Mature managers dominate the SMA landscape, finds snapshot report

Latest edition of annual study reveals breakdown of investor types, landscape of incentive and management fees, and more

Mature managers dominate the SMA landscape, finds snapshot report

The number of managers entering into separately managed account (SMA) relationships has grown as a result of persistent investor demand for more customized products, according to new research from Seward & Kissel LP.

In the second edition of its annual SMA snapshot report, which is part of its ongoing commitment to understand the trends impacting alternative investment industry and its clients, the firm found 91% of the hedge fund managers who manage SMAs started their companies more than two years ago – compared to 82% in the previous year's report.

Among the SMA managers that were launched more than two years ago, 90% began more than five years ago, compared to a much lower proportion of 62% in the previous year’s report. Meanwhile, only 9% of the managers surveyed this year were established in the past two years, compared to 18% last year.

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“These figures may demonstrate an investor shift in the SMA space towards mature managers,” Seward & Kissel said.

Focusing on the types of SMA investors, the study found 75% were funds (a sharp uptick from 52% last year) and 15% were high-net-worth individuals or family offices (down from 25%), with other investor types accounting for the remaining 10%. All SMA arrangements among newer managers were with fund investors, it found.

“The significant rise in the percentage of fund investors may be indicative of their abilities to best marshal the increased resources necessary to source, diligence and negotiate with SMA managers in the current environment,” Seward & Kissel suggested.

In terms of investment strategies, 55% of the SMAs studied included an equity-focused strategy (compared to 65% last year) and 27% had a credit-focused strategy (roughly the same as before), with the rest comprising other approaches such as single-name and commodity investments.

The majority of the managers implemented strategies that deviated from their flagship hedge fund strategy because of mandates that mainly dealt with long-only exposure; greater leverage; ESG factors; tax efficiency; or higher position concentrations.

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Average account sizes diverged sharply between experienced managers (over US$45 million) and newer managers (US$7.5 million).

Virtually all the SMA agreements permitted clients to terminate on an average of 45 days’ notice, though termination was only allowed on a quarter-end or after an initial lock-up period for roughly 30% of these instances. Managers were granted those same termination rights in only about a third of the agreements, compared to 45% last year.

Drilling down into incentive fees, the study found 28% of the SMA agreements charged none (compared to 40% last year); 54% charged between 15% and 18% (up from 32%); 9% had a tiered incentive fee structure; and just 9% used a traditional incentive fee.

On the other hand, the flagship hedge funds provided by these managers typically adhered to a conventional two-tier incentive allocation model, with an average of about 20% for the standard class and 15%–18% for the founder’s class.

“These latest findings appear to show a demonstrable move towards more managers requiring incentive fees in their SMA arrangements, which may in part be due to the seniority of the managers in the Report,” Seward & Kissel suggested.

The report also revealed an apparent drop in management fees, with fees this year averaging roughly 1% compared to 1.5% last year. That was somewhat offset by the fact that 27% of all SMA agreements had some tiered system of management fees typically tied to different AUM levels.

Nine per cent of the SMA agreements charged no management fee.