In the current institutional landscape, the traditional commingled fund is no longer the default choice for sophisticated allocators. A significant shift is intensifying toward Separately Managed Accounts (SMAs), as the industry’s largest players demand bespoke structures that offer more than a standard fund can provide.

Based on a recent panel discussion that I had the opportunity to modereate, here is a breakdown of why this shift is occurring, the operational hurdles for managers, and the critical considerations for scaling an SMA offering.

The Allocator’s Perspective: Why SMAs?

The preference for SMAs over commingled vehicles is driven by a desire for a “seat at the table.” While smaller allocators may still find commingled funds efficient, fund of funds and multi-manager platforms, large pension funds, sovereign wealth funds, and family offices are increasingly leaning into SMAs for several strategic reasons:

• Transparency & Control: Investors gain direct visibility into every line item and trade, moving away from the “black box” nature of monthly or quarterly fund reporting.
• Customization: Whether it’s ESG overlays, specific sector exclusions, or unique risk limits, SMAs allow allocators to tailor the investment mandate to their specific institutional requirements.
• Capital Efficiency: In many SMA structures, the investor retains the cash and only posts the necessary margin, allowing for better overall balance sheet management.
• Liquidity Flexibility: Unlike commingled funds with rigid redemption windows or gates, SMAs offer a smoother path to liquidation since the assets are held directly in the investor’s name.

Scaling Up: Benefits for the Manager

For managers, the SMA route isn’t just about accommodating client demands; it offers a strategic path to growth:

• Quicker Onboarding: Onboarding an SMA can often be faster than launching a full-scale commingled fund, which requires extensive legal structuring and a critical mass of seed capital.
• Building a Track Record: Securing an SMA mandate allows managers to build a “real-world” institutional track record faster, allowing them to start earning management and performance fees while proving their strategy to the broader market.

The Operational Reality: Challenges to Consider

While the benefits are clear, the operational burden of SMAs is significantly higher than managing a single fund. Scaling an SMA offering requires a robust infrastructure to handle several critical complexities:

• The Operational Matrix: In an SMA, you are often working within the investor’s ecosystem. This means managing relationships with their chosen Prime Brokers and Custodians, with whom you may not have a prior relationship.
• Technology Solutions: Managers must assess if their current Order Management System (OMS) and Portfolio Management System (PMS) are capable of handling multiple distinct accounts without manual intervention.
• Complexity in Fees and Reporting: Fee structures can be highly bespoke, and additional regulatory filings (such as SEC or CFTC updates) can quickly overwhelm a lean team.

Critical Considerations in Investor Agreements

Entering into an SMA agreement is a long-term partnership that requires careful legal, commercial, and structural navigation. While fees and liability are always on the table, some of the most critical negotiations center around operational and portfolio alignment:

• The Trap of Divergent Guidelines and Risk Limits: Accommodating bespoke requests is part of the SMA appeal, but a proliferation of accounts with slightly different investment restrictions, risk limits, and reporting triggers creates massive friction. This isn’t just a back-office headache; it directly impacts the fund manager’s ability to execute a unified investment strategy efficiently.
• The Fair Trading Allocation Nightmare: When multiple SMAs have varied risk tolerances, asset restrictions, or different reporting triggers, maintaining a pari-passu trading framework becomes incredibly complex. If one account restricts an asset class that another permits, or has a tighter leverage ceiling, the portfolio manager must manually deconstruct trade orders. This introduces significant operational risk and heightens regulatory scrutiny around fair trading and post-trade compliance controls.
• Most Favored Nation (MFN) Treatment: Investors often demand MFN treatment regarding fees or transparency relative to other fund investors. Managers must carefully track these obligations to ensure a concession made to one investor doesn’t trigger a cascade of fee reductions elsewhere.
• Liability and Indemnity: Unlike the standard protections within a fund’s organizational and offering documents, SMA contracts often involve more direct exposure. Negotiating the boundaries of liability—particularly around the “standard of care” and indemnification—is critical for the manager’s long-term protection.

The Governance Angle: Navigating the Inherent Conflicts of Interest

From a governance advisory perspective, running parallel structures is not just an operational challenge; it is a fiduciary minefield. Onboarding SMAs alongside an existing commingled fund inherently creates structural conflicts of interest. Whether it is the aggregation of trades, the allocation of limited-capacity investment opportunities, or the asymmetric transmission of information and transparency, managers face a constant balancing act. If an SMA allocator negotiates preferential liquidity or real-time portfolio visibility, it can inadvertently disadvantage the investors in the main commingled pool.

To scale safely, managers must look beyond simple checklists. Robust governance requires proactive conflict identification, clearly articulated allocation policies, and an independent framework to ensure all investor cohorts are treated equitably. Addressing these friction points early in the negotiation phase protects both the manager’s reputation and their regulatory standing.

How we can help The shift toward SMAs represents a fundamental change in the power dynamic between managers and allocators. Success in this environment requires more than just investment excellence; it demands operational agility, sophisticated technology, and a rigorous, proactive approach to institutional governance. Keigant Advisors provide specialized governance and advisory services to help asset managers bridge the gap between investment excellence and institutional-grade operational integrity. Please reach out to find out how we can help.