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Article: International Diversification in Frontier Real Estate Markets Author: Sulaiman T. Al-Abduljader Abstract: The paper investigates the effects of international diversification in reducing risk. The test is applied on real estate returns by analyzing global portfolios investing in the GCC real estate. The correlations between markets are not low to produce effective diversification. Nine out of the twelve portfolios produced high enough correlations that when opposite positions (long and short) are taken, only then we began to see significant reduction in risk. When comparing the effects of GCC real estate with BRIC in a global equity portfolio context, both GCC real estate and BRIC do not produce diversification benefits when a long position is taken on developed markets. Nonetheless, when taking a long position in GCC real estate, effective diversification is found when taking short positions on developed markets. A similar case can also be concluded when taking long positions on BRIC and shorting the developed markets. The results suggest serious concerns on effective diversification among global investors with the current long only exposure to real estate in the region and suggests the introduction of shorting financial instruments for active hedging and portfolio optimization. Keywords Diversification, Real Estate, Emerging Markets, Asset Allocation, Capital Markets, Investment Management
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