While hedge funds that have sought non-traditional investors have gone the ’40 Act route through funds-of-funds structures, they should consider separately managed accounts, according to a report from Pershing and Greenwich Associates based on detailed interviews with 41 hedge fund and investment managers and 27 institutional investors.
Sixty-three percent of the investors said they like the opportunity to influence an SMA strategy and have a say on risk management according to the report, “Transparency and Liquidity: The Growth of Separately Managed Accounts in the Hedge Fund Industry.” Investors' primary reason for being more proactively involved is because of significant losses suffered in recent years.
Fifty percent said they like the transparency offered in an SMA, citing concerns over fraud risk. Thirty-three percent of investors also said they like the liquidity offered in an SMA, and nearly 50% of the hedge fund managers said investors are pressuring them to eliminate lockup period and redemption notice requirements.
Nearly 80% of the managers interviewed are already offering separately managed accounts as part of their investment solution and gave four reasons why SMAs are attracting assets: transparency, liquidity, customized investments and the ability for investors to negotiate fees.
But offering an SMA does not come without challenges. More than 60% of the hedge fund managers said that SMAs require additional administrative requirements, and 33% said these requirements are costly.
“The increasing demand among investors for SMAs demonstrates the growth opportunity for hedge fund managers who incorporate SMAs into their investment strategy,” said Craig Messinger, a managing director with Pershing Prime Serices.
Prime brokers can alleviate the burdens of running an SMA program, added John Colon, a managing director at Greenwich Associates. “As investors gravitate to the SMA structure, growth-minded hedge fund 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,” Colon said.