With information now ubiquitous, the primary source of market inefficiency is no longer informational but behavioral. The most durable edge is "time arbitrage"—exploiting the market's obsession with short-term results by focusing on a business's normalized potential over a two-to-four-year horizon.

During due diligence, it's crucial to look beyond returns. Top allocators analyze a manager's decision-making process, not just the outcome. They penalize managers who were “right for the wrong reasons” (luck) and give credit to those who were “wrong for the right reasons” (good process, bad luck).

Contrary to popular belief, the market may be getting less efficient. The dominance of indexing, quant funds, and multi-manager pods—all with short time horizons—creates dislocations. This leaves opportunities for long-term investors to buy valuable assets that are neglected because their path to value creation is uncertain.

In a world of highly skilled money managers, absolute skill becomes table stakes and luck plays a larger role in outcomes. According to Michael Mauboussin's "paradox of skill," an allocator's job is to identify managers whose *relative* skill—a specific, durable edge—still dominates results.

The dominance of low-cost index funds means active managers cannot compete in liquid, efficient markets. Survival depends on creating strategies in areas Vanguard can't easily replicate, such as illiquid micro-caps, niche geographies, or complex sectors that require specialized data and analysis.

Superior returns can come from a firm's structure, not just its stock picks. By designing incentive systems and processes that eliminate 'alpha drags'—like short-term pressures, misaligned compensation, and herd behavior—a firm can create a durable, structural competitive advantage that boosts performance.

The best investment opportunities are often with managers who have strong demand and don't need any single LP's capital. The allocator's core challenge is proving their value to gain access. Conversely, managers who are too eager to negotiate on terms may be a negative signal of quality or demand.

The key question for institutions isn't "how do we access the best managers?" but "what is unique about us that facilitates privileged access to assets or managers?" This shifts the focus from picking to leveraging inherent advantages.

Instead of focusing on process, allocators should first ask managers fundamental questions like "What do you believe?" and "Why does this work?" to uncover their core investment philosophy. This simple test filters out the majority of firms that lack a deeply held, clearly articulated conviction about their edge.