Every investment decision is a bet on a person who hasn't yet met the specific bad year that's coming. You can model the market. You can’t model who someone becomes when things stop going their way, and that gap is where manager selection tends to go wrong.
A CIO can run Monte Carlo simulations across a thousand economic scenarios. They can split a portfolio into a growth bucket and a diversifying bucket, each with its own job to do. They can review every manager fee line by line and present it to committee, so the cost of doing business is never a mystery. None of that is the hard part.
Paul Chai, CIO of the Kansas State University Foundation, worked for nearly a decade running a family office's fund of hedge funds portfolio through the 2008 crisis and its long aftermath. Somewhere in that stretch he arrived at a rule no spreadsheet gave him, realizing the biggest driver of investment success is the person executing the strategy, not the strategy itself.
Every Allocator Is a Prediction Machine, and Certainty Never Comes
Allocators have been characterized as prediction machines. You are trying to forecast whether a manager will still be good in five years, in a market nobody has seen yet, using information that’s always inherently going to be incomplete. Wait for full certainty, and the opportunity is gone. Move on 60 percent confidence, and you are exposed. So the more useful question becomes a narrower one: What predicts whether a person keeps performing after the track record runs out?
Grit Is Passion Plus Perseverance, and Neither One Works Alone
One answer is grit, and it breaks into two components worth weighing separately. Grit is passion plus perseverance. You need something you love, and you need the willingness to keep working at it once it stops being fun. Neither one alone is enough.
Passion without perseverance quits at the first bad year. Perseverance without passion is just stubbornness dressed up as commitment, and it tends to curdle the moment the work stops paying off emotionally as well as financially.
There Are Two Kinds of Passion. Only One Survives a Bad Year
The harder split lives inside the passion half, as research distinguishes two types. Harmonious passion is oriented a bit more outward. It serves a purpose bigger than the person holding it: a curiosity about getting something right, independent of what it earns them. Obsessive passion is oriented inward, and it serves the person's need to arrive somewhere, whatever the cost.
Both can produce spectacular short-term results, which is what makes the distinction so hard to see from the outside. A manager running on obsessive passion can put up numbers equally as good as one running on harmonious passion, for a while. The difference shows up later, sometimes much later, but it almost always comes.
When a bad quarter hits, people running on obsessive passion tend to fray under pressure. They get brittle, defensive, quick to blame the market instead of examine the decision. People running on harmonious passion tend to hold their shape, because the goal was never really about them in the first place.
How a Manager Talks About a Bad Quarter Tells You A Lot
The test, then, is not the pitch deck. It is how a manager behaves once the market turns against them. Do they own a bad quarter, or explain it away? What did they change afterward, and why? A track record only tells you what happened. It takes a conversation, repeated over time, to find out why.
That question gets harder, not easier, as a track record grows. For emerging managers without ten years of returns to model, grit is close to the whole underwriting; there is no spreadsheet substitute for it. For established managers, the question shifts. Is the fire that built the record still burning, or did it go out somewhere around the third fund close, replaced by the comfort of assets under management that renew themselves regardless of conviction?
Your Instincts Can Help You Spot Grit and Blind You to It at the Same Time
Everyone doing this work is running their own pattern recognition, shaped by their own path, whether they notice it or not. That is worth sitting with, because it cuts in both directions at once. A pattern that helps you recognize real grit in one manager can just as easily lead you to mistake a familiar story for a good one in another.
A key move is not pretending the bias away. It’s naming it precisely enough to build around it, and then deliberately surrounding yourself with people who see the world differently enough to catch what you would miss on your own.
The People Around You Should Have the Power to Overrule You
That instinct extends past manager selection into how a team gets run.
It’s one thing to say you want dissent. It is another to give it teeth. If even one member of an investment team has a strong, well-reasoned objection to a deal, the rule that matters is whether the person in charge will stand down, not only listen politely and proceed anyway.
The same standard should apply to how leaders talk about their own mistakes. Sugarcoating an error and asking managers to be transparent about theirs is a contradiction most allocators never notice they are living inside.
Clarity Beats Completeness When You're Explaining Uncertainty to Someone Else
This same discipline shows up, less obviously, in how an investment office communicates upward. The instinct of anyone trained to be rigorous is to be maximally transparent: hand a board or a committee every piece of underlying data and let them draw their own conclusions. It feels like the more sincere approach, and in some ways it is.
But board members without an investment background don’t necessarily feel informed by that level of detail. They can feel shut out by it, and grow quieter in meetings rather than more engaged.
One solution is spending the time to understand where each person in the room is coming from, and prioritizing clarity of direction over completeness of data. The goal shifts from proving the work has been done to making sure everyone at the table feels like they belong there.
Be Curious, Not Judgmental, Especially When You Don't Have to Rush
One piece of advice ties the framework together: be curious, not judgmental. It maps onto Daniel Kahneman's distinction between fast thinking and slow thinking, the instinct to pattern-match a manager or a market in seconds, against the discipline to sit with uncertainty a little longer before deciding what it means.
An institution that never retires does not need to rush. Unlike a fund with a defined life span or an investor with a retirement date, an endowment has the rare luxury of thinking slowly, and that luxury is easy to waste by importing urgency the mandate never required.
None of this shows up on a term sheet. A manager's Sharpe ratio, correlation profile, and fee structure will always be visible in the data room. Whether their passion is serving them or serving something bigger than them usually is not.
That’s what every allocator has to go find for themselves, one conversation and one difficult market at a time, because it’s the part that decides what happens after the good years end.
DISCLAIMER: This article is based on a conversation from Top Traders Unplugged and reflects themes, ideas, and perspectives discussed during the episode. The views expressed are those of the guest and participants in the conversation and should not be interpreted as investment advice or as the official views of Top Traders Unplugged.
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