How do pension funds choose which managers to invest with?
Short answer
Pension funds usually pick managers through a group process. A committee has to agree, and an institutional investment consultant often advises or decides. Managers are asked to complete a long due diligence questionnaire, and they are expected to show an in-depth team, a real track record and, usually, audited returns. I explain each piece below.
A pension fund rarely picks a manager because of one good meeting. The decision tends to run through several people, often an outside consultant, and a written due diligence process. If you are a fund manager, it helps to know who is in that chain before you ever send a deck.
A committee decides, so one fan is not enough
When I explain the types of investors that go into hedge funds, I always flag pension funds and endowments together. The big difference from a family office is that you are not winning over one person. You need several people to say yes.
"You really are sometimes going to be dealing with a committee decision. You're going to be dealing with multiple people that need to buy in on it."
That changes how you prepare. Your materials have to make sense to someone who was not in the room. Each person on the committee may care about something different, so your story and your numbers need to hold up on paper.
This clip walks through five types of hedge fund investors and how pension funds and endowments differ from the rest.
Summary and key takeaways from this video
The investment consultant often sits in the middle
Many pension funds work with an institutional investment consultant. The consultant may have a discretionary mandate, which means they make the decisions. Other times the mandate is non-discretionary. Then the consultant gives opinions and the pension fund makes the final call.
Either way, I tell managers to get on the good list of these consultants. If you win one over, they can be a great ally for the long term. That is a slower relationship to build than a single family office introduction, but it can open the door to several institutions.
Expect the due diligence questionnaire
In my experience, institutional investors such as sovereign wealth funds, endowments and pension funds sometimes write checks of 10 to 30 million dollars, and occasionally 50 or 100 million, though check sizes vary widely. They tend to work with managers who have an in-depth team, an in-depth track record and numbers on everything. Audited returns are usually part of that.
The norm is that you are asked to complete a due diligence questionnaire. It usually has 35 to 70 questions. The first time you fill one out, it can take a full business day or even two.
Here I explain what a due diligence questionnaire is and how a master version saves time with institutional investors.
What I learned from doing this many times is that most of the questions repeat. One investor's 50 questions might differ from another's by only five. So every new answer goes into a master questionnaire. Next time you can say you already have a thorough one that covers what they asked and more. In my experience, they often accept that.
What this means if you are the manager
Treat a pension fund as a long process with several gatekeepers. Build the team and track record documentation early. Keep your answers transparent and sourced. Every pension fund has its own requirements, and many managers talk to a securities attorney about how they communicate with institutional investors.
From my book
One reason pension funds and other big institutions work through managers is time. They do not have the capacity to do diligence on every individual deal, so they typically prefer funds and will write bigger checks to them. Many also lean on fund-of-funds, because they cannot hire and fire 10 to 15 hedge fund managers in-house. I have also seen that once an investment gets above $20 million or $30 million, they can negotiate more on fees. So as a manager, expect the institution to value a clean, repeatable process over a single clever deal.
"Most family offices would rather, and families would rather put money in a direct deal than a fund, but big multifamily offices, big institutions, they don't have time to do diligence every deal. They typically do prefer the funds and will write bigger checks to funds."
"While the fund-of-funds name has seen better days, many family offices I know still invest in a few fund-of-funds because they do not have the resources in-house to hire and fire 10 to 15 hedge fund managers. Also, once you get above a $20 million or $30 million size of investment, you can negotiate more on fees and get customized fund-of-fund portfolios and advisory services included."
Key facts
- Pension funds and endowments often make manager decisions by committee, with multiple people needing to buy in.
- Institutional due diligence questionnaires usually run 35 to 70 questions.
- A first-time questionnaire can take a full business day or two to complete.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: 5 Types of Hedge Fund Investors, 2 Critical Core Due Diligence Tools - Episode 4. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around investor communication rules, offering materials and institutional investor requirements. Do not use AI to write your own legal agreements.
Next moves
- Find out whether the pension fund uses an investment consultant and whether that mandate is discretionary.
- Build a master due diligence questionnaire and answer it with sources.
- Prepare team bios and track record documents, with audited returns if you have them.
- Write materials that a committee member can read without you in the room.
- Many managers talk to a securities attorney about their offering materials before sharing them with institutions.
More questions on this
Do pension funds work with investment consultants?
Often they do. Some consultants have a discretionary mandate and make the decisions. Others are non-discretionary and give opinions while the pension fund decides.
How long is a typical due diligence questionnaire?
Usually 35 to 70 questions. The first one can take a full business day or two, but later ones go faster if you keep a master version.
Do I need audited returns to approach a pension fund?
Institutional investors usually expect an in-depth track record with numbers on everything, and audited returns are common. Many managers talk to a securities attorney about what fits their situation.
Related questions
- What is an operational due diligence questionnaire for fund managers?It is the written list of questions an institutional investor sends a fund manager before allocating capital.
- What are emerging manager programs and how do I qualify?Emerging manager programs are allocations some institutions set aside for newer fund managers.
- How long does institutional investor due diligence usually take?There is no single number, and I would not promise one to an investor.
- How do I get on a pension consultant's approved list?There is no single form that gets you on the list.
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