London Briefing:A dramatic collapse in the shares, a stampede for the exit by investors and accusations of mismanagement against executives: no, not Northern Rock, but Absolute Capital Management, the London-listed hedge fund manager, writes Fiona Walsh.
As the crisis exploded at Northern Rock last week, a smaller but even more extraordinary drama was unfolding at Absolute Capital. Its shares slumped 70 per cent as co-founder Florian Homm quit the £1.6 billion (€2.3 billion) hedge fund management group amid a very public boardroom row.
In an open letter to shareholders in the AIM-listed company, Homm laid open a boardroom rift over staff bonuses, saying he had decided to waive his own payment to allow others a larger share.
In a dig at the board, he said he had foregone his bonus this year because it was "important for the company to invest in its profit generators, not in non-producing management".
He added: "However, the board did not agree with my arguments, nor did they follow my lead in sacrificing personal bonuses and compensation, or in contributing shares to the funds. It is apparent that I share a different investment and management philosophy from the current and prior management of Absolute Capital."
That was his side of the story, at least, and the first the board knew of his dramatic departure was, apparently, when a press release was sent to investors. Now, however, another version of events is emerging, in which Homm promised bonuses to staff that breached the company's pre-agreed limits and on which he was subsequently overruled.
Boardroom rifts are always entertaining and the row at AbCap provides a fascinating insight into the still secretive world of the hedge fund. However, events over the past week have turned the drama of maverick fund manager Homm's abrupt exit into a deepening crisis for AbCap.
Included in his resignation letter was a seemingly blithe admission that last month, he had donated five million of his AbCap shares (then worth £23 million) into its funds in an effort to boost their performance in troubled markets. This, he said, would "help investors ride out the instability in the markets".
The shares, which have been as high as 579p over the past year, crashed from 390p to 118.5p on the day of Homm's departure. Two days later, they plummeted another 50 per cent as the company was forced to freeze its equity funds when investors stampeded to withdraw their cash.
Their rush for the door followed alarming revelations that as much as 20 per cent of the funds had been invested in illiquid micro-cap US companies, including over-the-counter and "pink-sheet" equities, which are not readily tradeable. Now, as the funds remain frozen, AbCap shares are trading at little more than 50p.
It's a world away from the company's short but high-flying history. Set up by Homm and Donegal-born Sean Ewing in 2002, AbCap was voted top hedge fund in 2006, an award it still proudly proclaims on its website. Ewing, founder of Funds Direct, which was later taken over by Egg, resigned from AbCap some weeks ago and is said to be appalled at the events of the past week.
"Colourful" is perhaps the best way to describe Homm, a member of one of Germany's wealthiest families and a familiar face on the social scene there, as well as one of the best-known figures in the hedge fund world. He hit the headlines last year when he was shot by armed motorcycle robbers while on holiday in Caracas, after refusing to give up his gold Rolex watch.
Aggressive and intelligent, Homm has been described as "a cross between Einstein and Mike Tyson". He set up his first investment-management company at 18, studied economics at Harvard and went on to work at Merrill Lynch, Fidelity, Julius Baer and Tweedy Browne.
Even before the extraordinary events of the past week, the 47-year-old fund manager had attracted more than his fair share of controversy, having been twice investigated in Germany for alleged market manipulation. No charges were ever brought.
Having pledged last week to continue to fight for shareholder value despite his resignation, Homm dealt another shock to the shares as it was revealed to the market at the start of this week that he had offloaded the bulk of his near 19.2 per cent stake at a heavily discounted price of 35.2p.
The one piece of good news for beleaguered investors is that the shares have been bought by Andreas Rialas, co-chief investment officer at AbCap. Along with his brother Kyriakos, he is now the largest shareholder with a near 28 per cent stake. As its equity funds remain frozen, the firm is now attempting to unwind its illiquid US investments.
It's a different drama from that engulfing Northern Rock but the end result looks pretty much the same for both sets of shareholders. Unlike Northern Rock however, there are no gilt-edged government guarantees to protect investors' cash at AbCap.
That will be particularly bad news for Homm's former wife, Susan. Just weeks ago, she took ownership of a stake of almost 6 per cent in the firm as part of her divorce settlement with him. Worth almost £18 million then, those shares have now shrunk in value to little more than £2 million.
Fiona Walsh writes for the Guardian newspaper in London
