By Nick Evans
Of all the many diverse and thought-provoking views and
ideas that emerged at this months packed and compelling
EuroHedge Summit in Paris, one in particular lingers in the
That was when Kathryn Graham, investment director at the BT
Pension Scheme the UKs biggest pension fund and
the very epitome of the type of institutional investor that
most funds most want to attract in the post-crisis era
said that hedge funds were not respectable enough
for her to feel comfortable about asking her board of trustees
to approve the kind of allocation level to hedge funds that she
might otherwise want to see in her portfolios.
That is a very telling, and damning, indictment. And it is a
warning that the hedge fund industry must heed if, as
there is every reason to suppose and hope, the industry is
successfully to emerge from the financial chaos of the last few
years as a beneficiary rather than as a victim.
Graham is no ingenue in the world of hedge fund investing.
The £34 billion BT pension scheme is one of the largest
European-based direct pension fund investors to hedge funds, as
well as through funds of funds, and it also runs its own
affiliate fund of funds business as well as advising other
institutions on alternative investments and managing portfolios
She is an influential figure in the Hedge Fund Standards
Boards recently launched Investor Chapter. And she is
playing a key role in other important new investor-led industry
initiatives such as the OPERA plan for providing hedge fund
investors with aggregated and standardised risk reporting.
So she fully buys as no sane investor has any excuse
not to do any longer the idea and the value of investing
in hedge funds as a vital part of a well-managed, diversified
and properly protected investment portfolio.
But she also knows full well, as a representative of a
pension scheme responsible for the savings and livelihoods of
many tens of thousands of ordinary individuals, how hedge funds
look to the outside world.
And her point is a critical one for the industrys
future. Rightly or wrongly, hedge funds are perceived
not just by the public, which is damaging enough, but by some
of their own investors as cavalier and renegade
operations, where managers are given the licence by their
lawyers to do pretty much what they want when they want, and as
businesses that like to keep communication to a minimum and
generally raise two fingers to the world at large.
That is the real reason why regulators, wrongly but perhaps
understandably, need to be seen to be taking action to bring
hedge funds more overtly into the regulated world; why the
hedge fund industry, for all the points it can make quite
rightly and potently in its defence, is in danger of losing the
wider battle for hearts and minds; and why, for many people,
UCITS funds with their veneer of respectability and
regulatory control are so much in vogue.
One could argue that investors could and should have done
more about this long before now. They, of all people, have the
power to make hedge fund managers (and their legal advisers)
change their ways not in terms of how managers manage
their portfolios, which they broadly do pretty well, but in
terms of how they manage and carry on their businesses, which
they broadly do a good deal less well.
But it is better late than never. It is high time that hedge
funds were run as proper businesses with proper levels of
governance, with directors that are not just puppets but people
who know what they are doing, and managed by people who
understand that good business management is every bit as
important as good money management.
Plenty of hedge funds already do this perfectly well. But
plenty more do not. At a time when the Galleon insider trading
conviction has the potential to deal the industry another very
serious blow in terms of reputation and is being seized
on by those who wish the industry ill as evidence that they are
right to be sceptical and suspicious there is no time to
It is time to wise up, ignore the often ill-conceived and
harmful advice of expensive legal counsel, listen to investors,
think about how hedge funds look from the outside and present a
face that is far more accommodating, politically savvy,
self-aware and plain respectable.
Being a smart portfolio manager is not enough on its own
anymore. Being a smart business manager is what will determine
success or failure in this new, more institutional and far more