Fund Customisation Intensifies in Competitive Environment

Investor calls for ever greater levels of customisation for hedge funds are getting louder, and managers and sponsors across the investment fund spectrum are increasingly accommodating these demands.

Managers are finding that being flexible and open to customisation, particularly where fundraising still remains tough, is key to growing assets. In addition to fund structuring requirements, some investors also now want their positions on certain issues adopted firm-wide. At the same time, further customisation can be required to expand into new retail markets, as alternative mangers continue to strike partnerships with traditional asset managers across the industry to facilitate the push to retail investors.

These themes featured strongly in discussions at the recent Maples Investment Funds Forum 2025. Other notable topics arising from this year’s event included the prevalence of crossover funds for technology investments at the intersection of public and private markets, capital raising opportunities in Europe and decoding the impact of generative artificial intelligence.

Hedge Funds Still Sweet on SMAs

For hedge funds in the US, Separately Managed Accounts (“SMAs”) have always been popular for the right investor and continue to be so, with customisation set to be a key driver going forward. This focus is showing up now in certain state pension plans with ‘carve-outs’ of types of ESG or DEI investments, while similar ‘carve-ins’ are coming from other states or other investor groups. “These situations all lend themselves to SMAs or funds of one to customise investment programmes,” one panellist said. Large multi-strategy hedge funds are also prevalent in allocating to outside third parties through these customised vehicles, finding them an opportune way to access new strategies where they are unable to bring expert portfolio managers in-house.

In Europe it is a similar story, with 40% of new manager launches coming to market leading off with SMAs.  With asset gathering still hard work, a panellist from the continent expressed the view that the more a strategy can be customised to make it attractive to allocators, the better, adding that “SMAs put managers in the perfect position to do so”.

With certain US and European investors at polar ends of the ESG and net zero debate, managers in Europe are receiving a significant number of Principal Adverse Impact disclosure requests under the Sustainable Finance Disclosure Regulation, further driving customisation. Managers report incoming requests from European clients which are not just related to their mandate but wanting them to take a firm-wide view on such issues as the use of negative screenings. Some US public pensions also want a similar commitment against considering any other non-pecuniary factors, or not joining any net zero initiative. All of this can create constant tensions, underlining a need for managers to be able to inject flexibility and creativity into finding solutions.

Previously in Europe, the operational burden of running an SMA had often been seen by COOs as a distraction from running the main commingled fund and a drain on resources. Developments in technology combined with outsourcing have, however, created a shift, and more are now coming to the view that once the initial operational model has been established and everything is set up, the next few easily fold in. From an allocator point of view, large institutional investors want transparency and their demands for customisation are only getting more complex.

Elsewhere, some investors have been seeking to unwind funds of one and convert them to SMAs to bring them into a consistent platform and benefit from the same risk oversight and reporting from their service providers. While many funds of one have been very successful, right now the market is dominated by SMAs.

The operational aspects of SMAs and funds of one have also come into focus, driven by the desire to replicate a manager’s strategy so there is less of an operational build out from the allocator side. This evolution of managed accounts towards greater customisation includes optimisation from a treasury standpoint and additional systems build out where greater risk or leverage is being run. For investors not replicating what the manager is doing, there is a clear need for in-house monitoring.

PE Investors Push for More Solutions

Private equity managers have been customising funds for LPs for some time, but in addition to accelerating, the key change now is that investors are looking for these customised solutions across asset classes, from credit to real estate and infrastructure. “Packing that all into a fund of one, however, can be extremely challenging,” one panellist remarked.

Another trend towards fund customisation is evident where sponsors and LPs are coming together to build a solution in areas which may be more difficult to execute. This is indicative of the challenging fund-raising environment, encouraging cooperation to build a platform around customised products such as a single investor PE vehicle targeting healthcare deals in India with an evergreen structure.

Fund customisation has been an especially hot button topic for GPs, where negotiations with a particular investor to provide the specific terms they require can become cost prohibitive. Investors, however, are often paying premiums for these custom terms, wanting a manager that will look after them, rather than being diversified across hundreds of managers. These negotiations are not always easy, especially when capital raising is already challenging. While smaller managers may be particularly focused on these tickets, panellists advised them to be cautious as some allocators try on some particularly challenging terms, such as capacity rights which would follow individuals to their next firm and an unwillingness to pay a fair share for research, which would then fall on the manager.

How private equity solutions will be geared towards retail investors, also formed part of the discussions at the event. Managers have found when innovating wealth products into new countries, local complexities, such as working with less sophisticated distribution partners can bring a need for customisation, such as incorporating a new feeder fund. Going forward, it will be interesting to see the development of these hybrid private products evolve with the trends towards retailisation and customisation converging.

In the meantime, the fund industry’s focus on customisation and greater adoption of SMAs continues to intensify on both sides of the Atlantic, in spite of the more complex demands from investors.

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