or at least of strategy implementation, represents both an opportunity and a challenge. The opportunity arises from finding hedge fund managers who are able to exploit unique informational or analytical advantages. The challenge is making choices among very diverse approaches. Evaluation of a hedge fund manager requires consideration of both compensated and uncompensated risks. Compensated risks are the investment risks a manager takes in order to generate returns to the fund. Key drivers of the manager's ability to deliver return for the investment risk are the investment strategy and the people executing the investment strategy. Uncompensated risks are created by the hedge fund organization and business. While these risks cannot increase returns, they can certainly lead to manager distraction or fund failure. The goal of manager evaluation is to assess whether a given hedge fund has an investment "edge." The manager's edge is the group of characteristics that will help deliver attractive risk-adjusted returns over time. Investment Strategy Investment strategy is the central focus of hedge fund evaluation. A thorough understanding of the hedge fund manager's strategy, style, and approach is essential prior to investing. The process begins with an evaluation of the general investment proposition's potential to generate returns. For example, suppose the hedge fund's returns depend on being able to predict the growth of an economic variable, and a careful evaluation of the strategy suggests that the economic variable in question is not predictable. In this case, the hedge fund would be discarded simply because the venture seems unlikely to generate returns, regardless of the relative qualities of the manager and organization. After determining that a fund is operating in a field in which it should be possible to generate returns, attention turns to evaluating the fund's strategy and its approach to implementing the strategy. A variety of factors will be considered in this evaluation. Consideration is given to how the manager develops investment views, including information sources and analytical tools used. Does the hedge fund have informational, analytical, or size advantages, and are these advantages sustainable? Implementation of the views, including trade structuring and execution, portfolio construction, rebalancing, risk monitoring, and use of leverage are all important. The decision-making process is important, particularly if there is a portfolio management team with more than a single key person. All managers have a style identified with their strategy. Understanding each manager's investment style will help in combining managers to create a portfolio that is not overly exposed to any single return-driving factor. Also, understanding investment style helps frame return expectations, particularly when the style is out of favor. Style analysis is both an analytical and a quantitative undertaking-analytical because manager style may change over time and because the history of returns may be too short to evaluate the style quantitatively. Furthermore, the investor is usually unable to observe the hedge fund's positions, so must infer the style from interviews or return histories.