Better cross hedges with composite hedging? Hedging equity portfolios using financial and commodity futures

Unless a direct hedge is available, cross hedging must be used. In such circumstances portfolio theory implies that a composite hedge (the use of two or more hedging instruments to hedge a single spot position) will be beneficial. The study and use of composite hedging has been neglected; possibly because it requires the estimation of two or more hedge ratios. This paper demonstrates a statistically significant increase in out-of-sample effectiveness from the composite hedging of the Amex Oil Index using S&P500 and New York Mercantile Exchange crude oil futures. This conclusion is robust to the technique used to estimate the hedge ratios, and to allowance for transactions costs, dividends and the maturity of the futures contracts.

A pharmacist-led information technology intervention for medication errors (PINCER): a multicentre, cluster randomised, controlled trial and cost-effectiveness analysis

Background: Medication errors are common in primary care and are associated with considerable risk of patient harm. We tested whether a pharmacist-led, information technology-based intervention was more effective than simple feedback in reducing the number of patients at risk of measures related to hazardous prescribing and inadequate blood-test monitoring of medicines 6 months after the intervention. Methods: In this pragmatic, cluster randomised trial general practices in the UK were stratified by research site and list size, and randomly assigned by a web-based randomisation service in block sizes of two or four to one of two groups. The practices were allocated to either computer-generated simple feedback for at-risk patients (control) or a pharmacist-led information technology intervention (PINCER), composed of feedback, educational outreach, and dedicated support. The allocation was masked to general practices, patients, pharmacists, researchers, and statisticians. Primary outcomes were the proportions of patients at 6 months after the intervention who had had any of three clinically important errors: non-selective non-steroidal anti-inflammatory drugs (NSAIDs) prescribed to those with a history of peptic ulcer without co-prescription of a proton-pump inhibitor; β blockers prescribed to those with a history of asthma; long-term prescription of angiotensin converting enzyme (ACE) inhibitor or loop diuretics to those 75 years or older without assessment of urea and electrolytes in the preceding 15 months. The cost per error avoided was estimated by incremental cost-eff ectiveness analysis. This study is registered with Controlled-Trials.com, number ISRCTN21785299. Findings: 72 general practices with a combined list size of 480 942 patients were randomised. At 6 months’ follow-up, patients in the PINCER group were significantly less likely to have been prescribed a non-selective NSAID if they had a history of peptic ulcer without gastroprotection (OR 0∙58, 95% CI 0∙38–0∙89); a β blocker if they had asthma (0∙73, 0∙58–0∙91); or an ACE inhibitor or loop diuretic without appropriate monitoring (0∙51, 0∙34–0∙78). PINCER has a 95% probability of being cost eff ective if the decision-maker’s ceiling willingness to pay reaches £75 per error avoided at 6 months. Interpretation: The PINCER intervention is an effective method for reducing a range of medication errors in general practices with computerised clinical records. Funding: Patient Safety Research Portfolio, Department of Health, England.

Sector, region or function? A MAD reassessment of real estate diversification in Great Britain

This paper re-examines whether it is more advantageous in terms of risk reduction to diversify by sector or region by comparing the performance of the ‘conventional’ regional classification of the UK with one based on modern socio-economic criteria using a much larger real estate data set than any previous study and the MAD portfolio approach. The general conclusion of this analysis is that property market sectors still dominate regions, however defined and so should be the first level of analysis when developing a portfolio diversification strategy. This is in line with previous research. When the performance of Functional groups is compared with the ‘conventional’ administrative regions the results here show that, when functionally based, groupings can in some cases provide greater risk reduction. In addition the underlying characteristics of these functional groups may be much more insightful and acceptable to real estate portfolio managers in considering the assets that a portfolio might contain.

An investigation of the effect of eco-labeling on office occupancy rates

This paper investigates the extent to which clients were able to influence performance measurement appraisals during the downturn in commercial property markets that began in the UK during the second half of 2007. The sharp change in market sentiment produced speculation that different client categories were attempting to influence their appraisers in different ways. In particular, it was recognised that the requirement for open-ended funds to meet redemptions gave them strong incentives to ensure that their asset values were marked down to market. Using data supplied by Investment Property Databank, we demonstrate that, indeed, unlisted open ended funds experienced sharper drops in capital values than other fund types in the second half of 2007, after the market turning point. These differences are statistically significant and cannot simply be explained by differences in portfolio composition. Client influence on appraisal forms one possible explanation of the results observed: the different pressures on fund managers resulting in different appraisal outcomes.

Style analysis in real estate markets: beyond the sectors and regions dichotomy

While style analysis has been studied extensively in equity markets, applications of this valuable tool for measuring and benchmarking performance and risk in a real estate context are still relatively new. Most previous real estate studies on this topic have identified three investment categories (rather than styles): sectors, administrative regions and economic regions. However, the low explanatory power reveals the need to extend this analysis to other investment styles. We identify four main real estate investment styles and apply a multivariate model to randomly generated portfolios to test the significance of each style in explaining portfolio returns. Results show that significant alpha performance is significantly reduced when we account for the new investment styles, with small vs. big properties being the dominant one. Secondly, we find that the probability of obtaining alpha performance is dependent upon the actual exposure of funds to style factors. Finally we obtain that both alpha and systematic risk levels are linked to the actual characteristics of portfolios. Our overall results suggest that it would be beneficial for real estate fund managers to use these style factors to set benchmarks and to analyze portfolio returns.

Hedging effectiveness of total returns swaps: application to the Japanese market

The development of the real estate swap market offers many opportunities for investors to adjust the exposure of their portfolios to real estate. A number of OTC transactions have been observed in markets around the world. In this paper we examine the Japanese commercial real estate market from the point of view of an investor holding a portfolio of properties seeking to reduce the portfolio exposure to the real estate market by swapping an index of real estate for LIBOR. This paper explores the practicalities of hedging portfolios comprising small numbers of individual properties against an appropriate index. We use the returns from 74 properties owned by Japanese Real Estate Investment Trusts over the period up to September 2007. The paper also discusses and applies the appropriate stochastic processes required to model real estate returns in this application and presents alternative ways of reporting hedging effectiveness. We find that the development of the derivative does provide the capacity for hedging market risk but that the effectiveness of the hedge varies considerably over time. We explore the factors that cause this variability.

Is there a “case for property” all the time?

The “case for property” in the mixed-asset portfolio is a topic of continuing interest to practitioners and academics. Such an analysis typically is performed over a fixed period of time and the optimum allocation to property inferred from the weight assigned to property through the use of mean-variance analysis. It is well known, however, that the parameters used in the portfolio analysis problem are unstable through time. Thus, the weight proposed for property in one period is unlikely to be that found in another. Consequently, in order to assess the case for property more thoroughly, the impact of property in the mixed-asset portfolio is evaluated on a rolling basis over a long period of time. In this way we test whether the inclusion of property significantly improves the performance of an existing equity/bond portfolio all of the time. The main findings are that the inclusion of direct property into an existing equity/bond portfolio leads to increase or decreases in return, depending on the relative performance of property compared with the other asset classes. However, including property in the mixed-asset portfolio always leads to reductions in portfolio risk. Consequently, adding property into an equity/bond portfolio can lead to significant increases in risk-adjusted performance. Thus, if the decision to include direct property in the mixed-asset portfolio is based upon its diversification benefits the answer is yes, there is a “case for property” all the time!

Attribution analysis of property portfolios

This paper aims to clarify the potential confusion about the application of attribution analysis to real estate portfolios. Its three primary objectives are: · To review, and as far as possible reconcile, the varying approaches to attribution analysis evident in the literature. · To give a clear statement of the purposes of attribution analysis, and its meaning for real-world property managers. · To show, using real portfolio data from IPD's UK performance measurement service, the practical implications of applying different attribution methods.

Commercial real estate return distributions: a review of literature and empirical evidence

This paper review the literature on the distribution of commercial real estate returns. There is growing evidence that the assumption of normality in returns is not safe. Distributions are found to be peaked, fat-tailed and, tentatively, skewed. There is some evidence of compound distributions and non-linearity. Public traded real estate assets (such as property company or REIT shares) behave in a fashion more similar to other common stocks. However, as in equity markets, it would be unwise to assume normality uncritically. Empirical evidence for UK real estate markets is obtained by applying distribution fitting routines to IPD Monthly Index data for the aggregate index and selected sub-sectors. It is clear that normality is rejected in most cases. It is often argued that observed differences in real estate returns are a measurement issue resulting from appraiser behaviour. However, unsmoothing the series does not assist in modelling returns. A large proportion of returns are close to zero. This would be characteristic of a thinly-traded market where new information arrives infrequently. Analysis of quarterly data suggests that, over longer trading periods, return distributions may conform more closely to those found in other asset markets. These results have implications for the formulation and implementation of a multi-asset portfolio allocation strategy.

The relative importance of sectors v's regions in determining property returns

A number of studies have investigated the benefits of sector versus regional diversification within a real estate portfolio without explicitly quantify the relative benefits of one against the other. This paper corrects this omission by adopting the approach of Heston and Rouwenhorst (1994) and Beckers, Connor and Curds (1996) on a sample of 187 property data points using annual data over the period 1981-1995. The general conclusion of which is the sector diversification explains on average 22% of the variability of property returns compared with 8% for administratively defined regions. A result in line with previous work. Implying that sector diversification should be the first level of analysis in constructing and managing the real estate portfolio. However, unlike previous work functionally defined regions provide less of an explanation of regional diversification than administrative regions. Which may be down to the weak definition of economic regions employed in this study.

Sector and regional factors in real estate returns

This paper presents a simple method to measure the effect of sector and regional factors in real estate returns, and thus provides a quantitative framework for analysing the relative impact of these two diversification categories to real estate portfolio selection. Using data on Retail, Office and Industrial properties spread across 326 real estate locations in the UK, over the period 1981 to 1995, the results show that the performance of real estate is largely sector-driven. A result in line with previous work. Which implies that the sector composition of the real estate fund should be the first level of analysis in constructing and managing the real estate portfolio. As a consequence real estate fund managers need to pay more attention to the sector allocation of their portfolios than the regional spread.

Friction and inertia: business change, corporate real estate portfolios and the UK office market

It has been asserted that business reorganisation and new working practices are transforming the nature of demand for business space. Downsizing, delayering, business process reengineering and associated initiatives alter the amount, type and location of space required by firms. The literature has neglected the impact of real estate market structures on the ability of organisations to successfully implement these new organisational forms or contemporary working practices. Drawing from UK research, the paper demonstrates that, while new working practices are widespread, their impact on the corporate real estate portfolio is less dramatic than often supposed. In part, this is attributed to inflexibility in market structures which constrains the supply of appropriate space.

The inter-temporal stability of real estate returns: an empirical investigation

This paper examines one of the central issues in the formulation of a sector/regional real estate portfolio strategy, i.e. whether the means, standard deviations and correlations between the returns are sufficiently stable over time to justify using ex-post measures as proxies of the ex-ante portfolio inputs required for MPT. To investigate these issues this study conducts a number of tests of the inter-temporal stability of the total returns of the 19 sector/regions in the UK of the IPDMI. The results of the analysis reveal that the theoretical gains in sector and or regional diversification, found in previous work, could not have been readily achieved in practice without almost perfect foresight on the part of an investor as means, standard deviations and correlations, varied markedly from period to period.