Consulting Firm Plans Launch of REIT Hedge Fund
February 12, 2004
By Orest Mandzy, Commercial Real Estate Direct Managing Editor

Two research executives are planning to launch a hedge fund that would invest solely in REITs.

The two, Randy Fuchs and Michaell Taylor, have been providing a variety of consulting services to real estate companies, such as portfolio analytics and marketing research, through their company, Boxwood Means Inc. of Harrison, N.Y. They're now ready to delve into the hedge-fund business.

REIT stocks have benefited recently largely because of the massive amount of capital chasing yield. And while there are some investment funds that focus solely on REITs, most rely on fundamental research to determine which companies to buy or sell. Boxwood Means, which uses fundamental analysis to evaluate the properties owned by REITs, takes a quantitative approach to stock-picking.

Fuchs and Taylor have developed a series of complex analytical models that helps them pick which REIT stocks to own, which to sell and which to sell short. Their models examine every property - some 30,000 - owned by 180 REITs, and assign various risk/reward values to them. They then predict how individual REITs perform relative to each other and run that data through various Monte Carlo simulations that ultimately help pick a portfolio of REIT stocks and positions, either long or short, where borrowed shares are sold in anticipation of a price drop.

Fuchs and Taylor have tested their models retroactively and they say they would have generated returns of 28 percent over the past five years. For their hedge fund, they'll be aiming for net returns of 15 percent to 18 percent.

Satisfied that their models work, Fuchs and Taylor are in talks with potential strategic investors, with an aim toward raising an initial $25 million for a fund that would have a total investment capacity of roughly $300 million.

"We're blending Main Street and Wall Street techniques," explained Fuchs, who noted that a fair amount of fundamental analysis goes into Boxwoods model's. After all, he and Taylor closely examine every property owned by every REIT they track. And they use modern Wall Street quantitative techniques to determine which stocks to buy - and which to sell.

While relative newcomers to the hedge-fund world, Fuchs and Taylor have deep backgrounds in real estate research and quantitative economics. Fuchs most recently was with GMAC Institutional Advisors, where he was helping develop risk analytics tools. Before that, he spent seven years at REIS Inc., as head of product development.

Taylor, meanwhile, has some 15 years of experience in quantitative risk modeling. He was a senior economist at REIS and more recently provided consulting services to UBS Asset Management and GMAC. While at UBS, Taylor developed equity allocation models for several hedge funds.

Reprinted with permission of Commercial Real Estate Direct.
Copyright © 2004 FM Financial Publishing LLC