The reality of evaluating fund managers is much more multifaceted than one would assume. Due to the increasingly complex nature of the industry and recent challenges like the Covid-19 pandemic, relying on numerical factors is no longer the only driver in effect within manager selection and monitoring.

There is a fundamental divide between managers and investors’ belief on what factors matter the most. The majority of investors believe that qualitative factors are equally important or even more important than quantitative data, while fund managers still put a stronger emphasis on quantitative data.

In a recent survey done by CAIA, in regards to the predictive power of investment factors, 77% of investors rated qualitative analysis as having moderate to high predictability. Meanwhile, nearly 51% rated quantitative analysis similarly, and about 43% rated operational analysis as having moderate to high predictive power.

In general, quantitative analysis is backwards-looking, and as the famous saying goes, “past performance is no guarantee of future results.”  Qualitative research is subjective and covers aspects like the philosophy, process, or people, which cannot be measured with specific metrics.  Qualitative analysis is considered forward-looking and provides further insights into the fund’s present or future trajectory.

How does the importance of qualitative, operational, and quantitative factors vary depending on the asset class?

Fund managers and some investors underestimate the importance of qualitative and operational factors compared to quantitative. This is especially true for certain asset classes that are much more convoluted to assess.

Take the case of Venture Capital and Systematic Hedge Funds. CAIA survey’s participants considered Venture Capital as the most difficult class to assess and rated qualitative factors as the most important when evaluating it.

For Systematic Hedge Funds, considered the second most difficult class for assessment, the participants rated quantitative factors as the most important while performing the evaluation.

Operational factors are considered key in evaluating Hedge Funds, Real Assets, Private Debts and Real Estate asset classes.

How is qualitative assessment accomplished?

 Achieving the qualitative assessment is based on the data collected mainly through the following channels:

  • Information gathered during the different interactions with managers (meetings, calls, etc.) – For investors, this is an integral part of their due diligence process. The main goal is to understand the investment process and philosophy.
  • Other sources, like network, publicly available information, etc. – Most investors discover new managers through word of mouth, internal teams, and conferences. Therefore, the firm’s reputation is key, and managers must understand the way they are perceived.
  • Due diligence questionnaires – When it comes to collecting and consolidating data from fund managers, trends show that due diligence questionnaires have a growing role and ever-larger impact to match an investor’s strategy and goal. In addition, there is a growing trend of customizing DDQs amongst investors and financial consultants.

Qualitative assessment is a cumbersome and time-intensive task. But technology can support and strengthen the process. For more information, please see our previous article focused on this topic

Future Implications – qualitative factors are here to stay

Every investor has a unique investment goal and constraints. As the saying goes, “one size doesn’t fit all.

Considering the above said, even with large ticket sizes being funneled into prominent fund managers, qualitative factors in the due diligence process are here to stay. Therefore, it is essential for fund managers to understand the role that non-tangible factors can play to set them apart.

Much like institutional investors who prepare for more accurate and efficient assessments, fund managers must better prepare and adapt to changes in the assessment focus if they want to win.


Are you interested to learn more about how Diligend solution can help fasten the qualitative assessment of more managers? Contact us on email or via our contact form.

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