R25 - Alt. Inv. Portfolio Management - Q3 c) page 109

[SydCFAL3]

Hi everyone,
Just wanted to clarify something, what is the difference between unhedged and hedged NAREIT Indexes.
Also the answer to Q3. C) Page 109 under Index construction can someone clarify what Double counting is and if it is in the CFAI please reference it and I will investigate further. Specifically what is the equity component they are referring it, is it simply that they are holding equity in a REIT and hence they want to hedge this.
Thanks guys and girls.

 

[Godism17]

I think in double counting they mean, you’re adding REITS to your portfolio to add diversification to your existing portfolio, however, the catch is REITS are categorized as Real Estate but they have a huge equity component “under the hood”, they hold real estate companies (Simons, Boston Properties, etc) that are traded on the stock market, so you have “double” your equity exposure.
To mitigate this, use mortage or hybrid REITs that have risk and return components that are more like Real Estate vs mid-small cap stocks.
The hedge NAREIT is removing the beta somehow (shorting S&P 500 for example, etc) so you can get back to what you want: diversification and less correlation to the equity component of your portfolio adding in Real Estate as an asset class.

 

[SydCFAL3]

Thanks @Godism17
Hey guys can anyone confirm this or provide their own viewpoint. Thanks.

 

[Unemployed]

I have the same understanding from the text. How do they archive it (shorting S&P 500?) is unknown to me. So if you take it as Godism17 said, I think it is enough for the exam.