Evaluating REITs for Pension Fund Allocation: Risks and Strategies

In the context of real estate investments, Real Estate Investment Trusts (REITs) have gained significant attention for their potential to enhance portfolio diversification and provide stable income streams. Consider a pension fund that is evaluating its allocation to REITs as part of its broader investment strategy. The fund’s investment committee is particularly concerned about the risks associated with investing in different types of REITs, including equity REITs, mortgage REITs, and hybrid REITs.

Your task is to develop a comprehensive response that addresses the following:

1. Discuss the main characteristics of each type of REIT (equity, mortgage, and hybrid) and how they differ from each other in terms of structure and risk profile.
2. Evaluate the potential benefits and drawbacks of incorporating REITs into the pension fund’s investment portfolio, especially in relation to its objective of achieving long-term capital growth and income generation.
3. Propose strategies for the fund to effectively balance the risks associated with REIT investments, including considerations around market conditions, interest rates, and economic cycles.

Support your argument with relevant examples and theoretical frameworks where applicable, ensuring a thorough analysis. Your response should be well-structured and demonstrate a deep understanding of REITs and their role in alternative investments.