What Does a Family Need to Learn About a Manager's Past Losses?

Learn how a manager's past losses happened, what decisions contributed to them, and what the team did in response. A loss alone does not tell you whether the manager acted poorly or faced an expected risk. The explanation, supporting records, and evidence of changed behavior help you assess how the same team may handle pressure with your capital.

Reconstruct the Loss

Ask the manager to identify the investment, the original thesis, the expected risks, and the events that led to the loss. Review the timing of key decisions, including when the team bought, added, reduced, or exited. Ask whether the loss came from the asset, the financing, concentration, liquidity, an operating issue, or a mistaken assumption. If several causes contributed, ask the manager to separate them.

Request support for the explanation, such as position records, valuation history, committee materials, and communications with investors, where available. Check whether the reported loss reflects realized results, an unrealized mark, or both. For private holdings, ask how the value was determined and whether it was independently reviewed. A credible account should be consistent with the available records and the manager's other descriptions of the event.

Examine the Response and Lessons

Ask when the manager recognized that the investment was in trouble and what options were considered. Did the team change its view, reduce exposure, seek additional capital, or hold its position? Ask who made those decisions and whether dissenting views were recorded. The purpose is to learn how the manager thinks when the original plan stops working.

In an interview in The Family Office Book, a family office executive describes asking managers how they would protect family capital if a similar event happened again, and how their risk management approach changed after experience. That kind of discussion can show whether the manager learned something specific or is offering a general reassurance. Compare the answer with the current risk controls, investment limits, and the fund's written materials.

Assess Relevance to Your Decision

Consider whether the past loss arose from a risk that remains part of the strategy. Ask whether the team, portfolio construction, or operating environment has changed, and whether the current fund has protections against a similar outcome. A manager may have a reasonable explanation for a loss, but you still need to know whether the family can tolerate that type of loss and how it might affect other holdings.

Record what is supported, what remains uncertain, and what the manager says it has changed. Compare losses across the record instead of focusing only on the largest event. If the explanation shifts, records are unavailable, or the team cannot describe its decisions clearly, treat that as an unresolved concern in your review. For legal or tax questions tied to a loss or fund documents, talk with your attorney or CPA.

Read next: What evidence helps verify an investment manager's track record? and How should a family judge performance when a manager has a short history? and How can investors tell whether a manager's strategy is repeatable?

We are much more in for this for our clients for the long haul and so minimizing taxes and minimizing downside tends to be especially more recently has tend to be a much great focus for us.

Sources: The Family Office Book. Informational only, not financial, legal or tax advice.