Balancing Risk and Return: Schulte Partners Lead Chambers USA 2025 Hedge Fund Introduction on Portable Alpha and SMAs | McDermott Skip to main content

Balancing Risk and Return: Schulte Partners Lead Chambers USA 2025 Hedge Fund Introduction on Portable Alpha and SMAs

Balancing Risk and Return: Schulte Partners Lead Chambers USA 2025 Hedge Fund Introduction on Portable Alpha and SMAs

Overview

Schulte Roth & Zabel partners Peter Greene, Dan Hunter, Eileen Overbaugh and David Lifshitz authored the introduction to Hedge Funds in the Chambers USA 2025 Guide.

Their article, “Portable Alpha Strategies: Legal and Structural Considerations” explores how these strategies have gained traction as investors seek to boost returns by combining alpha (excess returns from active management) with beta (market returns) in a single investment structure. The authors discussed how portable alpha structures presents a series of legal, structural and fiduciary challenges explaining that managers must carefully choose the right structure to balance efficiency, cost and risk — particularly contagion risk, where volatility in beta can affect alpha performance.

The article also highlights the rise of Separately Managed Accounts (SMAs), which have evolved into mainstream tools for fundraising and co-investments. Once considered secondary to commingled funds, SMAs now play a central role across strategies and investor types, offering customization, better alignment and direct ownership of assets.

Portable Alpha key considerations:

Structuring matters

  • Managed accounts: Low legal risk, but complex to replicate.

  • Class structures: Cost-efficient, but highest contagion risk.

  • Feeder funds: Balanced risk/cost approach with cash buffers.

Mitigating fiduciary risk involves

  • Capping strategy size

  • Clear margin protocols

  • Fee sharing and transparency

The rise of SMAs:

  • Direct ownership: SMAs give investors control over assets, unlike pooled funds.

  • Mainstream adoption: Used by managers of all sizes, including emerging and multi-strategy firms.

  • Broader use: Now common for launch capital, co-investments, and even less liquid strategies.

  • Improved terms: Liquidity, expense sharing, and financing terms are better aligned with commingled funds.

  • Institutional-grade structure: SMAs are now seen as flexible, efficient, and transparent — reshaping how managers and investors structure relationships.

Looking towards the future, the authors predict that as investor demand grows, both portable alpha structures and SMAs will reshape the asset management landscape.

Read the article here.