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The rise of SMAs in hedge funds: trends and considerations

15 Jul 2025

By Philippa Allen, Managing Director, Regulatory Compliance, Asia

The hedge fund industry has witnessed a significant rise in interest and adoption of separately managed accounts (SMAs). Since 2010, assets under management (AUM) invested in hedge funds via SMAs have increased approximately sixfold, more than doubling as a percentage of total hedge fund assets. This trend is being driven by traditional allocators, asset owners, and multi-manager platforms seeking greater control and transparency over their investments.

The momentum has accelerated considerably in recent years. Globally, according to media sources, hedge funds experienced a nearly 50% increase in investor requests for investment via SMAs in 2024 alone. This surge in demand reflects a broader shift in how hedge fund launches are being structured, with many of the largest launches now anchored by platforms rather than traditional seeders. Indeed, the SMA route is increasingly replacing seeders as the dominant form of anchoring new hedge fund strategies.

SMAs vs. other investment structures

A key discussion point revolves around defining SMAs and distinguishing them from similar structures such as the ‘fund of one’ (a hedge fund vehicle created for a single investor).

Unlike a blind pool fund, an SMA is independently established for a single investor and separately managed by the manager, with the SMA investor retaining beneficial ownership and oversight of underlying assets. By contrast, a fund of one retains ownership of assets within the fund structure and the manager has the discretion to manage and invest assets of the fund, with investors playing a passive role.

Benefits of SMAs for managers and investors

SMAs provide distinct advantages for both managers and investors.

For managers, key benefits include:

  • Access to investor capital that may not otherwise be available (and often in sizeable amounts)
  • The ability to focus on investing
  • An opportunity to deepen relationships with allocators and investors

For investors, SMAs offer:

  • Transparency and greater control over investments
  • The potential for portfolio customisation tailored to specific objectives and preferences
  • More control over the structure operations and expenses of the account
  • The potential for improved capital efficiency through optimised treasury functions, including finance, margin and cash management with notional funding and cross-margining techniques to reduce idle capital and collateral
  • Fee customisation to align with investor preferences rather than adhering to the traditional fund structure

Contractual negotiation considerations

Despite the advantages, SMA arrangements can be complex and require careful negotiations between the parties, often necessitating legal counsel. Key contractual considerations include:

  • The widespread expectation of the most-favoured nation (MFN) clauses, with close to 80% of SMAs containing these provisions
  • Control and termination rights, particularly in case of breaches of SMA terms and criminal/civil action (with almost all SMAs providing for this) and key person, bankruptcy or performance-related triggers (which around 70% of SMAs cover)
  • Determining whether capital is fully funded or based on gross market value (GMV)
  • Clarifying whether the structure is a pure SMA or a fund of one
  • Liquidity (it’s estimated that around 45% of SMAs have daily liquidity, 35% monthly and 20% quarterly)
  • Notice periods, which are seeing a wide variation
  • Lock-ups, with an estimated 30% of SMAs containing such clauses
  • Confidential information language where it is crucial for the manager to restrict the use of such information by the allocator to prevent its use in other funds or accounts of the allocator

Operational and compliance challenges

There are also practical compliance concerns to consider, including reservations about pre-end-of-day transparency and reporting, often demanded by the allocators.  These can cause potential problems with the flow of material non-public information (MNPI) and the control of restricted lists (both for the manager and the allocator). However, since next-day hedging or automated hedging are available options, these pre-end-of-day reporting requirements may not be essential.

Further complexities include:

  • Avoiding front-running by using volume weighted average price (VWAP) execution
  • Modification of a central execution desk’s order flow on the back of an SMA portfolio manager’s transaction patterns
  • Retaining flexibility to reduce market or factor risks for risk management purposes on the following trading day

Additionally, U.S. allocators often require managers offering SMAs to be registered as registered investment advisors (RIAs) with the Securities and Exchange Commission (SEC).  Managers overseeing SMAs alongside existing funds must review trading compliance policies and procedures related to aggregation, trade allocation and best execution.

There are a number of managers utilising established SMA platforms that provide operational support rather than developing these functions internally.

Track record considerations

Portfolio managers have questions around the portability of SMA performance for comparison and track record purposes. In Asia, a growing number of managers launch SMAs with no, or a very small, commingled base. This approach enables them to build a verifiable track record while maintaining a solid AUM base.

For multi-managers, SMAs are often used to retain talent by allowing the launch of an external product.   From a legal standpoint, intellectual property rights in the investment strategy should be considered during contractual negotiations.

The future of SMAs in hedge fund investing

SMAs continue to play a transformative role in the fund industry, offering both managers and investors new opportunities for customisation, transparency and efficiency. While navigating SMA structures requires careful consideration of contractual terms and regulatory compliance, the growing popularity of SMAs suggests they will remain a vital component of fund investment strategies in the years ahead.

How IQ-EQ can help

We represent the largest domain specialist in the regulatory compliance sector in the APAC region. Our award-winning team of 100+ regulatory compliance specialists works closely with firms, including fund managers, across Asia. Globally we offer a comprehensive suite of services designed to guide fund managers through the ever-evolving regulatory landscape.

To learn more about SMAs and how we can support your regulatory compliance needs in Asia, please don’t hesitate to reach out.

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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