estate, the credit crisis took its toll. In 2010, Farallon restructured $1.53 billion in debt on one troubled investment - trailer park American Residential Communities LLC.
By creating a separate real estate fund, the vehicle allows investors to target money to the illiquid asset class.
Several other hedge fund firms have launched vehicles with longer lock-ups and reduced liquidity to boost returns.
John Paulson's hedge fund firm Paulson & Co, for example, raised a Real Estate Recovery fund to take advantage of cheap land prices in some of the country's most depressed housing markets that required investors to lock-up money for 10 years.
And Andrew Feldstein's hedge fund BlueMountain Capital raised a $1.4 billion fund last year to target less-liquid debt investments and which has a five-year lock-up for investors.
With its new fund, Farallon will target shopping centers, office buildings, warehouses and apartments that fundamentally have nothing wrong with them, but might be over-leveraged or mismanaged. It will target deals that require the Farallon fund to invest between $25 million to $50 million, the source said.
The fund will not invest in land or hotels, the source said.
Although the fund will be dedicated primarily to real estate in the United States, it will be able to invest some capital outside the country.
(Reporting by Ilaina Jonas; Additional reporting by Katya Wachtel and Jennifer Ablan. Editing by Andre Grenon)
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