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).

A key struggle for investors is separating how they wish the world worked (conviction) from how it actually works (reality). Growing a portfolio may sometimes require investing in trends or outcomes that are personally disagreeable. Fiduciary duty requires an objective analysis of the world as it is, not as one wants it to be.

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.

The central task for capital allocators is to identify investment managers with a proven, durable edge—be it in sourcing, operations, or strategy—that allows them to consistently capture alpha in markets that are otherwise becoming more efficient.

The investment industry is obsessed with finding the "best" managers. However, an allocator's primary role is active portfolio management: ensuring the firm's money-weighted return exceeds its time-weighted return by dynamically sizing positions and ensuring proper portfolio fit.

To avoid emotional, performance-chasing decisions, institutional LPs should create a 'kill list' for each manager. This document pre-defines the fundamental criteria for redemption, ensuring that exit decisions are based on a disciplined, pre-agreed framework rather than market noise.

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.

An allocator's job is like a composer's: balance the performance of individual managers (the melody) with their collective impact on the portfolio (the harmony). The most skillful compromises, often in the less obvious parts of the portfolio, create the best overall result.

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.