// Hedge Fund Selection

Demystify the drivers of hedge fund performance and determine which strategies can sustain true alpha, net of all fees.

Open up the black box.

Hedge funds have a reputation for being opaque and secretive, but prudent investors need to gain more than a surface understanding of how a strategy's returns are being generated.

Effective hedge fund allocations can provide a portfolio with highly attractive, uncorrelated returns. However, many hedge funds fall prey to unexpectedly high volatility, or end up exhibiting performance similar to much lower cost liquid alternatives.

Empirically can help you objectively assess precisely where and how it makes sense to employ hedge funds, which managers are most likely to deliver the performance parameters you seek in the future, and when is the best time to select and deselect them. Together with your other diligence efforts, you'll have the conviction you need to make hedge fund commitments with confidence.

Hedge Fund Analytics Suite

Leveraging advanced technology, proprietary data, and deep expertise to support clients' selection and review efforts.


Advanced strategy simulation with complex constraints.


Decomposition, replication and substitution of return sources.


Modeling and testing of time series and non-stationary parameters.


Flexible scenario analysis, decision modeling and risk evaluation.

Key Diligence Questions

Select a topic area to view examples of the types of questions we can answer, after customization to the case at hand, to support review and evaluation processes.

  • Manager Evaluation

    • Has a hedge fund manager demonstrated evidence of a repeatable alpha generation process? What specific skills or inefficiencies are driving the performance?
    • What is the estimated distribution of absolute returns that a strategy will generate over the next 1 and 3 years?
    • What is the probability that a rules-based algorithm with no skill would have achieved results that were as good or better?
    • How much of the value added is attributable to the Portfolio Manager's ability, versus the investment strategy, versus the infrastructure and capabilities of the organization?
    • How should strategies with differing track record lengths be compared?
  • Timing Considerations

    • Is now likely to be an opportune time to invest or divest from a fund?
    • How prone is a strategy to "bad runs", or a skewed return distribution? How correlated are these to other investments in the client's portfolio?
    • Is a recent run of strong or poor performance likely to mean revert, or is it sustainable?
    • How sensitive is a hedge fund's performance to particular market conditions, macroeconomic environments or factor performances?
  • Cost, Value and Liquid Alternatives

    • What is the best liquid investment alternative (i.e. replicating portfolio) available for this strategy? How does its risk and net-of-fee return profile compare?
    • What is the estimated probability that the strategy will underperform its Best Liquid Alternative over the next 1 and 3 year periods?
    • How unique are the performance characteristics being offered by this fund, versus available alternatives? How valuable are they as a component of the broader portfolio?
  • ESG and Non-Financial Priorities

    ESG implementation and monitoring poses special challenges for hedge fund strategies. View our ESG Capabilities for more detail about how we can help you rigorously address considerations related to:

    • Responsible investment
    • Climate change
    • Manager diversity
    • Sharia compliance
    • Other custom priorities
  • Integrative Decision Making

    • Which candidate fund achieves the best balance between multiple competing objectives?
    • Which strategy offers strong long-run return potential while minimizing the risk of a near-term drawdown beyond a certain threshold?
    • Which allocation choice is most robust across broad ranges of uncertain variables, such as macroeconomic conditions?
    • How would the conclusions change if the weights of the objectives were different?
    • Planning ahead, what tolerance for underperformance should be permitted before terminating the manager?

Featured Insight //

Dimensions of Fund Evaluation

Explore the 7 key ingredients of a high-quality active investment product which guide Empirically's analytical process.

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More Than Just Hedge Funds

Explore how we power better due diligence across multiple asset classes.

Next STEP Read about the advanced technology behind Empirically's capabilities, or book an introductory discussion.