You mention that you hedge your exposure to market downturns through deep OOTM options -- would it be safe to interpret this as your company taking out OOTM puts on various REITs/ETFs? If so, I'm wondering about a couple things:
1. Do you hedge on REITs/ETFs with a local presence in the areas your properties are located in? If so, is there any liquidation risk of the REIT/ETF in the event of a major downturn that could force an early exit from your hedge position and leave you exposed to further decline? Also, how would you handle rebalancing/constructing new hedges when you add investment properties in a new area?
2. If you hedge on broader diversified REITs/ETFs, is it a plausible concern that your investment properties can be hit by a localized recession that leaves other parts of the broader real estate market unaffected, thus leaving your hedge unable to recoup the losses?
1. we hedge on both broader market REITs/ETFs as well as localized ones, depending on how many contracts we have in the local market.
2. Because we hedge on both, the probability of this is very low. Since a more granular hedge is an imperfect hedge due to the nature of these REITs/ETFs, it might not cover 100% of the localized recession. However, it should cover a large portion of it. So, our company will be on the hook for that remainder percentage.
We can cover it in 2 ways. Number 1, just use our own capital. Number 2, the profitable contracts in other areas not hit by recessions should be able to offset the ones hit by the localized recession.
1. Do you hedge on REITs/ETFs with a local presence in the areas your properties are located in? If so, is there any liquidation risk of the REIT/ETF in the event of a major downturn that could force an early exit from your hedge position and leave you exposed to further decline? Also, how would you handle rebalancing/constructing new hedges when you add investment properties in a new area?
2. If you hedge on broader diversified REITs/ETFs, is it a plausible concern that your investment properties can be hit by a localized recession that leaves other parts of the broader real estate market unaffected, thus leaving your hedge unable to recoup the losses?