The growth of the hedge fund industry in Europe has hitherto been remarkably scandal-free. This contrasts starkly with the US, where there has been a continuing series of blow-ups and frauds – with egregious cases such as Manhattan, Lipper, Lancer, Beacon Hill, Durus, Bayou and Wood River continually cropping up, and keeping the media filled with bad news about hedge funds. But there has always been the risk that, as the industry in Europe grew, problems would sooner or later emerge there too. In recent weeks, with the remarkable goings-on at Absolute Capital Management – a hedge fund management company publicly listed on the Alternative Investment Market (AIM) in London – it looks uncomfortably as if we have our first such scandal.
The recent extraordinary sequence of events arguably began with the abrupt resignation in September of Absolute Capital founder Florian Homm, although no one appears to have paid much attention when chief executive Sean Ewing resigned just a couple of months before his colleague. As one commentator quipped, when Homm left he appeared to have "flounced off in a huff", also making the strange revelation that he had used some €30 million-worth of his own shares to prop up the firm’s funds in August (an intervention not revealed to investors at the time), together with the allegation that he was unwilling to stay if other senior people at the firm declined to follow suit.
This, not surprisingly, sparked a sudden collapse in the share price of the company, followed by the declaration of substantial losses for most of the firm’s funds in September, and subsequently tortuous and highly public negotiations with shareholders and investors about how to sort out the mess.
In retrospect, plenty of warning signs were there. Homm had previously founded a long-only fund management company in Germany called Value Management & Research, which made terrific returns during the tech boom of the 1990s. That was the heyday of the Neuer Markt – the subsequently discredited junior stock market in Germany. As EuroHedge noted in a later profile, there were without doubt "hints of controversy" about Homm’s departure from VMR – just as the tech bubble burst and in circumstances that seem to echo those at Absolute Capital today.
Indeed, Homm was always one of the more colourful characters in European hedge funds and never seemed far from controversy. Any investors doing due diligence would have discovered that he was investigated more than once and fined by regulators in Germany for alleged manipulation of stock prices. And late last year came the bizarre news that Homm had been shot while travelling in Venezuela – although, by most accounts, this appears to have been a botched robbery rather than anything more sinister.
Arguably, there was no one in the European hedge fund industry who divided opinions more fiercely. He certainly did not take the orthodox route to building his business. Unlike the vast majority of European hedge fund managers, he opted not for registration with the Financial Services Authority in the UK but to run his funds from the Spanish island of Mallorca together with partner Ulrich Angersbach in Switzerland. Being based in Mallorca explained his perma-tanned appearance, made all the more striking by his height of about 6ft 8in – although investor sources commonly suggested that he had moved to the Mediterranean for his health.
Although plenty of investors questioned his methods, there was no shortage of others who viewed him as an investment genius of undoubted flair. He did not come to the industry entirely without credentials. He had begun his career at Fidelity in the US under the tutelage of legendary manager Peter Lynch. He certainly appeared capable of identifying opportunities that others missed – especially in small cap stocks, and apparently without excessive use of the balance sheet, which helped the Absolute Capital funds to achieve impressive returns with relatively low volatility.
Many of those investors will probably be feeling somewhat let down. In the meantime, the whole Absolute Capital saga will not have done anything for the image of hedge funds in Europe – at a time when many other groups remain hopeful of coming to the public markets.
As the European industry has grown so robustly in recent years there have been many in the business, myself included, who have seen this as at least partly a result of the FSA’s benign "principles based" regulatory regime. This line of thinking has also tended to be critical of the regulatory scheme in the US – which has clearly allowed so many scandals to erupt. To my way of thinking, nothing that has happened in the Absolute Capital case appears to undermine that line of argument.
At the same time, however, there have been many in the US who have been critical of the relatively light requirements for listing a company on AIM in London – which they contrast with the much more onerous requirements for listing on a US exchange. In the light of the Absolute Capital case, they too appear to have a strong point.