While most investors are familiar with private funds structured as GP/LP partnerships, far fewer understand a powerful alternative used by pensions, endowments, sovereign wealth funds, and large family offices: the Separately Managed Account (SMA).

An SMA is a customized investment vehicle in which a single investor — usually an institution — receives a dedicated portfolio, managed exclusively for them by a professional investment manager.

In the world of alternative assets, SMAs have become an increasingly popular way to gain exposure to private equity, private credit, real estate, infrastructure, and hedge funds.
This article explains what SMAs are, why they exist, and why large investors often prefer them over traditional commingled funds.

1. What Is a Separately Managed Account (SMA)?

An SMA is a privately managed investment account created for one investor — typically someone with significant capital (often tens or hundreds of millions of dollars).

Unlike a commingled fund where many investors share a common pool:

In an SMA:

• The investor owns the underlying assets directly
• The manager operates under a customized mandate
• The terms are negotiated specifically for that investor

SMAs combine the benefits of institutional money management with the flexibility of a private account.

2. Why Institutions Choose SMAs Over Traditional Funds

Large investors value SMAs because they offer control, customization, transparency, and better economics.
Below are the primary reasons institutions demand them.

3. Custom Investment Strategy and Portfolio Design

One of the most powerful advantages of an SMA is the ability to tailor the investment strategy.

Examples of customization:

• Specific sector exposures (e.g., “focus only on healthcare buyouts”)
• Geographic focus (e.g., “U.S. only” or “global excluding Asia”)
• Mandates around leverage or duration
• ESG or ethical constraints
• Position limits
• Risk tolerance settings
• Co-investment arrangements
• Cash flow pacing and capital deployment

Instead of adapting to a fund’s strategy, the strategy adapts to the investor.

4. Greater Control Over Capital Deployment and Cash Flow

In a traditional private fund:

• LPs commit capital
• The GP calls it over time
• Investors have no control over pacing

In an SMA:

• The investor can approve or decline individual deals
• Capital deployment follows the investor’s timing needs
• The account can hold cash between investments
• Redemptions may be more flexible depending on the structure

For institutions managing large portfolios, controlling the flow of capital is a major advantage.

5. Enhanced Transparency and Reporting

Institutions demand visibility into their investments.
SMAs provide:

• Line-by-line holdings disclosure
• Real-time or near-real-time reporting
• Customized valuation frequency
• Full access to underlying portfolio data
• Direct insight into performance drivers
• Greater clarity around risk exposures

This level of transparency is generally impossible in a commingled private fund, where secrecy around deal flow and positions is standard.

6. Lower Fees and Better Terms Through Negotiation

Because SMAs involve large, sophisticated investors with significant bargaining power, the economics are often far more favorable.

Typical advantages:

• Lower management fees
• Reduced or zero performance fees
• Customized waterfalls
• More flexible hurdle structures
• Access to co-investments with no fee and no carry
• Better reporting and service guarantees

For large LPs allocating tens or hundreds of millions to a single strategy, SMAs can save millions in annual fees.

7. Direct Ownership of Assets

Unlike LP stakes in a private fund — where investors own a share of a pooled vehicle — SMA investors often own the assets directly.

Benefits:

• Greater legal control
• Ability to transfer or liquidate positions more flexibly
• Improved governance rights
• Potentially favorable tax treatment
• Control over holding periods

Direct ownership transforms the investor from a passive participant into an active, informed stakeholder.

8. Improved Alignment With Internal Portfolio Needs

Every institution has unique goals, such as:

• Liability matching
• Yield generation
• Inflation protection
• Duration management
• ESG commitments
• Sector diversification targets

An SMA allows the investor to align the investment program precisely with internal models and policy requirements, which is difficult in a multi-investor fund.

9. Reduced Exposure to Other Investors’ Behavior

In a commingled fund, investors face risks that have nothing to do with underlying assets:

• Large LPs can influence fund manager decisions
• Redemption pressure can force sales
• Other investors' liquidity needs can create constraints

SMAs eliminate these risks entirely.

In an SMA:

• No outside investor can impact strategy
• There is no “run on the fund” scenario
• The timeline is not affected by other LPs
• Decisions are based solely on asset performance and GP expertise

This independence is invaluable for institutions managing long-term capital.

10. Better Access to Co-Investments

Co-investments—direct investments alongside a fund’s primary deals—are crucial because they often:

• Come with no management fee
• Come with no performance fee
• Allow investors to increase exposure to top-performing assets
• Improve net returns materially

Institutions with SMAs typically receive priority access to these opportunities.

11. Regulatory and Governance Advantages

Many institutions must meet strict:

• Reporting standards
• Compliance requirements
• Risk management frameworks
• Governance rules

SMAs can be structured to satisfy these internal and external obligations:

• Custom audit and reporting packages
• Tailored valuation methodologies
• Specialized risk metrics
• Legal structures compatible with regulatory bodies

This makes them ideal for pensions, sovereign funds, and endowments.

12. SMAs Are Transforming the Alternative Investment Landscape

Sophisticated investors increasingly view SMAs as the preferred way to participate in private markets because they combine:

• The control of direct investing
• The expertise of professional management
• The advantages of private market returns
• The freedom from commingled fund constraints

As a result, SMAs are one of the fastest-growing segments in private markets — particularly in private equity, private credit, and real estate.

Final Takeaway

Separately Managed Accounts (SMAs) provide institutions with:

• Custom strategies
• Greater control over capital
• Enhanced transparency
• Lower fees
• Direct ownership
• Better alignment
• Reduced structural risk
• Superior access to co-investments

For large-scale investors, SMAs represent the optimal blend of flexibility, precision, and performance, making them a central tool in modern alternative investment portfolios.