Separately managed accounts are increasingly popular hedge fund structures and they present growth opportunities to managers, according to a report by Pershing, a BNY Mellon company.
The study, developed with Greenwich Associates, details growing investor demand toward SMAs and provides guidance on how hedge fund managers can more effectively incorporate SMAs into their investment solutions and attract additional assets.
Nearly 63 per cent of the investors who participated in the survey cited the opportunity to have greater influence on SMA strategy and input in the area of risk management as one of its primary benefits. This is a result of many investors having experienced significant losses in the past few years.
Approximately 45 per cent of hedge fund managers reported that investors in pooled funds are pushing for higher levels of transparency. More than 50 per cent of the investors pointed to daily transparency as a central reason for using SMAs, a benefit that many investors associate with better protection against fraud risk.
Thirty three per cent of the surveyed investors cited access to liquidity as an important benefit of SMAs. Almost 50 per cent of hedge fund managers said they are experiencing pressure from their investors to eliminate lockup periods and redemption notice requirements while fewer managers report pressure from investors to reduce fees. Investors are reassessing the role of illiquid assets within their portfolios and seeking greater liquidity across all investments.
Nearly 80 per cent of the hedge fund managers interviewed currently offer SMAs as part of their investment solution and most confirm that SMAs are instrumental in attracting investor assets because they address investors’ greatest concerns: transparency, liquidity, customised investments, and the ability to negotiate fees.
However, despite having the necessary infrastructure, the study also reveals most managers are not actively promoting SMAs. More than 60 per cent of the hedge fund managers cited administrative requirements and resource demands as serious disadvantages associated with SMAs, while 33 per cent cited additional costs as a significant challenge.
"The increasing demand among investors for SMAs demonstrates the growth opportunity for hedge fund managers who incorporate SMAs into their investment strategy," says Craig Messinger, managing director at Pershing Prime Services. "Hedge fund managers should consider strengthening business operations internally and leveraging the full capabilities of their prime brokers to meet the growing investor demand for greater transparency, liquidity and flexibility.”
John Colon, managing director at Greenwich Associates, adds: "Prime brokers can help hedge fund managers develop efficient offerings that reduce administrative burdens while meeting investors’ current needs. As investors gravitate to the SMA structure, growth-minded hedge funds managers seeking new assets and longer-lasting relationships with their clients will look to abandon older ‘black box’ models in favor of more tailored offerings."
