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Alternative investment: US hedge funds look to short side

The number of funds with a dedicated real estate strategy is only slowly growing. Dominated by long-biased funds, the market will expand only if managers prove that shorting can be profitable. Helen Avery reports.

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Hedge fund research firm HFR estimates that of the 8,000 or so hedge funds around the world, the number of dedicated real estate funds may be barely more than 70. Of this small number, industry participants suggest almost all are long/short real estate hedge funds. And of those long/short funds, the majority plays the long side. "Many of the property hedge funds in the US are more long exposed, in some cases nearly as much as mutual funds," says Wilson Magee, president of Colony Investment Management LLC and a global real estate securities portfolio manager.

It stands to reason – the performance has been predominantly on the long side. The hedge fund industry is most mature in the US, and therefore, the majority of real estate hedge funds reside there. In addition, the Reit market in the US is the largest in the world. According to Ernst and Young’s global Reit report in 2006, the US Reit market accounts for $395 billion of the total world Reit market capitalization of $608 billion. And US Reits have enjoyed a tremendous rally.