Why Hedge Funds are Quietly Embracing SMAs and What It Means for Investors

Separately Managed Accounts (SMAs) have rapidly evolved from specialized offerings into a mainstream tool for institutional investors and hedge fund managers. The structure offers greater transparency, control, and customization, benefits that are increasingly essential to investors navigating today’s complex markets.

The increasing adoption of SMAs has accelerated the industry into a SMA Renaissance as allocators prioritize alignment and oversight, and as technology has made it easier for investment managers to administer bespoke accounts to scale their business. Today, established and emerging hedge fund managers are embracing SMAs as a key component of their fundraising and investor servicing strategy.

What is an SMA and How Does It Work?

Unlike traditional commingled hedge funds, an SMA is a private investment vehicle set up for a single investor, typically an institution, pension, endowment, or family office, in lieu of pooling assets with other clients within a commingled vehicle. The investor funds the account and delegates trading authority to the manager, but most importantly, the investor maintains oversight and control of the account’s assets and can set specific guidelines.

SMAs provide full transparency into holdings and exposures and the ability to tailor investment guidelines, choose service providers (e.g., administrator, custodian, prime broker), and set specific constraints like ESG exclusions, tax sensitivities, or risk limits. Many SMAs are run on institutional platforms that handle fund structuring, operations, and compliance, allowing the manager to focus on trading.

When Customization Justifies the Cost

Expectedly, this level of control and customization comes with higher legal and operational costs. Entity formation, audit and tax reporting, infrastructure for bespoke reporting, and potential trading inefficiencies all add to an SMA’s operating expense. As a result, SMAs are typically only viable above certain asset levels. At the lower end of the spectrum, a basic SMA, where the manager trades in an account held directly in the investor’s name without the need for a separate legal entity, can be feasible starting around $50 million to $100 million, depending on the complexity of the strategy and reporting requirements.

More structured arrangements, such as SMAs with dedicated legal wrappers (e.g., offshore fund entities, SPC cell, or special purpose vehicles), generally require a minimum of $100 million to $250 million to justify the incremental administrative and legal burden. For highly customized mandates involving systematic trading, multi-asset global macro, or sophisticated risk overlays, the all-in cost often pushes the practical minimum into the $250 million to $500 million range. Costs scale with strategy complexity and customization requirements.

Some managers may subsidize operational expenses to win strategic mandates, but SMA efficiency generally improves above the $100 million mark. At that level, the benefits, in terms of transparency, oversight, and alignment, begin to outweigh the costs.

4 Reasons Why Investors Are Flocking to SMAs

The growing popular appeal of SMAs lies in the combination of transparency, customization, and control they offer to investors. In the wake of the 2008 crisis and other market events, institutional investors have grown wary of “black box” funds and now insist on greater insight and alignment.  Here are four notable reasons SMA structures are increasingly favored.

1. Transparency

SMAs provide near real-time visibility and position-level transparency that traditional hedge funds rarely provide. Unlike commingled vehicles, where investors may only see a monthly NAV, SMAs allow allocators to monitor exposures daily, enabling quicker risk assessments during market or geopolitical events.

This direct line of sight strengthens trust and allows for more proactive risk management. In a significant market event, SMA investors can immediately assess their exposure and act decisively, an invaluable feature in today’s volatile, fast-moving environment.

2. Customization

Unlike one-size-fits-all funds, SMAs can be tailored to match each investor’s unique investment policy, including ESG restrictions, tax considerations, sector limits, and geographic or regulatory constraints. Beyond the portfolio, customization extends to operational preferences, as SMA investors can select service providers, reporting formats, fee structures, and liquidity terms that align with their broader objectives. The result is a hedge fund strategy integrated seamlessly into their existing portfolio and governance framework, and flexibility unavailable when investing directly into a commingled fund.

3. Capital Efficiency

One of the major technical benefits of SMAs is improved capital usage. Traditional hedge funds often require investors to fund capital upfront. This leads to idle cash earning minimal returns. In contrast, SMAs allow notional funding and cross-margining, so an investor can deploy a strategy with less cash tied up as margin or reserves. In today’s rate environment, this “structural alpha” can add 1–2% to performance returns, making it an increasingly valuable lever for a sophisticated allocator.

4. Control and Alignment

Key operational decisions such as choosing auditors to risk parameters may shift into the investor’s domain or a mutually agreed-upon framework, rather than being solely at the fund manager’s discretion. This enhanced control means institutional investors can ensure higher compliance standards, enhanced risk management, and alignment with their fiduciary protocols.

Investors directly set liquidity terms, guidelines, and termination rights into the mandate, often including triggers for performance, personnel, or compliance breaches. Since the assets remain in the investor’s name, they retain control over cash flows and can negotiate custom liquidity (e.g., monthly or daily). The shift in control, from the manager to the allocator, ensures operational standards are aligned, while the manager focuses strictly on portfolio execution within agreed boundaries.

Customizable Risk Parameters

Beyond transparency and operational control, SMAs enable allocators to embed tailored risk parameters directly into the investment mandate. Institutional investors can specify volatility targets, hard leverage caps, drawdown thresholds, and exposure limits by asset class, geography, or factor. These aren’t just risk controls, they are portfolio design levers that influence everything from performance volatility to capital efficiency and regulatory fit.

Opportunities and Challenges

From the hedge fund manager’s perspective, SMAs represent both an opportunity and an operational test. On the upside, they unlock access to large, long-term institutional capital, allocators often committing tens or hundreds of millions, while fostering deeper client relationships. The bespoke nature of SMAs typically leads to longer commitments, and for managers, that means a more stable capital base and an effective way to diversify the business. Managers see these accounts as not just capital sources but strategic partnerships that may grow over time.

SMAs also inherently align interests. The negotiated format means fees can be tailored—lower management fees, unique hurdle rates, or MFN clauses, ensuring the investor’s objectives are met without compromising the manager’s economics. With greater transparency and oversight, the investor feels more protected and engaged, and managers often find that this dynamic leads to deeper collaboration and long-term alignment.

For emerging managers, SMA flexibility can be a competitive edge. Offering an SMA demonstrates operational maturity and investor-centric thinking, key differentiators when seeking institutional capital. Newer funds increasingly win mandates from risk-conscious allocators by being able to deliver the strategy in an SMA format, often through a managed account platform.

However, SMAs introduce meaningful operational complexity. Each one is effectively its own fund, with unique mandates, reporting, and guidelines. Trade execution must be equitable across all accounts, and heightened transparency expectations increase the risk of information asymmetry. To ensure fairness and control, managers must establish strong allocation, compliance, and information handling policies. Many turn to outsourced platforms for administrative and operational support.

There are also cost and resource implications. Legal negotiations, ongoing compliance, and customized reporting all require infrastructure. Accommodating a single SMA can divert resources for smaller managers unless technology and processes are built for scale. Regulatory implications can also follow, such as triggering SEC registration or enhancing compliance programs.

Based on an SS&C report, nearly half of hedge fund managers now offer SMAs, and most of the largest platforms do so as a matter of course. The operational investment often pays off through strategic, sticky capital and better alignment with investor expectations.

The Bottom Line

The trend is clear: SMAs have gone from exception to expectation. Surveys show that, outside of the nearly half of hedge fund managers that currently offer, an additional 10% plan to launch SMAs within the next year. As an AIMA webinar highlighted, JPMorgan forecasts that 58% of hedge fund launches over the next year will be via SMAs, and Goldman Sachs estimates that SMA AUM in hedge funds will grow by over $400 billion by 2027.

SMAs are reshaping how hedge funds engage with institutional capital, offering investors control, alignment, and efficiency, while providing durable, strategic relationships with managers. They require investment in operational capability, but the rewards are increasingly clear: they provide scale, partnership, and long-term stability in a rapidly evolving investment landscape.

The future of capital formation in alternatives is customized, transparent, and investor-centric. For hedge fund managers, the question is no longer whether to offer SMAs but how to establish the internal infrastructure needed to meet the demand.

Contact Arootah today to learn more about our tailored advisory services to help you stay ahead.