Kathryn Graham, director of BT Pension Scheme Management, the $56.8 billion pensions advisory arm of BTPSM, the largest pension fund in the UK, gives her views of the hedge fund industry.

Kathryn Graham has been honoured at the Eleventh European Performance Awards. She was presented with Hedge Funds Review’s outstanding contribution to the hedge fund industry by an institutional investor at a gala dinner on May 18 and is the first recipient of the award.

Graham is a director of BT Pension Scheme Management (BTPSM), the £35 billion ($56.8 billion) pensions advisory arm of the BT Pension Scheme, the largest in the UK. Graham joined BTPSM in 2004 to help establish a team mandated to invest up to 5% of the BT scheme directly into single manager hedge funds.

Graham is enthusiastic about the returns hedge funds can give to institutional investors and in particular pensions funds. “We invest in hedge funds really for the diversification, the lack of correlation that they bring to a pension fund portfolio,” she said. Graham also said the skill of hedge funds managers gives her pension scheme access to “the sort of people we otherwise wouldn’t be able to access in a pension fund portfolio”.

In 2007 Graham took responsibility for manager selection across the BT scheme before setting up a new team looking at liability management.

On the key criteria she uses to select hedge fund managers, Graham is clear that corporate governance is high on the list. “We invest in people who understand risk,” she explained. “If they don’t understand risk in every aspect of how they run their business then it would be very difficult for us to put our money with them.”

Graham said she wants managers who look at risk within the portfolio and in the underlying investments. She is also concerned with not just the way the portfolio is constructed but also with how the managers works as an investment company.

“What are you buying? What does the management company look like? How is it run? Is it responsible in the way it approaches corporate governance? Is the structure correct because if the wrapper isn’t right, then the manager can be the best manager in the world but it makes it very difficult for us to give them our money,” Graham concluded.

She is a member of the London Board of 100 Women in Hedge Funds; a founding trustee of the Hedge Fund Standards Board and was included on the FN100 list of Influential Women in European Financial Markets.

Graham is also involved with a new initiative called the open protocol enabling risk aggregation, known as Opera. The idea is to standardise reporting procedures for collection, collation and conveying hedge fund risk information. Investors who have been asking for more transparency could use Opera to help them view and monitor risk from several sources more easily and compare like with like. Graham is part of the working group which brings together both institutional investors and hedge funds. Other members of the working group include DE Shaw Group, Lansdowne Partners, Och-Ziff Capital Management Group and Weyerhaeuser Asset Management.

Another initiative Graham is championing is the United Nation’s principles for responsible investing (UNPRI). Signatories of the principles include few hedge fund management companies although Graham hopes the movement will attract more. Some of the investment managers that have signed include Allianz Global Investors France, Aberdeen Asset Management, AXA Investment Managers, BNP Paribas Asset Management, Cartesian Capital Group, Culross Global Management, F&C Asset Management, Henderson Global Investors, Investec Asset Management and Legg Mason Asset Management Australia.

A full interview with Kathryn Graham will be published in the June 2011 edition of Hedge Funds Review.