Separately Managed Accounts in Alternative Investments: Why the Ultra-Wealthy Skip Commingled Funds

TL;DR: A separately managed account (SMA) in alternative investments is a bespoke portfolio arrangement where a single LP receives customized terms, direct asset-level transparency, and negotiated fee structures that commingled fund investors never see. Per McKinsey's 2026 Global Private Markets Report, SMA allocations from family offices and ultra-high-net-worth investors have grown consistently as the largest capital pools seek arrangements that match their specific tax, liquidity, and portfolio construction needs. Here is what SMAs are, who uses them, and when they make sense versus a commingled fund.

What a Separately Managed Account Is

In the alternatives context, a separately managed account is a direct relationship between a single LP and a manager, structured to invest in the same strategy as a commingled fund but on terms negotiated specifically for that LP. You are not buying into a pool with 200 other investors. You are the pool.

The asset manager runs your capital in parallel with their main fund — same investments, same team, same strategy — but with legal documentation, fee structures, reporting standards, and co-investment rights negotiated to your specifications. The GP does not have 200 people to answer to when you want quarterly calls about specific portfolio positions. You have a direct line.

SMAs exist across every major alternative asset class: private equity buyouts, private credit direct lending, hedge fund strategies, infrastructure, and real estate. The structure is not new. Institutional endowments and sovereign wealth funds have used SMA arrangements with managers like Blackstone, KKR, and Apollo for decades. What has changed is the threshold at which these arrangements become available, and the platforms that intermediate access for family offices at the $25 million to $100 million level.

Why the Ultra-Wealthy Prefer Them

Commingled funds are designed for efficiency. The GP structures one vehicle, raises from many LPs, deploys into a shared portfolio, and reports through standardized quarterly templates. That efficiency is good for the GP. It is less than optimal for a family office that owns $500 million in assets and has specific requirements.

Consider what a commingled fund LP gives up. You cannot dictate which deals the fund invests in. You cannot exclude sectors that conflict with your existing portfolio or your family values. You cannot negotiate around fund-level tax treatment that may be adverse to your particular tax situation. You cannot get the deal-by-deal transparency that lets you assess individual positions rather than a blended portfolio view. And you typically cannot get the management fee or carry concessions that scale with commitment size in the way SMA arrangements permit.

An SMA investor can negotiate all of these. A family office committing $100 million to a direct lending SMA with a manager like KKR or Blackstone can specify sector exclusions, tax pass-through structure, reporting frequency, co-investment allocation priority, and fee rates that reflect the size of the commitment. That customization has real economic value over a 10-year fund life.

The Fee Negotiation Reality

Management fees in commingled buyout funds run 1.75% to 2.0% of committed capital. SMA investors at $50 million or above typically negotiate management fees in the 0.75% to 1.25% range on invested capital , often with no fee during deployment and lower fees overall. Carry is negotiable as well. A $100 million SMA commitment might carry 15% carry instead of 20%, with a higher hurdle rate of 9% to 10% rather than the standard 8%.

Over a 10-year fund life at 15% gross returns, the difference between 2% management fee and 20% carry versus 1% management fee and 15% carry at 9% hurdle translates to meaningful return improvement at the LP level. Institutional LPs negotiating SMA terms understand this arithmetic. It is why the conversation is worth having even when the initial manager pushback is significant.

Platforms That Bridge the Gap

Not every family office has $100 million to commit as an SMA floor. The market has adapted. Platforms like iCapital and CAIS negotiate SMA-style relationships with institutional managers at scale and then offer access to their clients at lower minimums.

iCapital serves family offices and wealth management clients by structuring feeder funds and separately managed vehicles that aggregate capital from multiple investors but negotiate terms at the platform level. A family office with $25 million to allocate can access a Blackstone or Apollo strategy through an iCapital feeder at better terms than a direct commingled fund investment , not as good as a true SMA, but meaningfully better than standard LP terms.

CAIS launched model portfolios from BlackRock, Carlyle, Franklin Templeton, and KKR in 2025, offering advisors and family offices structured access to institutional managers through curated multi-manager allocations. These model portfolios are not true SMAs, but they represent the democratization of institutional-quality alternatives access below the $50 million threshold.

When an SMA Makes Sense

Three conditions point toward an SMA over a commingled fund:

First, your portfolio is large enough that customization creates real economic value. Below $10 million in alternative allocation, the fee savings from SMA negotiation typically do not offset the operational complexity of managing a bespoke relationship. Above $25 million in a single manager, the conversation gets interesting. Above $50 million, the SMA is almost always the better structure if the manager offers it.

Second, you have specific tax or legal requirements that commingled funds cannot accommodate. Foreign LPs with UBTI (unrelated business taxable income) concerns, tax-exempt institutions with ECI (effectively connected income) exposure, or family offices with complex trust and estate structures often find that standard commingled fund structures create problems that SMA documentation can solve cleanly.

Third, you have an existing manager relationship that warrants deepening. SMAs are not cold-call arrangements. They emerge from established track records, multi-fund LP relationships, and the kind of trust that takes years to build. If you have been an LP in a manager's previous two or three funds, the SMA conversation is a natural evolution of that relationship.

What You Give Up

SMAs are not free of drawbacks. The operational burden on the LP is real. You are negotiating documents, managing reporting across a relationship rather than receiving standardized fund reports, and maintaining direct manager communication that requires internal investment staff to process and act on.

Diversification is also a consideration. A $50 million SMA with one manager concentrates exposure in a way that a $50 million allocation across multiple commingled funds does not. The SMA relationship is appropriate for LPs who have already built a diversified alternatives portfolio and are deploying additional capital with a specific manager conviction, not for those still building their initial allocation.

For more on alternative investment portfolio construction, see our guides to building a private markets portfolio, co-investment rights in PE, and GP stakes investing.

The SMA Market by the Numbers

According to the McKinsey 2026 Global Private Markets Report, family offices increased their alternatives allocation to 46% of total portfolios on average in 2025, up from 39% in 2020. A significant portion of that increase came through SMA arrangements with established managers , particularly in private credit and real estate , where customization offers meaningful advantages over commingled fund structures.

KKR's asset-based finance platform manages over $74 billion in AUM, with a growing proportion structured as SMAs for large institutional investors who want credit exposure customized to their specific tax and liquidity requirements. KKR has formalized its SMA offering across multiple strategies , not as a favor to large LPs, but as a deliberate business line that attracts and retains the largest pools of institutional capital.

iCapital has built a technology platform specifically designed to make SMA-adjacent access available to wealth management clients below the institutional threshold. The firm works with managers to create feeder fund structures that maintain many of the customization features of true SMAs , tax pass-through treatment, co-investment priority, regular portfolio-level reporting , at minimum commitments starting around $500,000 to $2 million. CAIS operates a similar platform, with an emphasis on model portfolio construction for advisors who want to allocate clients across multiple alternative managers with consistent reporting.

Preqin data on family office alternative allocations shows that offices with over $1 billion in AUM allocate an average of 38% of alternatives to direct and SMA structures, versus 62% to commingled funds. Below $500 million in AUM, the SMA share drops to 12% , reflecting the minimum commitment thresholds that make direct SMAs inaccessible at smaller portfolio scales.

FAQ

Q: What is the minimum commitment required for a true SMA in private equity?

This varies by manager and strategy. Most institutional-grade private equity managers require $25 million to $50 million minimum commitments to open SMA discussions. For the largest managers , Blackstone, KKR, Apollo , the practical threshold for a meaningful SMA relationship is $100 million or more. Below those levels, iCapital, CAIS, and similar platforms offer structured access to similar strategies at terms between standard retail and true SMA.

Q: Can a family office run multiple SMAs with different managers simultaneously?

Yes, and many do. A sophisticated family office might have SMA relationships with a buyout manager, a direct lending manager, and a real estate manager simultaneously , each with negotiated terms suited to the strategy and the family's specific requirements. Managing multiple SMA relationships requires internal investment staff or a dedicated outsourced CIO arrangement.

Q: Are SMA returns better than commingled fund returns?

Lower fees and customized structure improve net returns, but the gross investment performance should be comparable since the manager is investing the same assets in the same strategy. The return advantage of an SMA is almost entirely fee-driven , lower management fee, potentially lower carry, and elimination of fee layering at the fund-of-funds level if applicable. The underlying investment decisions are the same.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.