Carol Kaufman, founder and chief executive at Alternatives TLC, lists some key considerations for family offices when selecting investment managers.

Alternatives TLC provides strategic planning, training and technology needs assessments to emerging managers, hedge funds, funds-of-funds, fund administrators and other alternatives industry participants. The firm also consults trust companies, software firms and entrepreneurs that need business process management, operational or project management assistance.

There are a significant number of issues family offices and high net worth investors should consider, in addition to performance, when selecting managers for their investments.

The crucial question is: who is ensuring that proper diligence is being done on the managers so that no “inadvertent risks” will cause an investment to fail?

For example, who is drilling down to the operational infrastructure of the managers to ensure that they are accountable, scalable and resilient, and so they can continue to stay that way as long as your money is with them, regardless of fires, natural disaster, security breaches or key personnel leaving?

There are three broad ways family offices and HNWIs can select investments into managers; they can do it themselves; they can fully outsource the process, relying on advisors, consultants, external CIOs and even platforms; or they can co-source it, which means sharing the responsibility with other professionals.

Whichever way a family decides to make that investment, the amount of knowledge needed to fully vet the manager is tremendous. Expertise in trading, risk management, technology, accounting, compliance, regulatory statutes, human resources, business continuity and disaster recovery – every facet of a manager’s business needs to be scrutinized so the family can be confident that the manager is not just a good trader; the manager is a professional business. This diligence is not a one-off exercise, either.

Clearly, ongoing risk management must be done on each manager as well as on the positions, in aggregate, of all the managers. But additionally, operations and even personnel must be initially and periodically reviewed, with full knowledge and disclosure of any issues such as regulatory requirements and/or sanctions imposed. If using an advisor or a platform, diligence at that level needs to be conducted, as well. The more layers, the more diligence is required.

Below are just a few sample questions that should be considered when making direct and indirect investments into managers:

    If directly invested with managers:

•         Can you describe their operational infrastructure? If not, who can and is it sufficient for both sustainability and scale?
•         Is there a separation of responsibilities in the manager’s firm? For example, does the same person or firm handle the daily reconciliations, the pricing, the Net Asset Valuation, the end of month statements and the performance tables (red flag, if so)?
•         If the manager is using an outside firm for critical tasks, e.g., administration, how are they monitoring the performance and viability of that firm?

    If invested through an advisor, an outsourced CIO or a platform:

•         Is there an inherent conflict of interest in that the advisor or platform may charge additional fees for using their recommended managers? Is that information disclosed?
•         Can they describe their own operational infrastructure?
•         How are they vetting the managers they recommend and how often are they performing an infrastructure review on them?
•         How are personnel of the advisors, platforms and managers being vetted? What’s the retention rate? What happens if a key employee leaves?

    For both direct and indirect types of investments:

•         Who owns the “secret sauce” - the trading intellectual property?
•         How is each professional and each manager addressing cybersecurity risk for each of their own firms? Are they ensuring that the firms with whom they do business are also addressing this risk?