Thursday, September 20, 2007

Homm Quits - Investors Locked-In

Don't you just love the hedge fund industry? The swash buckling image that is prevalent is underpinned by a certain arrogance written into documents that investors sign up for. So keen have investors been to grab a ride on the money train that they have basically thrown away rights that others would take for granted..such as being able to get your money back, for example.

On Tuesday we saw Florian Homm quit Absolute Capital Management Holdings, an AIM listed hedge fund manager, because he was unhappy that his top fund managers were not being rewarded enough. The shares in Absolute plunged 84% in two days and people were, obviously, a little worried about their investment.

With Northern Rock you could just turn up on the banks doorstep with your tent and a few sandwiches, sing some songs with other panicked depositors and wait for the smiley girl at the cashiers desk to give you your money back, unconcerned at what the shareholders in Northern Rock were suffering.

Imagine the scenario in high streets up and down the UK if Northern Rock had said "sorry we are locking up our branches for restructuring and you can have your money in a years time". Victorian riots would have ensued and people up and down the country would be taking the side of crying pensioners and baying for blood.

Pity then the investors in Absolute. On the news of Homm's departure $100mn of the funds under management wanted to leave, however Absolute have executed a lock-in provision for the funds under management and have suggested that investors cannot get at their funds for a year while restructuring of the funds takes place.

"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 said in a statement. "The company has held discussions with large fund investors, who have indicated their preliminary support for the proposal."

I can understand the issues that Absolute have to a certain extent, as they have as much as $500mn in illiquid over the counter shares in funds which would be difficult to sell. Under the proposed reorganization, the illiquid positions will be transferred to a new fund in which investors will get separate shares. Absolute will hire external advisers to value the illiquid assets before selling them, the company added. The other shares would track the liquid portfolio.

It does show, however, that there are a number of get outs that funds have when structuring the documents which investors just have to grin and bare. I do think, however, that investors will now be wising up to these lock-ins and 'gates' for future investments into hedge funds.

As for Homm, he is still the single largest shareholder in Absolute so standing on principal has just cost him 84% of his holdings value, you have to take your hat off too him for that. Also bare in mind that this was the guy who got shot because he would not hand over his wallet to a mugger. If I was the management at Absolute I would be looking for another job, as this guy is hardly likely to walk away from the company he founded if he is prepared to get shot for a few bucks in his wallet.

For me, Absolute looks like a buy today, when Homm comes riding back into town like John Wayne, having just disposed of some evil corporate management Bandidos, it will be a nice little earner.

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