The Rise of the SMA

The Rise of the SMA

In this month’s article, we have briefly reviewed some themes that we have started to see develop so far this year in relation to strategy appetite, and how this is impacting the type of talent firms are seeking out.

In this month’s newsletter, we have looked into the burgeoning trend of managed accounts and external allocations, and how these developments are reshaping the talent landscape within the hedge fund industry. 

As platforms grow and become more crowded, there has been a notable uptick in Portfolio Managers exploring independent avenues. This is driven by various factors, including the desire to establish their own brand, cultivate a unique culture, exercise full control over trading, own intellectual property, and enjoy location flexibility. Conversely, Hedge Fund managers are eager to access strong-performing strategies, even if they lie outside their infrastructure’s purview or immediate mandate. Through managed accounts (SMA’s), they retain a significant degree of control and insight and ultimately gaining access to strategies that their competitors might otherwise secure.

Whereas the trend is more pronounced in the US, Europe is also witnessing a surge in similar developments. 

While some firms offer spinout optionality, terms vary across platforms. Some provide little deviation in terms of risk limits and capital exclusivity. However, one immediate benefit of spinning out with capital from one’s current employer is the ability to expedite operations, as non-compete and non-solicit clauses are often waived, reducing the downtime between ventures which could otherwise see them out of the market for 12-18 months. 

External allocators are now exploring more creative avenues, offering partnership deals alongside traditional managed accounts, tailored to the needs of prospective money managers. Notably, flexibility in investing mandates and greater net exposure and volatility limits are among the competitive offerings we’ve observed allocators outside of the larger platforms presenting.  

Traders often resist capital-exclusive deals (fearing over-reliance on a single business entity), although there are obvious benefits in opting for single-exclusive deals due to their substantial ticket sizes and single point of contact. Conversely, multi-investor scenarios offer risk diversification and potential buffer opportunities, albeit with increased administrative complexity.  

How does this shift affect the hiring landscape? 

On the investment front, spinouts and external allocations are becoming commonplace discussions among Portfolio Managers from the outset. However, some managers may overlook the costs involved in replicating a trading environment to the same calibre as their previous platform. 

The rise of single-manager spinouts presents analysts, typically confined to platforms, with opportunities to work in boutique environments. Though they may experience greater exposure, they could miss out on successful elevation programs offered by larger platforms. 

For non-investment professionals, the evolving landscape opens unique opportunities. While expansion of the platform model previously led to increased risk-taking opportunities, there was a condensation of seats across senior non-investment roles as single managers diminished. With more smaller firms emerging, new senior infrastructure mandates will follow. 

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