As the alternative assets industry continues to grow, Preqin is launching an initiative examining the Future of Alternatives. In conjunction with key industry participants, we take a five-year look into the future to see where the market will be, what changes fund managers are planning for and how investors plan to invest in 2023.
This contribution is provided by Lizzy Buss, EMEA & APAC Head of Business Development for InfraHedge.
An important factor in the growth of separately managed accounts (SMAs) is the institutionalization of the hedge fund market: a decade ago, institutional asset owners represented only a fraction of hedge fund assets, whereas now they are by far the biggest investors in the asset class and are increasingly able to dictate terms. With this shift has come a much greater emphasis on the importance of high governance standards, and investors are looking to SMAs to deliver the transparency and control they need to achieve this.
For investors there are clear benefits in using SMAs in terms of achieving a degree of transparency, governance and control in relation to their hedge fund investments that is impossible when investing in a commingled fund.
For the largest, most sophisticated asset owners that are looking to achieve very specific investment objectives, the ability to customize their investments and create a fully bespoke hedge fund program is also hugely attractive. SMAs also enable large investors to more effectively leverage their scale to make significant savings on manager fees, but also on other costs throughout the value chain; cumulatively this can have a significant positive impact on returns.
One of the main benefits for fund managers in offering SMA structures is, simply, a greater ability to attract assets in an increasingly competitive market, by catering to the demand for customized investments.
However, we also see that money invested through SMAs is typically ‘stickier’ than that invested in commingled funds, which is naturally desirable for a manager. This is partly to do with the fact that most asset owners setting up SMA structures spend a lot of time and resource identifying and onboarding managers for the long term, so do not typically switch allocations that often. But we also see that with SMAs there is generally much more direct dialogue between the manager and the investor, which leads to greater mutual understanding and alignment of interest and stronger long-term relationships.
We currently estimate SMAs represent at least $500bn of total hedge fund assets, and we expect this figure to grow significantly. Already more than half of new hedge fund assets are being deployed through vehicles other than traditional commingled funds, and as investors increasingly see and experience the benefits of using SMAs, while costs are coming down simultaneously, we expect this rate of adoption will only accelerate.
Download your copy of the Preqin: The Future of Alternatives here.