Separately Managed Accounts (SMAs)

Foreword

This industry guide to Separately Managed Accounts (SMAs) (“Guide”), sponsored by Simmons & Simmons LLP, is the initiative of AIMA’s Sound Practices Committee and is an update of AIMA’s Managed Accounts Guide published in 2016.

SMAs are now a well-established part of the total capital allocated to the alternative fund sector. This Guide sets out detailed information covering the main features of SMAs which an investment manager needs to understand when considering whether to take on a new SMA. As well as describing common structures for SMAs, it discusses the key economic, practical, legal and regulatory issues relevant to managing an SMA and which types of allocator prefer SMAs and why. The Guide also includes some practical tips for investment managers considering a new SMA.

As a general resource, the Guide should not be regarded as a substitute for professional advice, which should still be obtained where appropriate. The Guide does not replace reviewing the applicable legal and regulatory requirements, which are more detailed than any descriptions contained in the Guide.

Lucian Firth

Partner, Simmons & Simmons

Who allocates via SMAs and why?
1. Types of SMA allocators
2. Benefits for allocators
3. Operational challenges posed by SMAs
SMA structures and funding
1. Common SMA structures
2. Funding models
SMA documentation
1. Investment management agreement
2. Term sheet
3. Client vehicle documentation
4. Trading documents
Trading counterparties and administrators
1. Choosing trading counterparties
2. Choosing administrators
3. Engaging additional counterparties
4. Margining
Fees
1. Headline rates
2. Notional capital
3. Funding charge
4. Fee payments
5. Performance fee features
6. Clawback
7. Balance of fees across business
Other economic factors
1. Paying for research
2. Non-deductible manager expenses
3. Deductible allocator and structural expenses
4. SMA size
Investment considerations
1. Co-investments
2. Investment structuring
3. Cash management
Liquidity terms
Transparency
1. Benefits for allocators
2. Concerns for investment managers
Conflicts of interest
Regulatory issues
1. Check regulatory permissions
2. Consider whether the SMA is an AIF
3. U.S. clients
4. Other international clients
5. Anti-money laundering
6. Regulatory host implications
7. Regulatory content
Other significant terms
1. MFN clauses
2. Minimum account size
3. Capacity
4. Investment restrictions
5. Standard of care
6. Restrictions on other clients
Practical tips
1. Reserve ability to negotiate terms
2. Analyse the economics early on
3. Review the SMA agreement closely
4. Consider the key regulatory issues and the incremental compliance burden
5. Consider the reaction of reference fund investors
6. Consider operational issues (e.g., new counterparties)
7. Plan for new trading documentation