what does equity double counting means in unhedged NAREIT ??

CFA Level III Portfolio Management
#1

can you explain to me how equity is component of NAREIT and the double counting part? (bolded part) Thanks!!

“The use of the hedged NAREIT Index could be justified by the concept of eliminating double counting (the equity return component in equity REITs). Additionally, the use of mortgage and hybrid REITs would reduce the redundancy of the more highly correlated equity REITs. Nevertheless, equity REITs compose about 95 percent of the NAREIT Index, so the unhedged data show a significant increase in return with less risk, as demonstrated by the high Sharpe ratio of the NAREIT Index relative to most other asset classes”

#2

Equity REIT is significant majority of unhedged NAREIT, so unhedged NAREIT has a huge equity market (beta) exposure. So, you are double counting equity market exposure- 1) through S&5P500 , 2) unhedged NAREIT)

When you strip out the equity market exposure, by making beta=0 (hedged NAREIT), then you get a true real estate exposure and “double counting” of equity exposure is eliminated.

#3

got it now … thanks a lot @cfa2014 :slight_smile: