Hedge Funds and the US Real Estate Bubble: Evidence from NYSE Real Estate Firms

Abstract

The recent US Real Estate Bubble had consequences not only for the real economy but for the stock market as well. Real Estate Investment Trusts' (REITS) prices reached levels which could not be supported by their fundamentals until mid-2007. Using this observation as a starting point we examine the behavior of a sample of hedge fund managers in the REITS sector of the NYSE. Our working assumption is based on the Abreu & Brunnermeier [2003] argument that rational investors under certain conditions may not always short a bubble but instead ride it so as to gain from the price rise. Using data on Hedge Fund holdings from the 13F Filing database provided by Thomson Financial, we find that hedge funds were overloaded with REITS stocks prior to the price peak of the sector but their positions were placed in such a way that they gained from this strategy. Moreover, non-specialized hedge fund managers outperformed specialized ones.

Keywords: Hedge Funds, 13F filing, Rational Investors, Bubble, Real Estate, REITS

JEL Classification: G14, G15, G18