An empirical analysis of downside risk and inefficiency in U.S. real estate funds

Abstract Using monthly data from July 2011 to July 2024, we estimate and compare the upside and downside betas across eleven well-established real estate exchange-traded funds (ETFs), alongside an aggressive growth (tech) fund and a defensive (utility) fund. We also examine the return per unit of risk using the Calmar, Martin, Omega, Sharpe, and Sortino ratios, with a particular emphasis on extreme downside risk. Furthermore, we employ a non-radial directional distance model to rank the risk-adjusted return inefficiency of the sampled funds relative to a best-practice frontier constructed from the above complementary measures. This approach provides a comparative understanding of how these metrics can better capture the complexities of downside risk and inform investment decisions in the real estate sector. It is found that the most inefficient funds also exhibit the highest downside betas, revealing a critical vulnerability in their performance during adverse market conditions. Not all real estate funds are created equal, as some demonstrate a greater ability to manage downside risk and maintain efficiency relative to the best-practice frontier. Given the importance of raising capital in the equity market for both residential and commercial real estate, our results offer valuable insights for making investment decisions within a multidimensional benchmarking framework.