Maverick hedge-fund boss Florian Homm's resignation was a bombshell – worse was to come

Florian Homm has long enjoyed a reputation as a maverick in the buttoned-up hedge fund community. From his brush with death last year when he was shot in Venezuela after refusing to hand over his Rolex to a would-be thief, to his decision to set up his hedge fund not in London or Geneva but in the island paradise of Mallorca where he lives, he has made a name for himself by doing things his way.

Indeed, last year he became one of the first managers to float his hedge fund on a stock exchange – Absolute Capital went public on Aim in March. But even given his history of running against the current, the spectacular way in which he chose to leave the firm he co-founded, and the events that have taken place since, was shocking.

Inspired by apparent philosophical differences with his fellow managers, Mr Homm decided this week that he had had enough of the firm. But this was to be no normal exit. Mr Homm tendered his resignation not via a closed-door board meeting. Rather, he informed his soon-to–be ex-colleagues that he was stepping down, effective immediately, via a press release sent out on a newswire on Tuesday morning. The open letter was highly critical of his fellow managers, accusing them of refusing to give up their bonuses, as he did, amid the recent market turmoil, and added that they did not share his ethos of investing in "profit generators, not in non-producing management".

Like a tidal wave crashing on to a serene Mallorcan beach, the surprise departure of the man responsible for overseeing all of the firm's investment activities, caused havoc. Investors holding more than $100m rang in to demand their money back. While the board huddled in an emergency meeting to formulate a response, AbCap shares went into freefall, ending 70 per cent down by the end of the day.

That was not the worst of it. After an impromptu review of its operations, the firm stated yesterday that seven of its eight equity funds were not properly valued. The valuation discrepancies affecting between $440m and $530m in funds – about a quarter of the firm's equity funds – were all related to bets placed by Mr Homm, the firm claimed. The news sent AbCap's stock spiralling down again. By the end of yesterday, its shares had shed 84 per cent in two days.

The company's remaining management, led by chief executive Jonathan Treacher, who only began the job three weeks before, came up with an emergency restructuring plan and suspended investor rights to pull money out of the funds until they could craft an orderly way to unwind the problematic holdings.

Sandy Chen of Panmure Gordon, the firm's house broker, said the apparent valuation shortfall "could prove fatal for the equity funds" and highlighted "the risk of investor lawsuits as an unquantifiable threat to earnings". He slashed his price target from 750p to 150p to reflect the value only of the firm's debt funds, writing the value of its equity funds effectively to zero. Mr Treacher admitted that rival hedge funds had already begun calling about possibly buying it out. Mr Homm meanwhile, remains incommunicado. It was a master class in value destruction. In two days, a firm that had grown in five years from an informal operation started by Mr Homm managing his personal fortune from Mallorca to a hedge fund with $3.2bn under management on the cusp of making the leap to the big leagues of the global hedge fund industry, came crashing to the ground, battered by a collapse of investor confidence. So what happened?

When chief executive Jonathan Treacher walked into AbCap's office in Palma de Mallorca on Tuesday morning, he was expecting to see Mr Homm. He had spoken with him the day before, and Mr Homm has assured him that he would be there first thing to field phone calls from investors. The firm was about to announce to the stock market that Mr Homm had donated ¿33m (£23m) worth of shares into the three funds he directly managed to shore up what otherwise would have been losses. Mr Treacher said net asset values across the firm's family of funds would mostly be flat or slightly down but the changes were "nothing material."

Instead, as he walked through the door he was handed the excoriating resignation letter. "It was a bolt out of the blue. It was completely bizarre. I had spoken with him the day before," said Mr Treacher. Of the many criticisms contained in the letter was Mr Homm's accusation that his fellow managers were too focused on "non-producing management."

In its Palma headquarters AbCap has a staff of 22 people. "We've got an incredibly lean staff. There are no layers of bureaucracy, so I don't know what he is talking about," said Mr Treacher. The firm manages 12 funds in total – 8 equity funds, with the remainder focused on debt and real estate.

Mr Homm also said that other managers refused to follow his lead in distributing his bonus to other fund managers whose remuneration would have been diminished by the recent market turmoil. "I didn't get a bonus. No one on the board got a bonus, so there was nothing to give up. The only one claiming a huge bonus was Florian. He recommended that certain portfolio managers get bonuses, and they all got them," said Mr Treacher.

Mr Florian did not respond to an email request for an interview. His exit prompted Mr Treacher and other executives to carry out an emergency assessment of the firm's funds.

The results were unsettling. Of the $3.2bn managed by the overall firm, $2.1bn is dedicated to investing in equities. As chief investment officer Mr Homm was responsible for overseeing general investing activities. He also had direct responsibility for three of these funds – Absolute Catalyst, Absolute Activist Value and Absolute Octane. The company said that between $440m and $530m, concentrated in these three funds, was improperly valued. This was due, the board said, to the illiquid nature of some holdings.

There are similar positions in all but one of the other equity funds. Though these funds were not directly managed by Mr Homm, the suspect holdings were also his doing, Mr Treacher said. "Everything that's a problem is a trade that [Mr Homm] has been involved with," he said.

The AbCap board has proposed setting up a new "side-pocket" structure into which all these illiquid positions would be placed and then liquidated over the coming months. This, however, must be approved by shareholders, who the company has asked to agree to a 12-month lock-in period while they work out the problems.

Mr Chen of Panmure was not gushing about the prospects of this coming off. He said: "In current markets, we do not think approval of the equity funds' restructuring, especially the 12-month lock-in, can be a foregone conclusion, making it possible that ACMH will face major redemptions."

In short, it's a right old mess. The frustrating part AbCap managers and investors is that it is still unclear why. Only Mr Homm knows the answer to that.