Absolute Capital Management froze investor redemptions yesterday after founder Florian Homm quit over a pay dispute, MarketWatch reports. Shares of the U.K.-based hedge fund firm slumped 47 percent.
The company’s board of directors said seven of the eight equity hedge funds that Homm managed have holdings that can’t be sold quickly at their stated values because they are illiquid, meaning the assets don’t trade much.
After Homm quit, Absolute Capital said it got requests from investors to withdraw more than $100 million from the funds. Because some of the funds’ holdings are illiquid, the company said it has suspended redemptions and the calculation of the funds’ net asset values.
The funds in question, which include the Absolute Return Europe fund, Absolute Germany and Absolute Octane, oversaw $2.1 billion at the end of August. Up to 45 percent of the assets of some of these funds are illiquid, the board notes.
The developments at Absolute Capital show how the success of some hedge fund firms relies on a few key managers. If such managers leave, investors can quickly lose confidence and try to pull their money out. It also shows how hedge fund moves into more illiquid holdings can cause trouble when investors can redeem quickly.
Absolute Capital’s board is now planning to set up so-called side pockets that allow hedge fund managers to set aside illiquid holdings in a separate structure. Under the plan, investors will likely end up with two classes of shares in each of the funds. One will hold the funds’ liquid positions and the other will contain the illiquid assets.
The funds are now looking to lock up investors’ money for 12 months, the board said. This doesn’t apply to fixed-income and real-estate funds run by Absolute Capital, which have been unaffected by Homm’s departure, the company notes.
“The company believes that the proposed restructuring of the equity funds and the imposition of the lock-in period will provide stability to its equity fund business,” Absolute Capital says in a statement.
Homm says he “donated” five million of his Absolute Capital shares to some of the hedge funds he managed last month after becoming concerned with performance. The stock was worth roughly 33 million in August, he noted in a letter to investors.
“This move was consistent with other firms in the industry, which have contributed their own capital in order to help investors ride out the instability in the markets,” he writes. “As a result of my actions, those funds ended up positive or neutral for the month.”
Homm also says he was not accepting a bonus this year so that money could be shared with other investment professionals at Absolute Capital. The board disagreed with his assertion that the company needed to pay adequate compensation to keep top fund managers, Homm adds.
“It is apparent that I share a different investment and management philosophy from the current and prior management of Absolute Capital,” Homm writes. “Therefore, I have decided that it is time that I left the company.”
Absolute Capital said it was “disingenuous” for Homm to portray himself as a champion of employees.
“For the avoidance of doubt, the company’s remuneration committee approved the payment of bonuses in the amounts recommended by Florian Homm,” Absolute Capital says in a statement.