If you're considering managing money professionally, you've likely encountered two primary structures: Separately Managed Accounts (SMAs) and Hedge Funds. While both allow you to manage capital for others, they operate fundamentally differently.
Let's break down what each structure offers and help you determine which makes sense for your situation.
What is a Separately Managed Account?
An SMA is an investment account owned directly by an individual investor but managed by a professional money manager. Think of it as hiring a personal chef who cooks in your kitchen with your ingredients.
Key Characteristics:
- •Each investor owns their securities directly
- •Requires separate management for each account
- •Typically requires higher minimums ($100K+)
- •Individual tax reporting (1099s)
What is a Hedge Fund?
A hedge fund pools money from multiple investors into a single investment vehicle. It's like joining a dining club where everyone contributes to hire a chef who prepares meals for the entire group.
Key Characteristics:
- •Investors own shares/units in the fund entity
- •One portfolio managed for all investors
- •Can start with lower minimums (especially with Hedgia)
- •Partnership tax reporting (K-1s)
Direct Comparison
Structure
Individual accounts for each investor
Pooled investment vehicle
Minimum Investment
Often $100,000 - $250,000
As low as $5,000 with Hedgia
Ownership
Direct ownership of securities
Own shares/units in the fund
Customization
Can be tailored to individual needs
Same strategy for all investors
Tax Treatment
Individual tax lots and harvesting
K-1 partnership taxation
Liquidity
Generally daily liquidity
Quarterly or monthly redemptions
When to Choose Each Structure
Choose an SMA When:
- ✓You have very few, high-net-worth clients
- ✓Clients need customized portfolios
- ✓Tax harvesting is a priority
- ✓Clients want direct ownership
Choose a Hedge Fund When:
- ✓You want to scale to many investors
- ✓You have a specific strategy to execute
- ✓You want lower minimum investments
- ✓Operational efficiency matters
Why Hedge Funds Make More Sense for Most Managers
Unless you're managing money for a handful of ultra-high-net-worth individuals who need customized portfolios, a hedge fund structure offers significant advantages:
The Bottom Line
SMAs make sense for wealth managers serving high-net-worth clients who need customization and direct ownership. But if you're looking to build a scalable investment management business, a hedge fund structure is almost always the better choice.
With traditional providers, starting a hedge fund meant choosing between high costs or operational complexity. Hedgia eliminates both barriers, making hedge funds accessible to any qualified manager.
You don't need to manage individual accounts to be successful. Start with a hedge fund structure and focus on what matters: executing your investment strategy and growing your AUM.