Hedge Fund SMAs Surge in Adoption: Trends, Risks & Strategies for 2025

In 2024-2025, SMAs have shifted from fringe offerings to core components of hedge fund capital formation and deployment. A 27% year-on-year expansion to $315 billion in SMA capital reflects institutional investors’ appetite for investment structures combining the benefits of hedge fund alpha with operational flexibility and transparency [1].

Multi-manager firms are central to this trend. Nearly three-quarters of multimanagers were backing external portfolio managers by mid-2025, often via SMAs; this is a marked increase from 54% in 2022, underscoring a structural change in how capital is sourced and deployed [1]. This externalization allows those firms to access broader talent pools while maintaining scalability.

Emerging managers benefit disproportionately: SMAs have lowered barriers to entry compared to traditional commingled funds. Infrastructure and third-party platforms (e.g., Innocap) ramped up quickly, growing assets from ~$85B to over $100B in half a year and attracting strategic investors like sovereign wealth and PE firms [1].

However, as the space gets more crowded, strategic tensions have emerged. Portfolio managers are more careful about agreement terms: liquidity, exclusivity and transparency are being negotiated harder [1]. There’s also concern about “shadow alpha”—allocators mirroring trades, reducing value for SMAs [1]. Talent competition is heating as both established and emerging funds require analysts, ops staff, technologists, and leadership capable of managing SMA complexities [1].

Strategic implications for players:

• Managers must modernize infrastructure (risk, compliance, execution) to offer SMAs efficiently.
• Fee and term negotiation will increasingly center around non-capital value: alignment, transparency and protection against strategy dilution.
• Capital providers (institutionals, family offices) will lean more toward wrappers allowing for control and customization; SMAs may capture institutional pools that historically went to commingled hedge funds or private equity.
• Regulators and service providers may need to address operational risks (e.g., counterparty risk, custody, tax treatment) stemming from sprawling SMA adoption.

Open questions include whether the external PM allocation will saturate, reducing excess returns; whether SMAs will converge in terms of cost structure with commingled vehicles; and how global regulation (especially outside the US) will adapt to this surge in separately managed formats.