Alternative Manager Due-Diligence Chain
Trace a manager's philosophy through deals, value creation, exits, and fit
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 6
- Confidence
- 95%
Alternative-manager diligence starts with people and process, then tests both against deal evidence. Meet the team to understand its philosophy, strategy, and approach to sourcing and executing investments. Review historical transactions and decompose outcomes: did the manager buy at attractive prices, improve operations, sell effectively, or primarily amplify returns through leverage? Compare those findings with the manager's stated method to determine whether performance reflects a repeatable capability. Finally, assess fit. A credible strategy can still be unsuitable if its risk, liquidity, return pattern, or operating approach conflicts with the investor's objective. This chain matters because alternative-manager returns vary widely; selecting a weak manager can cause materially greater harm than an ordinary public-market manager selection error.
Origin
Extracted from Masters in Business, where Ted Sidies outlines how investors can move from conversations with a manager to deal-level evidence and a final strategy-fit decision.
Core principles
- 01Manager selection matters more when return dispersion is wide
- 02Understand the people before relying on performance data
- 03Connect stated strategy to observable deal behavior
- 04Decompose returns into purchase, operations, exit, and leverage
- 05Judge whether the manager's method fits the investor's objective
How to run it
- 1
Clarify the objective
Define what the alternative allocation must contribute, such as excess return, lower risk, diversification, or a particular return stream.
Pro tip State the objective before speaking with managers so their pitch does not redefine it.
Watch out A prestigious fund is not automatically appropriate for the portfolio.
- 2
Meet the people
Interview the investment team to understand who makes decisions and how its members think about risk and opportunity.
Pro tip Ask different team members to explain the process and compare their answers.
Watch out Do not substitute brand recognition for team-level diligence.
- 3
Map philosophy to strategy
Document the manager's investment beliefs, target opportunities, deal process, and claimed source of advantage.
Pro tip Convert broad claims into specific behaviors that can be tested against past deals.
Watch out Vague philosophies cannot be validated reliably.
- 4
Inspect historical deals
Review prior investments and identify what happened from acquisition through ownership and exit.
Pro tip Include weak and average deals rather than studying only winners.
Watch out A curated success story can conceal inconsistent execution.
- 5
Decompose value creation
Determine whether returns came from buying well, operating companies well, selling well, financial leverage, or some combination.
Pro tip Look for the same value-creation mechanism across multiple deals.
Watch out Leverage can make ordinary execution look like exceptional skill.
- 6
Test consistency and fit
Compare the evidence with the stated strategy, then decide whether that demonstrated method matches the portfolio's needs.
Pro tip Write a short evidence-based case both for and against investing.
Watch out A repeatable process may still deliver the wrong risk or liquidity profile.
In the wild
An investor reviews a private-equity manager claiming operational expertise. Across several deals, the investor examines purchase prices, company performance, debt, and exit multiples. Most gains prove to come from higher leverage and favorable exit pricing rather than operating improvement.
→ The investor rejects the fund because the evidence does not support its claimed repeatable advantage.
A manager describes a disciplined approach to buying overlooked businesses, improving margins, and selling only after operational milestones. Historical deals show similar entry discipline and operating gains across both strong and weak markets.
→ The investor gains confidence that the strategy is repeatable and aligned with the desired exposure.
Common mistakes
Choosing by brand alone
A large brand may reduce the risk of a disastrous choice, but it does not establish that the product offers the best returns or fits the portfolio.
Reviewing winners only
Studying only successful deals prevents the investor from seeing how the manager behaves when its thesis fails.
Confusing leverage with skill
Returns produced mainly by borrowing may not demonstrate repeatable sourcing or operational capability.
Is it for you?
Best for
It is best for investors or advisors evaluating established alternative funds with accessible teams and historical deal records.
Not ideal for
It is not ideal when the investor lacks the time, expertise, access, or data required for manager-level research.
From the transcript
“the dispersion of returns and alts is much much wider, Meaning if you find a good manager it matters a lot more than if you…”
“A lot of it starts with meeting the people and trying to understand what is their philosophy, what is their strategy, and how do they…”
“Do they buy well, do they run the companies well, do they sell well? Is it financial leverage?”
From the episode
At the Money: Lessons in Allocating to Alternative Asset Classes