The first conversation with a prospective investment manager tells you almost everything you need to know. Five questions to make it count.
1. "Where exactly will my money be held?"
The right answer is a regulated third-party broker, in your name, with the manager holding trading authority only. Any other answer, pooled vehicles, manager-held custody, offshore "trust structures," promissory arrangements, deserves more questions. A lot more questions. Most of the largest investor losses in the history of the alternatives industry trace back, ultimately, to a custody arrangement that should have been a red flag from the first conversation.
2. "What is your maximum historical drawdown, and how long did it take to recover?"
Real managers know these numbers without hesitation. They know them because they have lived through them. Hesitation, recalculation, or a topic-shift is data. So is a number that sounds impossibly low for the strategy being described. The recovery time matters as much as the depth: a thirty per cent drawdown that recovers in six months is a different proposition from a twenty per cent drawdown that takes three years to claw back.
3. "Show me your fee structure end to end."
Performance fees only? Or a management fee plus performance? Are there setup fees, exit fees, custodial pass-throughs, expense reimbursements that get charged back to the account? A manager who says "twenty per cent of profits, that is it" and shows you a clean fee waterfall is one to take seriously. A manager who deflects, hand-waves, or offers a different structure on every call is signalling something useful about how they think about alignment.
4. "Can I speak with two existing clients?"
A confident manager will arrange this within a week. A nervous one will offer testimonials they wrote themselves, often presented in an unsearchable image gallery rather than as text you can quote back. The willingness of a current client to spend twenty minutes on the phone with a stranger on the manager's recommendation is one of the highest-bandwidth signals available to a prospective allocator.
5. "What is the worst thing you could honestly say about your strategy?"
This is the most revealing question on the list, and the one most managers fumble.
Listen for an answer that names a real weakness, a market regime where the strategy historically underperforms, a drawdown that lasted longer than expected, a parameter the team is still debating, a client segment for whom the strategy is the wrong fit. Managers who claim no weakness are either lying, marketing, or not paying enough attention to be entrusted with your money.
If a manager cannot answer all five clearly and quickly, that is the answer.
These five questions take twenty minutes. They will save you years of regret. Use them.