Hedge fund responds to crisis with backdoor listing

Hedge fund managers are moving to improve their capital base in the wake of the financial crisis, as well as their risk processes and asset/liability alignment for liquidity purposes.

Ramius Capital, a well-known US hedge fund of funds manager, will next month complete a proposed backdoor listing in order to have what Thomas Strauss, a managing director, describes as ‘permanent capital’.

Ramius shareholders will hold 71 per cent of the listed Cowen Group on completion, making up a diversified trading and funds management company, including hedge funds, hedge funds of funds, real estate and cash management.

Strauss, who heads up the hedge funds of funds division, told conexust1f.flywheelstaging.com that the reverse merger with the boutique investment bank Cowen Group, announced in June, would create a firm with permanent capital, and access to more capital if need be.

The transaction follows a sharp decline in Ramius’ assets under management from a peak of US$11 billion early last year to about $6 billion under management.

Strauss said that Ramius had not gated nor suspended any funds, although it had been impacted by the global financial crisis no less than its competitors.

“Investing is about looking forward,” he said. “2008 is finished. It’s in the record books. I think the investors in 2009 and 2010… will learn from it and think about what the new opportunities are.”

The Ramius response to the financial crisis started with the enhancement of its risk management processes. The firm recruited Vikas Kapoor to head up risk management and portfolio construction last year. Kapoor also led the charge in developing Ramius’s new strategies in hedge fund replication, an increasingly popular post-crisis option for investors seeking reduced fees.

Then in January this year, the firm hired Stuart Davies, former managing director and global head of investment at Ivy Asset Management in New York, as chief investment officer.

And the two hedge fund divisions are to be renamed: the fund of funds group will be called Ramius Alternative Solutions and the hedge fund group will be called Ramius Alternative Investments.

Straus said the term “fund of funds” did not reflect the full scope of the Ramius business, which involves building customised hedge fund portfolios for institutional clients.

“I always thought fund of funds had a grungy connotation anyway,” he said.

He believes that the industry had been guilty of a mismatch between its assets and liabilities which had hurt its credibility.

The Ramius replication strategies, which claim to offer better liquidity than most traditional hedge funds, are differentiated from others by replicating the returns of actual hedge fund portfolios, rather than broad indices. They carry a flat 1 per cent management fee.

“It is cheaper and it is more efficient,” said Strauss. “At the end of the day, it’s about returns, not fees… If you think about replication in a broader sense… hedge fund indices are inherently inefficient.”

Strauss is optimistic about the hedge fund industry over the next three to five years, even after its total assets under management slumped by almost half from a peak of about $3 trillion.

“Over the next three to five years, it will surely double again,” he said.

According to industry research firm HedgeFund.net, hedge fund assets, which have risen for five consecutive months, climbed back over $2 trillion in September.