Cost recharging in funds: Setting the scene in a shifting landscape

As the alternative investment management industry navigates in an economically challenging environment, a key topic has come into focus at the intersection of operations, governance, and investor expectations: the allocation of internal costs and external expenses between fund managers, the funds they manage, and ultimately, investors.

In this miniseries of articles, we share our market insight and take you alongside the journey of reviewing fair allocation of cost between managers and investors, and how it can be achieved in practice from an operational standpoint.

In recent years, fund managers have been increasingly allocating operational and support costs, previously born out of their own profit and loss statement (P&L), directly to the funds they manage. These costs can be internal, relating to services delivered in-house, as well as external, such as fees from service providers and advisers.

While this trend reflects a broader focus on margin preservation on the manager side, authorities such as the Securities and Exchange Commission (SEC), the Financial Conduct Authority (FCA) and, more recently, the European Securities and Markets Authority (ESMA) have placed growing emphasis on ensuring that costs borne by funds are justified, reasonable, transparent, and in the best interests of investors.

Against this backdrop, a central challenge emerges. At the core lies a business aspiration shared by many managers: to establish a fair and defensible allocation of costs between the fund and the manager’s corporate structure. But achieving this is no simple task. Fund managers today operate within a delicate triangle of constraints, spanning market practice, investor willingness to pay, and regulatory pressure.

On one side is what peers are doing with benchmarks, peer comparisons, and prevailing norms. On another is the investor perspective, including what clients are prepared to accept, what they perceive as fair, and how transparency shapes trust. The third dimension is regulatory scrutiny, where authorities set high, though often not fully defined, expectations around governance, documentation, and steadily increasing oversight.

Striking the right balance between these three forces is essential. Overcharging the fund can risk breaching regulatory expectations, reducing investor confidence, and making the product less competitive in price. On the other hand, charging too little may prevent the business from recovering its costs and could affect long-term sustainability.

Navigating this landscape requires internal clarity, robust governance, and external awareness of both market norms and regulatory developments.

Stay tuned for a deeper dive into the regulatory and governance constraints that fund managers face and how these can be addressed not only as compliance requirements, but as opportunities to enhance investor trust and operational resilience.