New Real Estate Hedge Funds Popping Up

One of the deterrents of creating a real estate hedge fund is the difficulty of shorting REIT stocks. Any borrower of the shares has to cover the REIT's dividend once announced. As well, REITs have been on a remarkable run, beating the S&P 500 for the past five years. Therefore, shorting traditional REIT sectors like office, retail and apartments has been difficult, Tash says, whereas shorting residential-mortgage REITs has been profitable.

"In real estate, I'm not sure a lot of these managers have been tested yet, because we haven't had a serious bear market in six years," Tash says. Tash declined to provide his fund's performance, explaining that he might be prevented from raising money if he did.

While U.S. REITs that own properties continue to be the bull's-eye of investing activity in the space, hedge funds also are making bets on mortgage REITs, homebuilders, international REITs and C-Corps. Making plays on publicly traded real estate debt is a lesser focus.

While fund managers won't describe their specific hedging strategies, value investing is clearly a part of the long strategies. It's why a name like CarrAmerica (CRE Quote) popped up on several hedge funds' radar screens over the past year. Tash says he bought CarrAmerica because it was undervalued, and he believed good things were happening with the company, as its Northern California office portfolio was starting to rebound. On Monday, the REIT said it agreed to be bought by the Blackstone Group for $5.6 billion, or $44.75 a share. That price is 28% above where the stock stood at the beginning of the year.

CarrAmerica's third-largest owner is Wesley Capital Management, a New York-based real estate hedge fund. Art Wrubel, one of the Wesley managers, used to work with Tash in the late 1980s at JMB Realty, a longtime Chicago-based commercial real estate owner. Elrad, from GEM Realty, also worked at the firm.