Real Estate Fund of Funds: A Transaction Cost-Based Analysis

Patrick Schlump

ERES from European Real Estate Society (ERES)

Abstract: Indirect real estate investments have become increasingly attractive for institutional investors as well as for privates. Besides the obvious advantages compared to direct investments, such as smaller lot size and better liquidity, the question of cost of third-party management arises. There is a vast number of real estate vehicles available in the market and many investors do not have the resources to conduct excessive research in order to identify adequate products to build a real estate portfolio. Real estate fund of funds offer a managed product which invests at a specified risk level into selected funds. It takes over the process of selection and portfolio management. Being a diversified investment, risk can be minimised according to portfolio theory. While there are various interesting topics when analysing fund of funds, such as the selection of target funds or the principal-agency problems, this paper is supposed to look at the transaction cost aspect. Especially the fact, that additional fee levels appear, as the fund of funds manager requires remuneration for his service, is often used as a argument against this vehicle. Therefore, transaction cost form the basis of the analysis. As different legal structures imply different cost, a selection of structures is presented. Furthermore, performance is analysed and compared to the cost.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2007-01-01
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