The Effect of Benchmark Choice on Risk-Adjusted Performance Measures for Commingled Real Estate Funds

This study examines the portfolio performance for forty-seven commingled real estate funds using several different sets of real estate benchmarks and the multifactor Jensen alpha measure. The results indicate that the choice of a specific aggregate real estate market index makes very little difference in the performance results. Adding an inflation index, or disaggregating the market index into regional subindices, produces alphas that are less correlated with the single-index model alphas and produces a large reduction in the amount of abnormal performance detected. In addition, disaggregating the single-market index into property types produces alphas that are the least correlated with those from the other models and also produces a reduction in the amount of abnormal performance detected, similar to the results for the inflation and regional models.