For institutional investors who allocate to alternatives, manager selection remains one of the more elusive parts of portfolio construction - historically, manager due diligence was a long and complicated process that would take months to complete.
Managers are expected to fill out detailed questionnaires, participate in multiple interviews, and provide in-depth disclosures about their strategies, operations, and risk management processes. This procedure requires significant resources from both the institution and the manager, with no guarantees of a successful match.
While relying solely on technology would be overly simplistic, incorporating analytical tools into the due diligence process can significantly enhance decision-making. By complementing traditional methods, technology offers insights that streamline the process and helps the right managers get selected for the right mandates.
Despite the well-known caveat that past performance is not an indicator of future returns, investors still rely heavily on past performance data - even if it’s a misleading indicator. Managers who perform well in one market environment may struggle when conditions shift, and without understanding the “how” behind the numbers, investors risk picking managers whose strategies are no longer suited to current market conditions, especially at the pace at which they evolve.
Beyond performance, traditional due diligence often centers around manager interviews, track records, and investment philosophy - all these elements can be far more insightful when quantified, be it by the manager, or by the allocator in charge of the due diligence process.
Advanced analytics allow investors to deconstruct performance, providing granular insights into what’s driving returns. Our tools help understand a manager’s strategy and highlight:
- Alpha generation: How much of a manager’s performance stems from skill rather than market exposure?
- Risk-adjusted returns: Is the manager taking on outsized risk to achieve performance?
- Behavioral patterns: Are managers consistently making the same types of investment decisions?
For example, if a manager generated significant returns during a bull market, our analytics library can reveal whether that success was the result of skillful stock selection or a result of broad market exposure.
Stress Testing and Scenario Analysis
With stress testing—the ability to simulate how a manager’s strategy would perform in various market environments— institutional investors can model potential future scenarios, such as:
- Market downturns
- Interest rate hikes
- Geopolitical shocks
This analysis allows investors to see how resilient a manager’s strategy is in times of volatility. Traditional due diligence doesn’t always account for these scenarios, but stress testing helps investors understand how likely managers are to successfully navigate potential future challenges and market changes.
Risk Attribution
Another important part of our analytics library are risk attribution analytics. Investors can identify the specific risks managers are taking to achieve their performance. For example:
Is the manager overly reliant on a handful of positions or sectors? Is the manager’s success driven by significant leverage, exposing the portfolio to outsized risk?
Quantifying Manager Skill
Our analytics library helps allocators understand what is it that managers do well and whether what they are doing well can be scaled, too.
By breaking down their performance to understand where returns are coming from— you can also figure out whether the results are because of stock selection, market timing, or asset allocation. This is a key differentiator when selecting managers for long-term mandate
As due diligence evolves from a retrospective focus on past performance to a data-driven, forward-looking process, the way institutions select their managers is fundamentally changing. Investors can now move beyond gut instincts and past results to make informed choices that align with their investment strategy.
With Kiski’s analytics, institutions gain insights that enable them to evaluate managers more holistically, navigate risks with precision, and ensure their portfolios are positioned for success in any market condition.
