Separately managed accounts (SMAs) are reshaping the hedge fund landscape, driven by investors' growing demands for transparency, customization and control. While the operational benefits of SMAs are clear, their implementation introduces significant complexity for managers, making operational infrastructure a vital factor in their success.
Our "Separate Ways: Behind the Evolution of Managed Accounts" report explores key operational considerations for SMAs, including the role of advanced technology, the importance of strategic service provider selection and how geopolitical uncertainty impacts operational strategies.
Technology as the Backbone of SMA Offerings
SMAs have increased in parallel with advances in technology. Efficiently managing multiple accounts requires robust systems capable of handling the nuanced demands of highly customized portfolios. Functional capabilities such as real-time reporting, portfolio monitoring and seamless automation are non-negotiable.
According to a recent survey conducted in partnership with Hedgeweek, 38% of hedge fund respondents identified technological infrastructure as one of the top two considerations when selecting service providers. With SMAs requiring daily oversight into holdings, cash flows and counterparty exposure, cutting-edge platforms are essential for ensuring operational efficiency.
For example:
- Real-Time Transparency: Investors now expect continuous visibility into their portfolios, rather than standard month-end or quarter-end reports. This aligns with the post-2008 shift toward increased investor control.
- Automation: Automated workflows reduce manual errors and improve the scalability of SMA platforms, which is particularly crucial for larger fund managers overseeing billions in assets under management (AUM).
Managers looking to drive SMA adoption should prioritize investment in technology that guarantees both operational accuracy and investor satisfaction.
Service Providers are Strategic Partners, Not Vendors
The management of SMAs requires seamless collaboration with third-party service providers. Our survey found that market reputation (28%) and existing relationships (22%) are the top criteria fund managers consider when choosing their service providers. This preference for established, reliable partners stems from the high stakes tied to SMAs, where errors can have significant reputational and financial consequences.
Key factors fund managers evaluate include:
- Experienced Capabilities: Providers must be adept in managing the intricacies of SMA structures, including multi-jurisdictional tax management and complex compliance requirements.
- Integrated Solutions: One-stop-shop service providers with sophisticated technology and operational expertise simplify SMA administration.
- Scalability: Institutions handling billions in AUM need service providers who can seamlessly scale with their growth.
Cost was ranked surprisingly low (just 6%) as a key consideration. This reflects the scale and risk involved in SMA operations鈥攎anagers prioritize trust and the ability to adapt to complex structures over cost savings.
Market Volatility and the Need for Resilient Operations
Market volatility reinforces the necessity of strong operational infrastructure within SMAs. Unlike pooled funds, SMAs offer investors greater control, enabling real-time adjustments to allocations in response to global events.
Operational systems must be robust enough to handle:
- Counterparty Risk Diversification: SMAs allow diversification across custody, prime brokerage and execution venues, reducing reliance on single institutions during unpredictable events.
- Daily Risk Management: SMAs offer transparency into exposures that pooled fund investors might only quantify after prolonged intervals. This is critical in volatile markets where timely action is paramount.
- Liquidity Optimization: The flexibility of SMAs allows investors to adjust risk exposure without the constraints of fund-level gates or lockups, granting them a competitive edge during uncertain times.
Managers with well-developed infrastructures are positioned to capitalize on these benefits, turning volatility into opportunity and providing greater peace of mind for investors.
Why Operational Excellence Sets Top SMA Providers Apart
The advantages of SMAs make them an increasingly attractive investment vehicle, but these benefits come with operational demands that push traditional resources to their limits. For hedge fund managers, meeting investor expectations means going beyond the basic customization and transparency features.
Operational excellence, underpinned by advanced technologies, strategic partnerships and resilient systems, is no longer a luxury, but a necessity. Firms prepared to deliver seamless, efficient SMA management will position themselves as leaders in an environment where investor expectations only continue to grow.
For managers navigating this transition, prioritizing infrastructure development is essential to stand out amid rising competition. Building SMA capabilities not only meets immediate investor demands but also lays the foundation for long-term growth in a changing hedge fund industry.
Read the full "Separate Ways: Behind the Evolution of Managed Accounts" report to learn more about how SMA management can enhance hedge fund operations and drive success in today's market.
