Simply keeping pace with peers is not a valid measure of success. If peers are taking excessive risks in a bubble, matching their performance means you were equally foolish. True skill is outperforming in bad times while keeping pace in good times.

In a rising market, the investors taking the most risk generate the highest returns, making them appear brilliant. However, this same aggression ensures they will be hurt the most when the market turns. This dynamic creates a powerful incentive to increase risk-taking, often just before a downturn.

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).

Many LPs focus solely on backing the 'best people.' However, a manager's chosen strategy and market (the 'neighborhood') is a more critical determinant of success. A brilliant manager playing a difficult game may underperform a good manager in a structurally advantaged area.

In an environment characterized by a series of sector-specific bull runs (e.g., from semis to metals), a winning strategy is to actively trade breakouts as they occur. This capitalizes on rotational leadership and momentum rather than relying on a static portfolio.

Beyond a strong thesis, Limited Partners (LPs) critically evaluate how crypto fund managers understand and adapt to crypto's four-year bull/bear cycles. A manager's ability to strategically time the market—knowing when to be aggressive versus when to take profits—is a key filter for LPs allocating capital in the space.

The long bull run in software and growth stocks from 2010-2025 may have inflated investor track records. Similar to energy investors in an oil boom, their success might be more attributable to market beta and favorable macro conditions than pure investment acumen, a fact revealed during downturns.

Calendar year results are arbitrary and can be misleading. A more robust method is to analyze rolling returns, which evaluate performance over fixed periods (e.g., five years) from many different starting points. This method reveals a strategy's true consistency by smoothing out short-term market noise.

Judging investment skill requires observing performance through both bull and bear markets. A fixed period, like 5 or 10 years, can be misleading if it only captures one type of environment, often rewarding mere risk tolerance rather than genuine ability.