The Wall Street Journal – By CRAIG KARMIN

Some of the world’s biggest investors are betting they can beat real-estate fund managers at their own game.

Put off by high fees and disappointing performance of so-called pooled funds, major institutions such as Harvard University’s endowment, Canada Pension Plan and Abu Dhabi Investment Authority are building in-house real-estate investment divisions to acquire property directly. They are making fewer real-estate investments through outside fund managers who pool contributions from dozens of investors.

“When we can control what we buy, and how we manage it, our results tend to be better,” said Jane Mendillo, head of the company that manages Harvard’s $32 billion endowment, which is the largest college endowment in the U.S.

In addition to what investors see as lagging performance of pooled, or “commingled,” funds, others feel burned that some of these funds continued to seek capital during the downturn even when they had no investing prospects. Many felt the use of debt had gotten too high at the market’s peak.

“Commingled funds have more risk than investors are being paid for,” said Tom Arnold, head of Americas real estate for Abu Dhabi Investment Authority, at a recent Pension Real Estate Association conference.

In a poll of 472 investors world-wide with $10 billion or more in assets, 80% said they were either investing in real estate directly or considering it, according to Preqin, which tracks alternative investments.

These investors increasingly are beginning to show up in big deals. For example, Abu Dhabi Investment Authority recently took a 50% stake in the Oracle retail development in Reading, U.K. Canada Pension Plan has bought a major stake in a dozen shopping malls across the U.S.

Other institutional investors that have indicated a growing appetite for direct investing include insurer Allstate Corp. and DuPont Capital Management, the asset management arm of the DuPont chemicals company.

“I think it’s a secular change,” said Sean P. O’Shea, managing principal at Sienna Capital Partners, a New York-based real-estate advisory firm. “Investors are developing their capabilities to go direct, allowing them to control the use of leverage and their exposure to specific property types and geographies.”

This go-it-alone approach among some of the world’s most influential investors helps explain why many of the hundreds of private-equity real-estate groups world-wide have been struggling to raise cash for new funds. Even well-established companies like Apollo Global Management and J.P. Morgan Chase & Co. have struggled to raise money since the downturn.

Insurance companies and pensions used to buy nearly all their property directly until the commercial real-estate crash of the early-1990s. At that time, money managers began to form pooled funds partly to buy huge portfolios of distressed assets being sold by banks and the Resolution Trust Corp.

Creators of these real-estate funds included Wall Street firms like Goldman Sachs Group Inc. and Morgan Stanley . Most of the funds used the private-equity model, charging a management fee and taking a share of the profits. Early on, many of them showed big profits.

In 2000, 59 closed-end real-estate funds world-wide raised $22 billion, according to Preqin. By the peak in 2008, 304 funds raised $142 billion.

Many of these funds had big losses on investments made around the market’s top. Institutional investors also became concerned about the future commitments attached to these funds, which made them more vulnerable if the funds called for cash in rough market periods.

In 2010, Harvard sold several positions in property funds after its real-estate portfolio’s value lost more than 50% for the fiscal year ended June 2009, according to Ms. Mendillo. More recently, she hired a former Carlyle Group executive to run the Harvard program like a private investment shop, and the endowment is investing actively after largely lying low for two years.

Some industry observers say the direct approach isn’t always a good idea. Only the largest institutional investors have the size and resources to build the team needed to buy directly, said Edward Schwartz, a principal at ORG Portfolio Management, an investment adviser. “You’ll need a staff as capable as a professional fund manager,” he said.

“It also creates new conflicts to manage,” Mr. Schwartz added, since an operating partner in a joint venture may also own a construction, leasing or property-management business that the investor may be forced to use.

Yet, some funds see the direct approach as a natural evolution. Canada Pension Plan started investing abroad through funds but is now investing primarily through partnerships. That meant staffing up from four people in 2006 to a real-estate team of 45 today.

The in-house team starts by picking a city and property type, like office buildings in Manhattan, said Peter Ballon, CPP’s head of real estate for the Americas. Then, CPP narrows its sights further, settling on specific neighborhoods, even certain streets, where it wants to own. It meets with potential partners, from property managers to real-estate investment trusts that have expertise and access to those property types and areas.

The investors, which often provide most of the equity, share in major decisions, such as when to sell. By contrast, managers of pooled funds usually make most major decisions, giving individual investors less control and sometimes less insight into the status of their investments. Fees for direct investing tend to be about half those paid to funds.

The government-run Abu Dhabi Investment Authority has assembled a real-estate team to rival even the largest private property investment groups, doubling staff size over the past three years to more than 100.

As part of its hiring spree, the Abu Dhabi Investment Authority has lured former real-estate executives at blue-chip names like Morgan Stanley and Starwood Capital Group.