What is a key consequence of misalignment between investors and fund managers?

A key consequence of misalignment between investors and fund managers is conflicts of interest. When the goals and incentives of fund managers do not align with those of the investors, it can lead to situations where fund managers prioritize their own interests—such as earning higher fees or pursuing personal investment strategies—over those of the investors, who are primarily focused on maximizing returns and managing risk.

These conflicts can manifest in various ways, such as fund managers engaging in excessive risk-taking to boost short-term performance or failing to communicate key information about fund performance and strategy. Such behavior can undermine investor trust and can lead to poor long-term performance for the fund, damaging the relationship between the fund and its investors.

While increased operational costs, lack of investment diversification, and higher market volatility can arise for various reasons in investment scenarios, they are not direct consequences of misalignment between interests. The primary issue stemming from this misalignment is the potential for conflicts, which can significantly impact investment outcomes and overall satisfaction for both parties.