First-of-its-kind study reveals makeup of mandates, compensation models, and managers driving adoption in hedge fund industry
An increasingly popular offering in the hedge fund industry, separately managed accounts, is benefiting from the confluence of several trends, according to new research.
In a first-of-its-kind study focused on SMAs, U.S.-based law firm Seward and Kissel laid out several key metrics to create a snapshot of the current state of the industry over the past 12 months.
“The demand by investors for specific terms and strategy exposure is substantial, and only growing, which has been a large contributor to the increase in SMAs,” said Steve Nadel, a partner in the Investment Management Group of Seward & Kissel and lead author of The SMA Snapshot Report.
Among the SMAs included in the research, a 45% plurality had managers deviating from their hedge funds’ flagship strategy to accommodate investor mandates around several priorities including ESG considerations and exposure to private and digital assets.
A slight majority of investors in the SMAs sampled (52%) were funds, while one quarter (25%) were high-net-worth individuals. Among the managers of SMAs, an 82% majority had more than two years of experience as hedge fund managers, including 61% with more than five years’ experience. The 18% minority of managers with less than two years of experience, the firm found, got 100% of their SMA investments coming from high-net-worth individuals and family offices.
The study revealed a stark disparity in average SMA sizes by manager age: those over two years old had SMAs holding US$35 million on average, while newer managers averaged less than US$10 million. There was also a much greater tendency for SMAs to employ equity-focused investment strategies (65%) than credit-focused strategies (27%).
Overall, management fees for SMAs were just 1.5% on average, with 40% of agreements including some type of tiered management fee structure that typically hinged on AUM levels; just 11% of SMAs charged no management fee.
A 14% minority of SMA agreements featured a traditional 20% incentive fee, while the same number (14%) used a tiered incentive fee structure. Another 32% charged an incentive fee of between 15% and 18%, while 40% did not charge an incentive fee at all.
The flagship hedge funds offered by managers, the study found, generally adhered to the traditional two-tier incentive allocation model of about 20% on average for the standard class and 15%-18% for the founders class.