Practical Applications of Narrative, Storytelling, and Qualitative Due Diligence

Abstract

In <b><i>Narrative, Storytelling and Qualitative Due Diligence</i></b>, from the Winter 2022 Due Diligence Special Issue of <b><i>The Journal of Alternative Investments</i></b>, <b>Mark Rzepczynski</b> of <b>AMPHI Research and Trading</b> describes how the manager selection process employs narratives to impart non-quantitative information and solve a significant asymmetric information problem. Narratives, or stories, are an integral part of the due diligence process, with selection often centered around the manager’s description of his investment strategy and clarification of noisy signals from past performance. Similarly, investors form manager narratives to clarify their assessment of skill and performance. After a quantitative performance filter, a qualitative investment and operational due diligence review is based on a manager’s story of current and future behavior. The selection process balances competing stories and fund perceptions drawn from narratives between the manager (sender) and investor (receiver) of information. Narratives, the qualitative description of skill, are often used to explain the manager’s distinct edge for risk-taking and return generation. A classic storyline where the manager is a hero overcoming an investment obstacle is often employed to demonstrate qualities not shown in track records, such as the manager’s character and ability to deal with adversity. An effective narrative closes the information gap between the manager as agent and investor as principal.