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Hedge fund ‘hero’ who jumped ship

Date: Sunday, September 23, 2007
Author: Louise Armistead, Business.Timeslonline.co.uk

IN an exclusive nightclub in Zurich last Friday, revellers laughed as a tall, dashing German ripped off his shirt and jumped onto the dance floor. He was drunk but charming and, judging by the cut of his dishevelled clothes and the drinks he kept ordering, extremely rich.

He was partying as though he hoped to forget himself, but for many the 6ft 8in figure was unmistakable. He was Florian Homm, a member of one of Germany’s richest families, former national basketball player, and financial genius.

After his “tough” weekend, Homm was back home in Majorca when, at 8am on Monday morning, he received a call from Jonathan Treacher, chief executive of Absolute Capital Management, the £3.2 billion London-listed hedge fund that Homm had co-founded.

Treacher had come to Abcap’s Majorca offices to prepare for a stock-exchange announcement and wanted to discuss it with his star manager.

Homm explained to Treacher that he had got in at 7am, hadn’t been to bed yet and felt too ill to come into the office. “Florian just said he was going to sleep to be fresh for the next day,” said Treacher. “That was the last I heard from him.”

The stock-exchange announcement was prepared in his absence.

“Suddenly someone put a print-out in my hand,” he said. “Florian had resigned.”

Homm had written an open letter in which he said he was “concerned with the performance of certain of our funds” and that he had “a different investment and management philosophy” from the board. The shares went into free-fall and finished the day down 70%.

On Wednesday, Abcap said it was closing the doors to frantic investors trying to withdraw their money because they had found that 20% of the funds were in opaque and illiquid micro-companies in America. The shares plummeted another 50%.

Sandy Chen of Panmure Gordon, the firm’s house broker, said the apparent valuation shortfall “could prove fatal for the equity funds” and high-lighted “the risk of investor lawsuits as an unquantifiable threat to earnings”.

By the end of the week, £237m had been wiped off the value of Abcap’s shares – including the 19% owned by Homm.

Sean Ewing, an Abcap co-founder who quit a few weeks ago, said: “It’s madness. This is a great business and one that could easily recover, except for the reputational damage. The business and wealth we created over three years has just gone down the toilet with one crazy action from Florian. I feel bitter.”

This weekend, Treacher flew back to London to deal with investors and regulators. He will also appoint lawyers and investigators to find out what went wrong.

Insiders point to the coincidence that Homm’s departure came within weeks of Ewing quitting suddenly. Others, including Ewing, say the business is sound but Homm has been under increasing pressure because of a recent divorce.

A friend said the reason Homm was in Zurich at the weekend was to see his former wife, Susan Devine, but the meeting went badly. “Homm had just handed over 4m shares in Abcap to his wife and 2m to his children. She will have lost a fortune.”

The Abcap drama added to the fears of investors who were already jittery from the credit crisis. With hedge funds queueing up to float, how many others were so vulnerable to the whims of their star managers?

Like many, Abcap has been at pains to diversify. Ewing said: “We’ve diluted Florian’s long-short speciality to debt and emerging markets and property.

We’ve grown from 20 staff to 80, including 40 investment professionals. The market just chose to ignore it.”

One investor said: “Hedgies are like film stars – many are nuts but that’s what often comes with brilliance. To spread the risks, most have to diversify and bring in managers.”

Homm is viewed as a “hero” in Germany, both socially and in business – a reputation enhanced in November when he was shot in a car chase in Caracas after a man tried to steal his Rolex watch.

One friend said: “He’s a cross between Einstein and Mike Tyson: bright, intelligent, volatile and aggressive.”

Homm set up his first investment-management company at the age of 18 before being taken on by Merrill Lynch as an analyst. He studied economics at Harvard and went on to work for the investment houses Fidelity, Julius Baer and Tweedy Browne.

Abcap was founded in 2002 by Homm and Ewing, another veteran of the fund-management industry who founded Funds-direct, the funds supermarket that was acquired by Egg and then Prudential in 2002. The pair made a fortune when they floated 30% of Abcap on the Alternative Investment Market in 2006. But it wasn’t an easy partnership.

In April this year, there was a disagreement between Homm and the board and Ewing immediately wrote to the board saying he wanted to resign.

Treacher, a former investment banker who had been a nonexecutive director, was made chief executive. Based in London, he didn’t have daily contact with Homm. “I met him for breakfast at Claridge’s,” said Treacher. “We spent most of the time outside while he smoked cigars and took calls, but he seemed great.”

Treacher, who joined on August 15, seems not to have known about Ewing’s decision to resign. He said: “Sean and I were set to have investor meetings on Monday August 20. But I woke up to find a text from him saying he couldn’t come. Later, again by text, he said he was resigning immediately. Later he said he would stay until Christmas. I thought it was odd.”

Back in the office the following week, Homm told Abcap staff that he had worked out their bonuses. The news angered Andreas Rialas, head of Argo, the hedge fund Abcap bought last year.

At the time of the merger, Argo paid managers 40% of profits, in line with the industry, while Abcap paid only 20%. Rialas resisted pressure from Homm to reduce Argo’s level to 20% and insisted on a place on the renumeration committee. In return, the Abcap side was given a higher share of the profits.

But now Homm had gone through the agreed limits and, at a hastily convened committee meeting, Rialas vetoed the bonuses. Treacher said: “Rialas was firm - but also reasonable and said we should try to honour Homm’s promises as far as possible. So we told Homm his staff could have the bonuses but he would forgo his own.”

Treacher said Homm complained “a bit but not hugely”. There certainly weren’t any suggestions he would react as he did. “Despite the theories, we’ve no idea why he did it,” said Treacher. “We’ll have to wait until he reappears.”