Equity Strategies Rule SMAs as Fee Structures Shift 

Equity strategies are now incorporated into more than two-thirds of investors’ Separate Managed Account (SMA) arrangements with hedge funds, according to research by law firm Seward & Kissel, which also discovered a significant change in incentive fee structures. 

The firm’s fourth annual SMA Snapshot Report examined the principal trends and topics in the SMA landscape within the hedge fund sector over the past year. The results emphasize the persistent superiority of established hedge funds within the SMA sector and demonstrate a “continuing allocation trend towards mature managers,” which were first observed in Seward & Kissel’s 2022 study. 

Consistent with the previous year’s research, almost 95% of hedge fund firms handling SMAs were established more than two years ago, with over 90% initiated over five years ago. Conversely, only 5% of hedge fund managers operating SMAs were established less than two years ago. 

“Newer managers appear more likely to offer founders classes, thus potentially obviating the need for many newer manager investors having to request SMA arrangements,” the report noted. 

The study also noted an ongoing shift in the types of hedge fund strategies available to investors in SMA arrangements. Currently, 69% of all SMAs employ an equity-focused strategy, a significant recovery from last year’s analysis, which indicated that equity hedge funds comprised only 37.5%, a notable decline from the 55% reported in 2022. 

In contrast, credit-focused strategies were implemented by 23% of SMAs, a decrease from 50% in 2023 and 27% in 2022. The remaining 8% was allocated to a variety of other hedge fund strategies. 

“The change with respect to equity and credit strategies may be due to an increased interest in certain equity strategies, such as technology, coupled with easing inflation, which may have dampened credit trade opportunities,” Seward & Kissel said. 

The research also identified significant alterations in the structure of incentive fees throughout the SMA sector. The percentage of managers imposing a conventional 20% incentive fee has risen to 73% from 25% last year, while the percentage of hedge funds levying no incentive fee has drastically declined to 9% from 50% in 2023.  

The average management fee decreased to 0.71% from 1.25% in 2023; nonetheless, 30% of all SMA agreements included a tiered management fee structure, generally linked to varying AUM levels. Furthermore, 9% of the contracts imposed no management fee.