V5, P18~19, 3.2.2 Historical Performance I have much difficulty in understanding following (statements) : 1. In 4th~5th line on P.18 the “hedged” REIT return series has been “purged of” its over all “equity market return component”, as represented by the S&P 500 Index. What do they mean by “hedged” REIT return, and has been “purged of” its over all “equity market return component” ? 2. In 2nd paragraph on P.18 What do they mean by “levered” and “non-levereaged” ? 3. In Exhibit 3 The NAREIT Index is the hedged" REIT mentioned above ? The NCREIF Index is the smoothed NCREIF Index ? 4. The 2nd line to the 5th line on P19 Does it mean that if the correlations are high, the securitized real estate (REITs) will be good substitute for direct investment ? Anyone can help ? Thanks !
- “Purged” simply means that the Equity Market returns ( i.e. price moves ) will not affect the overall return for the REIT. By taking an active short position in S&P Index returns any down moves in the S&P will leave the REIT 's full return unaffected ( but so will an up move) . This assumes that the REIT’s other return components are not correlated to the market or the correlation is weak. 2. Levered means that the investment uses borrowed money , so the return is leveraged ( imagine trading with $10 of your cash but investing $100 . $90 is borrowed . Your return is much amplified even after paying borrowing costs ) The NCREIF does not show this leverage but the actual REIT fund might. 3. NAREIT would represent a real estate returns index for an indirect investment in real estate properties , distinctly separate from any equity market component , so yes as above. NCREIF is smoothed , or maybe smooth , so we have to unsmooth it with transaction data to represent closer to reality. 4. That is obvious isn’t it? If an investor is looking to gain exposure to the real-estate market but doesn’t want the hassle of a direct investment , she would look for a correlated product . The NAREIT is however a poor proxy because of its low correlation
Purged means “Equity Market returns have been REMOVED”. NAREIT Index in the table returns 12.71%, while NAREIT Hedged only returns 8.96%, NAREIT STD Dev=12.74%, NAREIT Hedged STD Dev=11.93%. So portion of return that can be attributed to Equity market returns have been REMOVED. and they say that portion of the return is the S&P 500 Index (in the text).
Look at CP all grown up and posting on the L3 forum…i feel like a proud stranger
janakisri & cpk123 : Thank you so much for your responses ! I still have following questions. 1. In Exhibit 3 (1st & 2nd column) A. Is it that the 1st column (12.71%, 12.74%, 0.66) shall be for “Un-hedged” NAREIT INDEX, though “Un-hedged” is not indicated ? B. Un-hedged return (12.71%) - Equity Market Retun (3.75%) = Hedged return (8.96%) ? 2. “Hedging” means short the S&P index ? If you long un-hedged REIT, then you must short the S&P index to get the hedged REIT return so that the REIT return can be evaluated independently (not affected by stock market’s movement) ? 3. Why NCREIF is “non-levereaged” investment ? Usually people borrow money to make direct real estate investments, right ? 4. What are the definitions of “Equity REITs, mortgage REITs and hybrid REITs” mentioned in the 1st paragraph ? Your further advices will be much appreciated !
" 3. Why NCREIF is “non-levereaged” investment ? Usually people borrow money to make direct real estate investments, right ? " Yes they do , but not for trading : Maybe a long term investment such as building equity/security . In any case the leverage effect will not be in the NCREIF which is based on transaction data, not total returns " 2. “Hedging” means short the S&P index ? If you long un-hedged REIT, then you must short the S&P index to get the hedged REIT return so that the REIT return can be evaluated independently (not affected by stock market’s movement) ? " Yes to remove the market effects you would short an appropriate amount of money in the S&P index 1. AMA , please read some of the material in context. If you see a column name and see another with same name but with the word “Hedged” after it , is it not common sense that the first column is “UnHedged” ? If you’re asking is NAREIT unhedged , answer is , of course it is : No index is constructed with a built in hedge . A portfolio manager resorts to hedging to reduce risks , the index doesn’t
janakisri, Thank you very much again for your response ! But I am sorry again that I have further questions. 1. The 2nd paragraph on P19 Why the volatility of hedged NAREIT Index is compared with that of NCREIF ? NAREIT Index is “indiret” investment while NCREIF is “direct” in real estate. 3. The statements under 3.2.3 Interpretation Issues on P19 Why NCREIF Index is “not” an investable Index ? 3. What the word “equity” means in real estate investment ? Does it mean the money owned by the investors rather than borrowed money ? The words of “equity” are found in the : A. 2nd line and the 4th line of the paragraph under 3.3 Real Estate : Investment Characteristics and Roles B. 2nd line of of the 5th paragraph on P20 C. 4th line of the 1st paragraph on P25 Your kind response will be appreciated again !
AMA Wrote: ------------------------------------------------------- > janakisri, > > Thank you very much again for your response ! But > I am sorry again that I have > further questions. > > 1. The 2nd paragraph on P19 > Why the volatility of hedged NAREIT Index is > compared with that of NCREIF ? > NAREIT Index is “indiret” investment while > NCREIF is “direct” in real estate. > > 3. The statements under 3.2.3 Interpretation > Issues on P19 > Why NCREIF Index is “not” an investable Index > ? > > 3. What the word “equity” means in real estate > investment ? Does it mean the > money owned by the investors rather than > borrowed money ? > The words of “equity” are found in the : > A. 2nd line and the 4th line of the paragraph > under 3.3 Real Estate : Investment > Characteristics and Roles > B. 2nd line of of the 5th paragraph on P20 > C. 4th line of the 1st paragraph on P25 > > Your kind response will be appreciated again ! 1. You have answered your own question. There are two types of investment in real estate. Hence the two investment types are being compared to show which type of investment maybe applicable to a give portfolio. 2. It means you cannot invest in the index itself. As you see on page 17, NCREIF are individual properties which make it quite difficult to get a fair value. Also the appraisals are conducted once every year. http://www.answers.com/topic/hedge-fund#Non-investable_indices 3. Yes, the shares in that company are owned. It does not contain borrowed money.
Equity in your house/home is the money that is yours, not the bank’s . Similarly Equity in an investment is the non-leveraged portion , the one that if you liquidate will go to your bank account , not to repay loans.
V5, P16, the statements under 3.2.1 Benchmarks In 1st paragraph : The NCREIF Index is essentially “value weighted” and … In 2nd paragraph : Begun in 1972, the NAREIT Index is a real-time, “market-cap-weighted” Index of … Is there any difference between “value weighted” and “market-cap-weighted” ? Anyone can clarify ? Thanks !
AMA Wrote: ------------------------------------------------------- > V5, P16, the statements under 3.2.1 Benchmarks > > In 1st paragraph : > The NCREIF Index is essentially “value weighted” > and … > > In 2nd paragraph : > Begun in 1972, the NAREIT Index is a real-time, > “market-cap-weighted” Index of … > > Is there any difference between “value weighted” > and “market-cap-weighted” ? > Anyone can clarify ? Thanks ! It means the same thing. It is a type of market index whose individual components are weighted according to their market capitalization, so that larger components carry a larger percentage weighting.
agree with idreez, essentially the same. The index ( NAREIT) is composed of different securities to do with real estate such as REIT s in some proportion , the total value of the index is the sum of cap weighted value of the securities. The NCREIF is just based on value of properties as given by various transaction data pieces.