Real Estate Opportunity Funds: Past Fund Performance as an Indicator of Sub

Abstract

Real estate opportunity funds are one of the fastest growing segments of the real estate investment industry. The real estate equivalent of the private equity and “alternative investments” asset classes that seek high returns by taking on more risk in highly illiquid private investments, opportunity funds rely heavily on the skill and expertise of the fund managers. This article investigates an important dimension, and indicator, of management performance, by examining whether the investment performance of real estate opportunity funds displays persistence between subsequent funds launched by the same manager. Analytical tests similar to those used to analyze performance persistence in stock mutual funds and hedge funds suggest that relative performance in real estate opportunity funds is persistent for consecutive funds (both for “winners” and for “losers”). However, relative performance appears to be mean-reverting or even reversing over longer time spans between fund launchings. We find less persistence in returns net of management fees, which suggests that successful managers are able to effectively charge higher fees on subsequent funds, while less successful managers must charge lower fees (at least relative to the successful managers).