Chapter 2: Investment Manager Selection

In this section

• Manager Selection Process and Due Diligence
  Gain practical insights into the manager selection process, from clarifying investor goals and constraints to conducting in-depth quantitative and qualitative due diligence.
• Type I and Type II Errors in Manager Hiring and Continuation
  Explore how Type I and Type II errors impact the manager selection process, the costs of erroneous decisions, and strategies for achieving an optimal balance in manager hiring and continuation.
• Returns‑Based vs. Holdings‑Based Style Analysis
  A comprehensive exploration of two key methods for evaluating investment manager style—returns-based using historical returns data and holdings-based using actual portfolio constituents—highlighting best practices, pitfalls, and real-world applications.
• Using Capture Ratios, Maximum Drawdown, and Drawdown Duration
  Explore how to assess investment managers by examining capture ratios, maximum drawdown, and drawdown duration for effective risk and performance analysis.
• Evaluating Managers’ Investment Philosophies and Processes
  A comprehensive exploration of how to assess an investment manager’s core beliefs about markets, execution processes, and alignment between stated philosophy and real-world portfolio implementation.
• Behavioral Factors Affecting Investment Team Decision Making
  Explore how biases like groupthink, confirmation bias, overconfidence, and loss aversion influence investment team decisions, and learn practical ways to overcome them.
• Pooled Investment Vehicles vs. Separate Accounts
  A comprehensive exploration of the trade-offs between pooled investment vehicles and separate accounts, emphasizing key considerations such as customization, fiduciary responsibilities, operational complexities, and performance measurement.
• Comparing Different Investment Manager Contract Structures
  Explore various investment manager contract structures, including flat fees, performance-based fees, high-water marks, clawbacks, and more, to align incentives, mitigate risks, and optimize investment outcomes.
• Performance‑Based Fees: Forms, Provisions, and Interpretation
  Discover how performance-based fee structures align investment manager compensation with returns, exploring forms such as fulcrum fees, incentive fees with hurdles, and waterfall structures in private investments. Learn about fee crystallization frequencies, lookback provisions, and the potential for asymmetric risk-taking, all essential to informed investment manager selection.
• Manager Search and Selection Tools
  Discover essential platforms, screening methods, RFP processes, and advanced tools for effectively searching and selecting the right investment manager.
• Monitoring and Reviewing Manager Performance Over Time
  Explore how to effectively monitor and review investment manager performance using regular performance evaluations, benchmark comparisons, qualitative assessments, and clear trigger events that prompt deeper investigation.
• Impact of Capacity Constraints on Manager Performance
  Explore how growing assets under management can limit a manager’s ability to sustain performance, focusing on liquidity, strategy drift, and risk considerations in capacity allocation.
• Transition Management and Manager Replacement
  A comprehensive guide to effectively transitioning assets between investment managers, minimizing costs and risks, and ensuring a structured replacement process.
• Manager Style Drift and Its Impact on Portfolio Alignment
  Explore how manager style drift arises, how it affects portfolio alignment and risk budgeting, and best practices to address it in manager selection.
• Impact of Soft‑Dollar Arrangements on Manager Selection
  Explore how soft‑dollar arrangements shape the manager selection process, focusing on potential conflicts of interest, regulatory aspects, and best practices.