How Do Family Offices Evaluate Fund Managers?
Short answer. Family offices evaluate fund managers by checking whether the strategy fits the family's mandate, examining the manager and fund through due diligence, and discussing risks through an investment process. They also review terms and performance reporting. A disciplined team must be willing to ask follow-up questions or walk away if concerns remain.
Family offices evaluate fund managers by testing the fund's fit, examining the manager and investment process, and deciding whether the risks and terms suit the family's mandate. A persuasive presentation is only a starting point. The family needs a consistent review process and enough time to investigate what matters.
Start With Fit and Screening
Before reviewing a fund in detail, compare its strategy with the family's investment policy, portfolio, and goals. Look at the asset class, approach, time horizon, and role the fund would play. An initial screen can also identify basic gaps in the information provided, so the investment team does not spend its time on an opportunity that does not fit.
An analyst or investment committee member can do this first pass, then bring forward opportunities that merit further review. An investment committee gives the team a regular forum to discuss potential managers, portfolio construction, and risk. Its job includes helping select managers and making sure the investment policy is followed.
Examine the Manager and Terms
Due diligence should test the claims in the fund materials and seek a better understanding of the proposed investment. Review the strategy, how the manager makes decisions, the fund's structure and terms, and how the manager explains potential risks. Ask for clarification where materials are incomplete or hard to reconcile. The review may also include conversations with people who can speak to the manager's work and process.
Fees deserve careful attention. In the book, I describe the typical hedge fund fee structure as two percent management and twenty percent performance fees, while also noting that some funds offer different terms. The relevant terms depend on the fund, so assess them in context. Consider the incentives they create and how they affect the family's expected outcome.
For more on the process, see how family offices conduct due diligence and the questions a family office can ask a fund manager.
Make a Decision and Keep Monitoring
After diligence, bring the findings back to the investment team and the family decision maker. Lay out the case for the investment, the risks, the fund terms, and any open questions. If the team is not satisfied, it can expand the review or walk away. Being willing to stop late in the process is part of disciplined manager selection.
Approval is not the end of the work. Set expectations for reports and ongoing communication, then monitor whether the fund and manager continue to operate in line with what the family reviewed. Performance matters, but so do changes in strategy, risk, and execution. A written review process helps the family compare managers consistently and record why it made its decision.
Read next: What role does an investment committee play in a family office?
The role of an investment committee is to help make strategic investment decisions, evaluate, or select fund managers, discuss portfolio construction, and risk management approaches and implementation, and ensure the long-term preservation of capital and implementation of the investment policy they have been given.
Sources: How to Start a Family Office, The Single Family Office. Informational only, not financial, legal or tax advice.