The hedge fund industry has been reinventing itself in the past two years and, notwithstanding massive redemptions as the credit crunch spread throughout markets, managers are looking to bring revamped and new strategies to the market. Most of the changes look to address major criticisms of hedge funds during the crisis, namely transparency, ownership stability and liquidity. According to Tom Strauss, the chief executive of the hedge funds of funds group of US-based diversified alternatives manager Ramius Capital, high yield bonds went through a similarly unpopular period in the early 1990s.

“There were massive redemptions from high yield bond funds and the reaction from many people was that the sector was finished,” he said on a recent trip to Australia. “But businesses just don’t disappear.” Ramius believes that it always provided more transparency than most of its contemporaries but has addressed the issue of liquidity risk by better aligning assets with liabilities in various products and also launching a hedge fund replication strategy. The firm recruited Vikas Kapoor last year to head up risk management and also lead the charge on the replication funds.

The Ramius replication strategy developed over the last 12 months differs from others by not seeking to replicate the main hedge fund indices but rather the specific hedge fund portfolios in its models. According to Damien Hatfield of Hatfield Advisors, the firm’s Australian representative, an unnamed Australian client has recently invested US$10 million into the strategy. Strauss says that the key to replicating something is that it needs to be efficient in the first place. But hedge fund indices are not efficient. They have all sorts of biases, he says.

With Ramius’ replication the manager is able to take advantage of strong manager research, whereas replicators of indices do not know what investments are in the underlying portfolios. Strauss says that the firm cannot replicate a manager’s alpha but it can replicate the hedge fund beta and the market timing of managers. Over time, with multiple managers – say 30 – the alpha will tend to cancel itself out in any case. “Hedge fund beta and market timing tend to become more important with time,” he says.

The other unusual response to the global financial crisis by Ramius is to give the firm “permanent capital”. Ramius should this month complete a backdoor listing of the financial trading company and boutique investment bank Cowen Group, after which the Ramius founders and staff will have 71 per cent of the listed vehicle, providing greater diversification and possible access to further capital.