NASA
All hail the separately managed account.
Hedge fund launches had been steadily declining until SMAs, portfolios that investors can oversee directly instead of being pooled with others, became commonplace in recent years. Last year, according to Hedge Fund Research, there were nearly 500 launches, a figure that harkens back to the pre-pandemic days, and there were 121 new funds in the first quarter of this year.
After years of steadily becoming more complex and requiring hundreds of millions of startup dollars and operational and compliance know-how, there are now more avenues for getting a new fund off the ground, with the SMA serving as the most obvious change, said Kristin Kramer, Goldman Sachs’ global head of capital introduction, who connects emerging hedge funds with big-money investors.
“There are so many ways to get into the business now. That’s how the game has changed,” Kramer said in an interview with Business Insider.
What’s changed “the most in the past few years,” she said, is the surge in new funds launching with capital from SMAs run by larger hedge funds or institutional investors. SMAs come in different flavors depending on which large investor is providing the capital for them, but they differ from the typical hedge fund by allowing the allocator more control and access to the end manager.
Goldman Sachs
For example, allocators that invest in a hedge fund via the traditional commingled option might get a portfolio and performance update once a month, while those that invest in a manager with an SMA can get daily or even near-real-time access.
Izzy Englander’s Millennium has been the poster boy for this movement, but firms like Qube, Squarepoint, Balyasny, and more have put their capital to work with external managers. The structure helps the biggest firms offer top talent another avenue to run their capital, and Goldman estimates more than 70% of multimanager funds are now externally allocating compared to roughly half in 2022.
While there are still big names that have not yet dipped their toes into this water, namely Ken Griffin’s Citadel, the proliferation of SMAs has changed the launch process, especially for portfolio managers at multimanager platforms.
“It might be the most seamless way to get into business,” Kramer said.
Behind the rise of SMAs
Allocators investing through SMAs can move quickly, especially the funds, which treat the process almost like an extension of their business development teams, which are responsible for recruiting portfolio managers.
“Many are fishing in a lot of the same pools of talent” for external allocations and internal hires, Kramer said.
Beyond the quick capital, new managers have found other benefits with the structure, Kramer said.
Being a bundle of SMAs instead of running a commingled fund allows funds to have a more simplified marketing and investor relations process. Instead of a larger, more diverse group that all want different things from their hedge fund managers, managers with three or four large SMAs are often dealing with clients with similar structures and goals.
“Capital efficiency” is the No. 1 reason SMAs have become so popular from an allocator standpoint, Kramer said, as it allows multimanager firms and institutional investors the ability to run their external investments like internal trading teams.
But this means there’s additional transparency and risk metrics placed on portfolio managers who take SMAs.
Managers are required to provide additional transparency on their holdings and trades in an SMA structure, though there are occasionally contract stipulations where the information is restricted to only a certain segment within an SMA provider, Kramer said. There are some founders who “just say no” to this type of disclosure, she said, noting “it’s not going to be for everyone.”
More illiquid strategies, like credit funds, might not make as much sense in an SMA structure, she said.
With founders, “there’s a lot of time spent on what they’re trying to accomplish.”
“It’s all about alignment,” she said.
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