When evaluating a potential manager, allocators and investors are often focused on the manager’s track record as a key factor in their decision-making process.
But a track record can only reveal so much.
It’s important to dig deeper into a manager’s history to consider various factors that may have contributed to their success.
A manager may have an amazing track record, but they may also have a superstar analyst or team of analysts working for them and feeding them brilliant investment ideas. If the manager is unable to bring that team with them or replicate the same process, their track record may not be as relevant.
Their success might have also resulted from a manager who worked tirelessly to get the best out of them or to a superior process. Can they replicate that process — or are they even allowed to take the process with them to a new organization?
Let’s look at a few critical, yet often-overlooked areas allocators and investors need to consider when evaluating potential managers.
One important factor to consider when evaluating a manager’s work history is their risk management approach. The best indicator of risk management is how much of the manager’s personal capital they have invested in the fund. Allocators should ensure that the manager has invested a significant portion of their own net worth in the fund and that there are no withdrawal terms that would allow the manager to withdraw from the fund and leave investors holding the bag. A good practice is to have some sort of pari passu arrangement that allows the investor to withdraw from the fund if the manager withdraws.
Allocators should also consider the manager’s soft skills, the personal attributes that enable someone to interact effectively and harmoniously with other people.
Some examples of soft skills include:
- Communication: A manager who can effectively communicate with their team, investors, and other stakeholders will be more successful in achieving their goals.
- Leadership: A manager with strong leadership skills can inspire and guide their team towards a common goal.
- Emotional intelligence: A manager with high emotional intelligence is able to understand and manage their own emotions, as well as the emotions of others. This emotional management enables them to work well in a team and handle difficult situations effectively.
- Adaptability: A manager who can adapt to change and handle uncertainty is more likely to be successful in a dynamic investment environment.
- Interpersonal skills: A manager with strong interpersonal skills can build and maintain positive relationships with other people, which can be beneficial when it comes to fundraising, networking, and finding potential investments.
By evaluating these soft skills, allocators can gain a better understanding of a potential manager’s ability to interact and work effectively with other people.
The manager’s ability to manage their time and prioritize tasks are key factors that can affect their overall performance.
When a manager doesn’t have a process for allocating their time in alignment with their highest priorities, this misalignment should be a red flag as it can indicate a lack of organization or focus.
Is the manager starting up the business just to make money, or are they passionate about investing as their career?
A manager who is hungry to learn and grow and views the role as their career is more likely to be dedicated to the success of their fund.
Allocators and investors must also evaluate a manager’s decision-making process. A manager who relies solely on intuition or makes decisions in their head may be more prone to cognitive biases. Managers with a solid decision-making process will weigh the criteria to determine which standards are more or less important. Otherwise, the decision-making process is akin to throwing darts.
A manager who prioritizes sleep and taking care of themselves through proper exercise, nutrition, hydration, etc. is more likely to have the energy and focus they need to make sound investment decisions and “show up” every day.
The Bottom Line
Allocators and investors need to consider various factors when evaluating a potential manager. While their track record is important, it’s crucial to dig deeper and consider factors such as the manager’s team, risk management approach, soft skills, and decision-making process.
By evaluating these criteria, allocators can make more informed decisions and increase their chances for investment success.