Hedged REIT return

CFA Level III
#1

Section 3.2.2, p. 266, CFAI vol 4, on Historical performance of real estate investment. Two performances of the NAREIT index were shown: the “raw” (unhedged) and the hedged ones. It is mentioned that “such an adjustment (the hedge for NAREIT) is meaningful oly forequity REITs because mortgage and hybrid REITs have different risk charactersitics.” Can sb explain this? Thanks. - sticky

#2

anyone? Sticky have you figured this out? what’s the reason for removal of equity market return component for Equity REITs??? don’t seem to see the link…:frowning: any REITs guru here? pls

#3

not sure about this, but don´t they just take out the beta (for example, with SP500 or whatever broad equity index) to capture something more… “pure real estate”?

#4

no idea still. Actually I almost forgot I have posted this question :slight_smile: It’s good you bring this up again. - sticky

#5

if it’s LI or LII exam, I’d certainly skip if it takes too much effort to figure out. for LIII, as mentioned many times, it’s completely different, I was really scared after sample exam - CFAI asks very detailed Qs - one page of reading material could come up with 2-3 tough Qs, if you don’t know the concepts crystal clear very likely to stuff up have to be very detailed and cover everything possible, not sure if it’s the right approach tho. :frowning:

#6

got it, page 266 of the cfa text, the take out the equity market return component measured by the s&p500

#7

hala_madrid Wrote: ------------------------------------------------------- > got it, page 266 of the cfa text, the take out the > equity market return component measured by the > s&p500 I know. This is mentioned in the original question. But — WHY hedging? - sticky

#8

i think it is the same concept as in alpha and beta separation (not sure if this is covered in equities or in derivatives), as you have alpha + beta in your portfolio (REITs) you short beta with futures to isolate alpha (pure real estate performance)

#9

Basically equity REITS are highly correlated with the equity market - returns on small cap stocks. By hedging NAREIT, you’re mitigating this risk factor, leaving you with returns that more closely mimic real estate. However, hybrid and mortgage REITs are not affected by small cap performance to the same extent.