Analyzing the attributes of hedge fund managers determines the quality of hedge fund investments. Skilled managers are able to navigate the ins and outs of absolute return investing, finding the best opportunities that bring in the best risk adjusted returns. These managers merit hedge fund fees and can enable portfolios to thrive across market cycles.

However, inexperienced or overconfident managers may cause failed investments while unscrupulous individuals have defrauded institutional investors out of millions of dollars.

The challenge of hedge fund investing is identifying the quality managers. By doing so, you will maximize your hedge fund investments while avoiding extremely expensive mistakes.

In this blog, we’ll uncover how to identify and evaluate the desirable hedge fund managers by using a qualitative, quantitative and operational evaluation.  

Finding the best hedge fund manager

The quality of hedge fund managers can be evaluated via three primary methods:

A qualitative analysis - which involves evaluating non-numerical factors such as the fund's investment strategy, risk management techniques and controls, the expertise and integrity of the management team and the organization as a whole, and the terms of the fund itself. It's about understanding the underlying characteristics that drive the fund's performance.

A quantitative analysis - that deals with the numerical aspects of a hedge fund. This includes examining performance metrics such as returns, volatility, and risk-adjusted performance. It's focused on measurable data to assess the fund's historical and potential future performance.

An operational review - that looks at the fund's operational processes and infrastructure. This includes reviewing the fund's internal controls, compliance function, execution systems, and the quality of service providers like auditors and custodians. It's about ensuring the fund, which is a business at the end of the day, has a solid foundation for executing its investment strategy and managing risks.

Conducting each of these methods of evaluation is key prior to investing with a hedge fund manager to ensure that the manager’s strategy and team align with your objectives. Mismatched risk, historically poor performance, or operational failures can to a large degree be mitigated to suit investor’s requirements. 

Qualitative Analysis

Qualitative analysis entails evaluating a hedge fund manager’s strategy, risk management approach, team, organization, and terms. It ensures the fund's strategy and team align with investors' objectives and risk appetite at the highest manager and performance quality possible.

Investment Strategy

This is critical to assess alignment with the investor's own risk-to-return profile and investment outlook. Understanding the strategy and philosophy helps in evaluating how the fund might perform under varying market conditions. Otherwise, investors might end up in a fund that doesn't match their risk tolerance or investment goals, which can lead to unexpected losses or disappointing performance.

Additionally, the relative attractiveness of the strategy, the competitive advantages that the manager brings to the table, and the consistency of the investment process are assessed and compared relative to their peers. Changes of the strategy and process over time are evaluated to ensure repeatability and the absence of style drift.

Portfolio Implementation

One of the key advantages of hedge funds is their ability to control and manage risks in order to take bets which are assessed as above average in attractiveness and where the manager has a competitive edge. That is why the implementation of the strategy is scrutinized in particular depth under risk management and loss mitigation aspects.

Various risk limits are considered, such as ones related to risk concentration, VaR, gross and net exposure, style factor exposures, drawdown, liquidity, tail risks, hedging etc. Additionally, the independence, scope, and authority of the risk management function as well as systems used are evaluated and compared to peers.

Management Team

The skills, integrity, stability, and experience of the team are vital because human judgment drives investment success. A team with a strong track record is likely better equipped to navigate market challenges.

Overlooking the evaluation of the team could result in entrusting money to managers who lack the ability to effectively execute the investment strategy, potentially leading to underperformance. Examining qualifying factors such as certifications, track records and case studies enable higher probabilities for success. 

The team’s size, access to resources, and incentives also play a key role in evaluating a manager. For example a manager who invests in their own fund indicates alignment with investor’s interests.


The manager’s overall business set-up also plays an important role in allowing the team to implement the strategy seamlessly and without distraction. The background of the company’s founders, its culture and values, its ownership structure, succession plans, conflicts of interest, reputation, decision making bodies, organizational structure, quality of service providers and operational processes etc. are all evaluated.

Fund Terms and Agreements 

A hedge fund’s terms require scrutiny and understanding prior to investing to ensure investors are comfortable with the agreement. These terms directly affect the liquidity and potential returns for investors. Unfavorable terms can limit investors' ability to respond to changes in the fund’s performance or the broader market or may gate investors in unfavorable conditions, such as longer lock-ups or higher fees, reducing overall returns and liquidity.

Quantitative Analysis

Quantitative analysis examines the facts, figures and the ultimate performance of a hedge fund. It provides empirical data to gauge the fund's performance potential and risk exposure, helping to prevent unexpected losses.

Performance Metrics

These provide insights into the fund's historical performance and risk-adjusted returns, which are indicative of the manager's skill. Ignoring performance can lead to misjudging the fund’s ability and missing out on how the fund performs relative to market benchmarks and peers.

Risk Metrics

Quantitative risk metrics verify the measures and safeguards revealed in the qualitative analysis are present.

For example, consider drawdowns and if they coincide with market drawdowns and peers’ drawdowns. Decorrelation of drawdowns is usually beneficial, but it also may indicate style drift or hidden risks. The Sortino ratio is a quantitative risk metric which indicates superior capital preservation abilities.

The fund’s market beta can be compared to the fund’s net exposure and differences can be investigated. A study of the historical change of market beta can also be enlightening – e.g. whether the fund has a stable profile or it tries to time markets. The fund’s exposures to style factors can also be juxtaposed with the things learned about portfolio implementation. Finally, the fund’s uniqueness can be evaluated via a multifactor regression and its R2 can be compared to peers.

The fund’s level of alpha and its stability over time are a significant indicator for consistency. This can be gleaned from a historical review of the fund’s rolling Sharpe ratio and in comparison to its peers. The above analysis can be carried over 12-month, 24-month, or 36-month rolling windows.

The higher moments of the fund’s return attribution (skewness, kurtosis) can be used to see if the fund tends to perform better or worse during high market volatility or tail risk exposure. The manager may also be unaware of the extent of such risks.

Portfolio Composition

Reviewing a portfolio involves evaluating position sizing for concentration risk, diversification, and exposure to various risk factors.

Overlooking concentration risks might result in being exposed to the risk of significant loss if too much capital is allocated to a single investment or sector. Investors should always question how diverse a portfolio is. A good hedge fund will have multiple industries, markets and strategies in place to ensure robust performance.

Additionally, values like net and gross exposure, leverage, trading and fund costs can be assessed and compared to expectations and learnings in the qualitative due diligence process.

Operational Review

An operational review confirms the fund's ability to sustain its operations, safeguard assets, and comply with regulations. This includes reviewing the fund's internal controls, compliance with regulations, execution systems, and the quality of service providers like auditors and custodians. This indicates the fund has a solid foundation for executing its investment strategy and managing risks.


Operational infrastructure is fundamental for the fund’s ability to execute strategies effectively and safeguard assets. Examining the fund’s operational setup, including trade execution, custody of assets, and accounting systems. Poor operations could impact trade execution and asset security which is critical to evaluate before investing.

Compliance and Controls

A hedge fund investment’s compliance policies require continuous scrutiny. Managers must adhere to laws and industry standards to mitigate the risk of legal or regulatory penalties that could impact returns or the safety of assets. If compliance checks are ignored, investors could face large losses up to the full investment amount.

Service Providers

Reliable service providers reduce operational risk, add to the fund's credibility, and can provide an additional layer of oversight. Ineffective service providers might lead to reliance on subpar services, increasing operational risk and potentially resulting in severe financial losses.

The quality and reliability of service providers such as prime brokers, administrators, and auditors must be considered before investing.

A partner you can trust

Performing detailed due diligence on hedge fund managers is both demanding and necessary. It is both an art and a science since all aspects aren’t quantifiable and not all quantitative inputs can be evaluated unambiguously. By evaluating your investment, in this manner, you can thoroughly understand the strategies in place, confirm the credibility of the management team, and assess the robustness of the fund's risk management and operations. This ultimately leads to better returns, higher conviction, and better capital protection.

Resonanz Capital works with the best hedge fund professionals available. We have a proven track record of successfully handling complex strategies. Our experienced hedge fund management process has produced substantial capital gains with low market dependence, while outperforming peers.

Contact us today, as we guide you towards generating value through hedge fund investment.

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