Fund expenses: practical considerations for hedge fund managers

Marex Prime Services recently hosted a breakfast roundtable, in partnership with McDermott Will & Schulte, to discuss how expense allocation is evolving in the current environment.

The session was led by Josh Dambacher, drawing on McDermott’s work with hedge fund managers across the US, Europe and Asia, alongside broader market perspectives.

Fund expenses continue to attract attention as managers balance investor expectations, regulatory scrutiny and the practical realities of running a fund. For those unable to attend, some of the key themes and observations from the session are set out below.

 

Approaches to expense allocation continue to vary across the market

The opening theme was the apparent difference between how managers in different regions approach expense allocation, particularly between the US and Europe.

US managers, in particular, appear more willing to charge a broader range of expenses to the fund than many of their UK and European peers.

While some managers are charging costs such as market data, regulatory reporting, risk tools and technology systems to the fund, others continue to absorb those costs at management company level.

The discussion suggested that this remains an evolving area, with managers continuing to reassess how costs are allocated and where current market practice sits.

 

Investor scrutiny remains an important consideration

Investors continue to question certain categories of expense.

At the same time, the discussion highlighted that investor approaches are not always consistent across the market. Investment-related travel, for example, is often charged to the fund, while market data and technology costs continue to be areas where managers are assessing how existing documentation applies in practice.

One observation from the session was that investor focus often remains on net returns and headline fees, rather than detailed scrutiny of every individual operating expense line.

Documentation and disclosure were also highlighted as important factors. Where approaches are clearly supported by fund documentation and communicated appropriately, managers may have more flexibility than they initially assume.

 

Documentation continues to come under greater focus

Josh raised the importance of fund documentation and ongoing disclosure.

Since 2021, there has been a noticeable increase in managers revisiting their fund documents; both to better understand existing provisions and, in some cases, to clarify or update expense language.

The discussion also touched on the distinction between what documents allow and what a manager may have historically charged or referenced in due diligence materials. Statements that a cost is not ‘currently’ charged do not necessarily prevent a manager from changing approach in future, particularly where the governing documents already provide scope to do so.

At the same time, regulatory scrutiny around disclosure continues to increase, placing greater importance on ensuring that documentation, investor communications and actual practice remain aligned.

 

Separately managed accounts present different commercial dynamics

The contrast between commingled funds and separately managed accounts (SMAs) was another area of focus.

In commingled structures, managers generally retain greater control over expense language, liquidity terms and overall fund structure. In SMAs, managers are often working within tighter parameters set by investors or platforms, including around fees, expenses and liquidity arrangements.

The discussion also touched on the broader commercial dynamics that can emerge in SMA-heavy business models, particularly where revenues become concentrated across a smaller number of accounts.

Liquidity tools and terms also formed part of the conversation, including investor-level gates, lock-ups and other mechanisms designed to balance different investor needs and redemption profiles over time.

 

Alpha capture and AI are emerging areas of focus

While the session focused primarily on fund expenses, two adjacent themes also emerged during the discussion.

The first was alpha capture, particularly the use and monetization of trading data. Questions around data ownership, disclosure and how these activities are reflected in fund documentation are becoming more relevant as managers explore these models.

The second was AI, both from an expense perspective and in relation to confidentiality and data handling. The discussion highlighted growing awareness around how AI tools are used, how fund information is handled and whether existing documentation adequately reflects those considerations.

 

A continuing area of evolution

Overall, the session reflected how approaches to expense allocation continue to evolve across the market, alongside increasing focus on disclosure, documentation and operating practices.

For managers, the practical takeaway may simply be to revisit existing assumptions and ensure that documentation, disclosure and day-to-day practice remain aligned with how the business operates today.