INREV turns spotlight on fund of funds

An inaugural study of fees charged by fund of funds managers in Europe has concluded they are ‘cost-effective’

Fund of funds are cost-effective in terms of giving investors access to markets where they lack resources and expertise to make direct investment, according to INREV, the European Association for Investors in Non-Listed Real Estate Vehicles.

In research called the INREV Fund of Funds Fee Study – the findings of which were released this week – the association concluded that that while fund of funds were cost-effective, there was no room for complacency as fund of funds needed to further improve transparency in areas such as total expense ratios.

The inaugural study also found key differences in approach between the fee charging models at fund of funds that focus on core property funds and those which target value-added and opportunistic funds.

It said nearly all fund of funds targeting value added and opportunity funds charged a performance fee whereas only 22 percent of those that looked to invest in core funds did so.

In other findings, nearly half of the fund of funds based their annual management fees on net asset value, with an average of 0.4 percent. It also said overall, fund of funds fee structures were simpler and lower than for direct funds. 

Antonio Alvarez, chairman of the INREV Fees Committee, said: “Fund of Funds give investors a cost-effective access to markets where they lack the resources or expertise to make direct investments. However, we must not be complacent and recognise that there is an need amongst investors for the fund of funds industry to further improve transparency in areas such as total expense ratio.”

The INREV Fund of Funds Fee study included details from 34 non-listed real estate funds targeted by institutional investors.  
The lowest management fees were reported by open-end fund of funds launched before 2005.
Fund of funds typically reported IRR hurdle rates in the region of 9 percent with on average 11 percent share of the out-performance paid to the manager. The hurdle rate is on average placed 3 percentage points below the target net IRR of the vehicle. 

In addition to management fees and performance fees, various fund level expenses could be charged to the fund of funds or the investors.  The most common expenses charged include audit and legal fees, administration fees, custodian fees and set-up fees.

In general respondents felt fund of funds were coming under pressure in terms of fees.