Florian Homm has always attracted attention. He stands more than two metres tall, is the scion of a wealthy dynasty and a pioneer in European investment management, having established a hedge fund in 1993 when most German fund managers had barely heard of CAPM. He also did eye-catching things, such as getting shot in Venezuela and winning multiple awards from such respected publications as Hedge Fund Review and Eurohedge.
Homm is now on "holiday", having resigned last month as the co-chief investment officer of Aim-listed Absolute Capital Management. This stock almost achieved the remarkable feat of halving in price for three consecutive days, but instead merely fell more than 70%. Rated a buy by house broker Panmure Gordon at 569p (target price 700p), it was trading at 60p on September 20.
Shareholders were not just unnerved by the loss of Herr Homm’s investment talent but also by the bizarre manner of his departure. In an open letter he explained how he had used 5 million of his own shares in Absolute to boost the performance of three hedge funds. This philanthropic gesture worked – the net asset values of these funds were stable through the turmoil in August. However, it subsequently turned out that the funds also held even less liquid shares than those gifted by Homm, including a hefty allocation to Nasdaq Pink Sheets, some of which might turn out to be of about the same investment quality as the equity tranches of CDOs invested in sub-prime mortgages.
Until this spectacular snafu, Homm’s recent investment performance looked great on paper – almost too good – with the NAVs of his funds rising smoothly, few down months, and magnificent Sharpe ratios. However, a cursory examination of Homm’s personal history should have set alarm bells ringing. What is remarkable about this tale is not only its denouement. Just as intriguing is how he ended up as the co-chief investment officer for a firm running more than €2 billion.
You might call him a serial entrepreneur. Homm established Value Investment Management GmbH in 1993 in the village of Königstein im Taunus, about 11km northwest of Frankfurt. By 1995 he was running approximately $160 million. Unfortunately, his performance that year wasn’t great. His flagship fund, European Value, fell by about 15%, having made a series of bad bets on small-cap stocks.
In 1998, Homm listed his management company in Frankfurt and then shifted its focus from quoted stocks to venture capital. In 2000, at the height of the technology, media and telecoms boom, he boasted that he wanted his firm to be bigger than 3i. However, the TMT bust was less kind, and in 2001 he told the New York Times: "It is sensationally awful. It makes the crash of 1929 look like a joke. We’re going to get slammed."
Some time later, Homm moved from Germany to Palma de Mallorca. In August 2004, BaFin, the German regulator, fined him €70,000 for the "administrative offence" of publishing false information in a research note. He was also cautioned by a Frankfurt district court in 2005 for not properly declaring his self-interest in research reports published on German investment group WMC.
But Homm has not confined his interests to Germany. He has been on the board of companies in the US, including one called Dynamic Associates Inc. Dynamic subsequently became Legal Access Technologies Inc, based in Las Vegas, Nevada. In 2001, Legal Access Technologies said that it was "poised to become the leader in alternative access to legal services. The Company’s unique technologies and systems put it in the enviable position of being able to make money while improving consumer access to legal services at all income levels. It’s a true win/win solution."
This win/win didn’t quite work out and the company has since transmogrified into the Atlanta, Georgia-based UnderSea Recovery Corporation. Apparently, it has "identified a number of shipwrecks in Europe, Central and South America, and Southeast Asia".
Any investor in hedge funds should note this tale of woe. In the wrong hands, illiquid investments encourage the smoothing of NAVs. Too little scrutiny and too much discretion also bedevil the industry. Some claim this is all for the good. But investors have the right to ask questions and expect sensible answers. Absolute Capital Management is now doing its best to put the mess made by Homm right. But in truth someone should have been monitoring his investments more closely long ago.
In the meantime, the nagging point remains his ability to raise funds under management. His brushes with the German authorities alone should merit concern. One of the biggest sources of assets for hedge funds are the funds of funds. Part of their selling proposition is that they don’t just shop for good track records. Rather, they look through the veneer and do serious due diligence. Any that invested in Homm’s funds should be looking at themselves in the mirror.
Andrew Capon is editor-in-chief at State Street Global Markets, the research and trading business of State Street Corp. He was formerly senior editor at Institutional Investor and has won numerous awards for journalism on fund management and investment issues. The views expressed are the author’s own