Indirect investment in property through unit-linked property funds has been all the rage over the past few years, but these funds can have a variety of charges attached to them.
Property funds
If the fund is geared - in other words, if the fund is used to borrow extra money to finance property purchases - these charges can include a margin on the loan, typically 1.25-1.5 per cent.
The annual management fee can be charged on the geared up amount rather than the net sum invested.
"Some people see that they are paying 0.75 per cent on a property fund and think, 'oh that's great'. Then they realise they are paying 0.75 per cent on the geared up amount and not on what they put in. Charges can be quite opaque," says Nigel Poynton of NCB Wealth Management.
In addition to these charges, there is often a property management fee, says Maeve Corr of Deloitte Pensions and Investments.
"These can be higher where there are multiple properties or a property with multiple tenants," she says.
Professional fees should be taken into account on the acquisition and disposal of the property.
"Obviously in a fund like this, you hope that the anticipated return is quoted net of all of the fees as well as net of taxation, both domestically and internationally, and that the projected return significantly outweighs the cost," says Corr.
Hedge funds
Some investment funds will include performance fees that usually kick in if the returns achieved go over a certain threshold. They may be a feature of property and other investment funds, but are particularly common to hedge funds.
Hedge funds are investment funds where the fund manager will often follow a strategy of "selling short" or betting that the price of an asset is about to fall rather than rise.
Hedge funds also use leverage to take bigger bets on the market, meaning both gains and losses can quickly accrue.
"Hedge funds might charge a 1.5 per cent annual management fund and a 20 per cent performance fee over a certain level. Some people are quite happy to pay that because they feel the fund manager's interests are more aligned with their own," says Poynton. "But you are giving a good bit away."
Investors should check if performance fees are before or after tax and internal charges.
Multi-manager funds
Promising to spread the risk for investors among a number of "best in class" fund managers, these funds are becoming increasingly popular, according to Corr.
"Again here the management fees are typically higher with a certain layering of charges. The fund selector charges a fee, the underlying fund managers get a fee and the promoters or life assurance company also charge a fee," says Corr.
