The answer is purely subjective and debatable. I think anyone answering this question will have his answer skewed by his own experience.
I feel that it is important, yet not necessary, for the project manager to be an SME. I've seen projects that would have gone much faster had the project manager been a subject matter expert.
Here are some of the advantages of having a project manager with experience on the subject:
- The project manager can help the team members in devising solutions to technical problems.
- The project manager is more able to assess the potential of team members.
- Time and cost estimating is more accurate.
I have to say that, again, although it is important, it is not necessary for a project manager to be a subject matter expert. I have seen web projects managed by someone who can't read (let alone write) a single line of HTML code being finished on time, and I've seen projects being managed by an ex star developer that are still (and will never be) finished.
Bottom line, being a subject matter expert to manage a project helps, but only if you're a good project manager...