Investment Manager Selection & Monitoring #
Investment manager selection and monitoring is a core responsibility of the family office, ensuring that external asset managers, private equity funds, hedge funds, and other investment partners align with the family’s objectives, risk tolerance, and long-term strategy. A structured process reduces risk, enhances returns, and provides transparency across multi-asset portfolios.
Context & Importance #
UHNW families often rely on external managers to access specialized strategies, global markets, and institutional-grade capabilities. However, manager performance, fees, risk profiles, and operational quality vary widely. A disciplined, repeatable framework helps the family office identify suitable partners and continuously monitor whether they add value relative to objectives and benchmarks.
Manager Selection Framework #
Family offices generally use a multi-step due diligence process to select managers across asset classes such as equities, fixed income, private markets, real estate, and alternatives.
- Define objectives: Risk tolerance, return targets, liquidity needs, ESG preferences, and time horizons.
- Initial screening: Identify qualified managers based on track record, strategy, team stability, and size.
- Qualitative due diligence: Culture, investment philosophy, governance, alignment of interests, and compensation structures.
- Quantitative analysis: Returns, volatility, drawdowns, benchmark comparison, attribution, and risk-adjusted metrics.
- Operational due diligence (ODD): Compliance, cybersecurity, valuation processes, fund administration, counterparty risk, and financial controls.
- Fee evaluation: Transparent and competitive fee structures, including performance fees and expense ratios.
- Reference checks: Conversations with investors, custodians, and service providers.
- Documentation: Investment agreements, side letters, reporting standards, and governance rights.
Monitoring & Oversight #
Manager relationships require continuous monitoring to ensure alignment with expectations and evolving market conditions.
- Quarterly reviews: Performance reports, attribution analysis, risk exposures, holdings, and compliance events.
- Annual deep dives: Strategic review of the portfolio, team updates, process changes, and long-term performance.
- Risk monitoring: Stress tests, factor exposures, leverage, liquidity, and concentration risks.
- ESG oversight: Tracking sustainability metrics, stewardship activity, and ESG integration.
- Manager scorecards: Assessment based on performance, reporting quality, responsiveness, and operational robustness.
- Fee benchmarking: Comparison with peers to ensure cost-effectiveness.
- Watchlists & escalation: Clear triggers for review, remediation, or termination.
Operational Due Diligence (ODD) #
ODD protects the family from hidden risks unrelated to market performance, such as operational failures, mispricing, fraud, or poor governance. This is essential for both traditional and alternative managers.
- Compliance: Regulatory filings, internal controls, code of ethics, and audit history.
- Cybersecurity: Information security policies, access controls, vendor risk, and incident response plans.
- Valuation process: Independence and rigor of asset pricing, particularly for illiquid assets.
- Counterparty exposure: Prime brokers, custodians, administrators, and auditors.
- Business continuity: Disaster recovery, redundancy, and backup systems.
Implementation & Best Practices #
- Use a standardized due diligence template: Ensure consistent evaluation across all managers.
- Maintain a manager database: Track onboarding, performance, contracts, and reviews.
- Hold annual in-person meetings: Strengthen relationships and validate team stability.
- Include diversity of strategies: Reduce correlation and avoid overexposure.
- Integrate reporting tools: Use dashboards to monitor returns, exposures, and risk in real time.
- Ensure alignment of interests: Prefer managers with meaningful personal capital invested.
- Document all decisions: Maintain transparent records for auditability and succession planning.
- Review selection criteria annually: Update based on market changes and family priorities.
Common Challenges #
- Insufficient ODD leading to operational risk exposure.
- Overreliance on manager marketing materials.
- Difficulty comparing managers with different strategies or benchmarks.
- Lack of transparency in private markets or hedge funds.
- Underperformance masked by inappropriate benchmarks.
- Failure to terminate underperforming or risky managers in time.
- Fee structures that erode net returns.
See Also #
- Investment Policy Statement (IPS)
- Strategic Asset Allocation
- ESG & Impact Investing
- Risk Management & Reporting
- Wealth Reporting & Performance Analytics
