October 8, 2010

Pershing Study: SMAs Can Help Hedge Funds Gather Assets

Giving investors 'input' and 'liquidity' makes the funds more attractive

Hedge funds that offer separately managed accounts (SMAs) may be more attractive to investors, according to a study that BNY Mellon’s Pershing LLC released Friday. The SMAs can provide investors with a bit of control they wouldn’t ordinarily have with hedge funds, according to the study.

The report, “Transparency and Liquidity: The Growth of Separately Managed Accounts in the Hedge Fund Industry,” indicates that “SMAs are being embraced by investors” looking for “transparency” and “liquidity in their hedge fund investments, and they are being accepted—if sometimes reluctantly—by hedge fund managers as a means of attracting assets and deepening relationships with clients.”

“Access to liquidity” is a point that investors have become acutely aware of, especially in the past few years when liquidity—or lack thereof—became a key issue for investors. Thirty-three percent of participating “investors cited access to liquidity as an important benefit of SMAs. Almost 50% of hedge fund managers said they are experiencing pressure from their investors to eliminate lockup periods and redemption notice requirements,” the announcement said. “Fewer managers report pressure from investors to reduce fees.”

“Influence on investment philosophy”

SMAs also provide a means for investors to have some “influence on the investment philosophy,” the report states, but demand from investors appears to be higher than the number of hedge funds willing to use the SMA “structure.”

Craig Messinger, managing director at Pershing Prime Services, stated in the announcement: “The increasing demand among investors for SMAs demonstrates the growth opportunity for hedge fund managers who incorporate SMAs into their investment strategy.”

But “operational issues and resource demands, such as setup and ongoing administrative costs,” are still an obstacle for some hedge fund managers, and could prevent them from offering the SMA option, the report notes.

“As investors gravitate to the SMA structure, growth-minded hedge funds managers seeking new assets and longer-lasting relationships with their clients will look to abandon older ‘black box’ models in favor of more tailored offerings,” said John Colon, managing director at Greenwich Associates, the firm which conducted the study.

Nearly 80% of the hedge funds interviewed currently offer SMAs, and a majority of those, “two thirds,” reported a “typical account size between $50 million and $250 million, with SMAs making up about a quarter of their total assets.”

Twenty-seven institutional investors and 41 hedge funds and investment managers were interviewed for the study from Sept. to Nov. 2009, by Greenwich Associates. 

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