<p>Much of the debate over whether fund managers attempt to subvert the evaluation procedure to their advantage has focused on private equity buyout funds. This study provides new evidence that bears directly on this ongoing debate by investigating private equity funds that invest in commercial real estate. Three key questions motivate the exercise in what follows. First, given the subjective nature of the evaluation process, can the decisions made by private equity real estate fund managers shape the outcome of property performance into something that affects the fund manager’s fee? Specifically, are unlevered deal level alphas “known” at acquisition with enough certainty that the manager can utilize positive financial leverage to enhance Jensen’s alphas? Second, do discrepancies in reported versus true deal-level performance exist in booming versus declining markets? Third, it is not entirely clear as to which type of private equity real estate fund, core, value-added, or opportunistic, poses relatively more moral hazard than others. The theory would say that value-added and opportunistic funds pose the biggest threats, but there is a growing concern of style creep and style gaming among core funds. We find that for a vast majority of property deals over the sample period of 1978 through 2009, particularly for properties that were acquired prior to 2001, Jensen’s alphas exceed the unlevered deal-level alphas by a wide margin, with a range of approximately 0.40 to 8.90%. Our results also suggest that years of high Jensen’s alphas are followed by years of low Jensen’s alphas that are well below true deal-level alphas. The latter is understandable in light of the fact that fund managers use leverage to increase their potential returns but at the cost of more risk.</p>