Why separately managed account matters
It can offer transparency, customization, tax control, custody choice, and ownership protections, while requiring sufficient scale, operating resources, and carefully defined responsibility.
How it is applied
The mandate specifies benchmark, guidelines, assets, leverage, liquidity, fees, custody, voting, reporting, valuation, termination, derivatives, tax constraints, and authority over cash and trading. The investor owns assets in a dedicated account while delegating trading under an investment agreement. Terms define mandate, restrictions, custody, leverage, derivatives, reporting, fees, termination, and operational responsibilities. Reconciliation among manager, custodian, and administrator is essential.
Portfolio example
An institution hires a manager to run a $100 million equity portfolio in the institution’s own custody account with exclusions and risk limits tailored to its policy. An institution allocates 50 million to a credit manager but prohibits below-B-rated debt and sets daily transparency. The manager applies its strategy within those limits, while assets remain in the institution’s named custody account.
How to interpret it
An SMA is not automatically safer or cheaper than a fund. Benefits depend on legal ownership, operational design, bargaining power, asset class, and the investor’s monitoring capability. An SMA can provide customization, transparency, tax control, and asset ownership. It may also improve liquidity relative to a commingled fund, although underlying securities can still be illiquid and termination can require time.
Limitations and common misconceptions
Customization can create tracking differences and operational errors. Some strategies cannot be replicated efficiently, while minimum size, trading allocation, side-by-side management, and termination costs matter. Smaller accounts may receive less efficient allocations, incur higher costs, or miss trades due to minimum sizes. Operational burden, mandate drift, cross-account allocation, and manager capacity require oversight. An SMA does not eliminate strategy or counterparty risk. Compare the dedicated account with a representative commingled portfolio to identify cash drag, restricted holdings, and trade-allocation differences. Documentation should state whether the investor can revoke authority immediately and how open positions are handled at termination. Transparency creates data volume, not automatically insight, so the owner needs systems and staff capable of monitoring exposures. Asset ownership also needs to be confirmed for every derivative and collateral arrangement.
Sources and further reading
- Alternative InvestmentsCFA Institute