Quiet starter making a big noise in Mallorca

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A spate of high-profile stock exchange listings by alternative asset managers over the past year has whipped investors into a frenzy. The latest, by Fortress Investment Corporation, a US manager of private equity and hedge fund assets, was 17 times subscribed. The stock
doubled on the day of its launch and now trades on a price-earnings ratio of more than 40.

Absolute Capital Management, despite being the third such company to list, after Man Group and Rab Capital, was less loved by the market after its listing in February last year. Its unheralded flotation was missed by most analysts and the shares barely moved for most of the year.

Sean Ewing, the Irish chief executive of the Spanish-based firm, says the low profile was a deliberate ploy. “We came to the market quietly,” says Mr Ewing. “We didn’t hype it because we wanted to build up a track record before marketing ourselves. Rab may be quite high profile now but remember it had a quiet start too.”

Two recent triggers have changed ACM’s profile. First, its inaugural fund, Absolute Return Europe, reaches its five-year milestone this month, which makes it more attractive to institutional investors. Absolute Return Europe is one of eight equity long-short funds in the ACM stable, which includes strategies focused on Germany, India, Eastern Europe and large-cap stocks.

The second trigger is ACM’s acquisition in January of Argo Capital Management, a firm with three hedge funds investing in emerging market debt, distressed debt and private equity. The $50m (€38m, £25m) mainly paper-based deal gives ACM a wider range of strategies and boosts its total assets under management from $1.5bn to $2.4bn in one fell swoop.

Mr Ewing says the company is now approaching critical mass, the level at which big institutional investors and their consultants become interested. “Big pension funds are looking to invest with businesses, rather than individual funds. The closer we can get to $5bn the better.”

The possibility of attracting serious assets prompted a bullish research note at the end of last year from Panmure Gordon, ACM’s house broker. “ACM is trading at a 40-50 per cent discount to its peers despite offering better performance, higher profitability and strong growth prospects,” analyst Sandy Chen wrote.

The shares have more than doubled since, cheering investors. Alongside the acquisition and the maturing track record, the performance of the funds has been a factor here. Absolute Return Europe has more than doubled investors’ money in five years and has only suffered two months of losses out of 57. All the other funds have provided positive returns over the long term and in the last 12 months.

Mr Ewing believes the successful hedge funds of the future will be the ones that create fully fledged, broad-based businesses. “It is like building a football team.
On the long-short side we have eight strategies and eight different risk profiles. You need the right people and the right profiles.”

Building a business is not necessarily the strength of a typical hedge fund manager but Mr Ewing is unusual. He floated an asset management company, Farlake Group, on the Aim market in 1995. He then pioneered the funds supermarket concept, setting up FundsDirect in 1999. It spanned 13 European countries and had 36,000 funds on the platform by the time Mr Ewing sold it to Egg in 2002, in a transaction that valued the business at £32m.

His counterbalance on the investment side is Florian Homm, one of the investors in Farlake Group. The two set up ACM and in 2004 decided to relocate most of the managers to a converted farmhouse in Mallorca. Both men loved the island and they hoped to attract staff who might also enjoy the lifestyle. This helps offset the fact that ACM’s base salaries barely reach six figures, although bonuses and profit shares can make total pay a lot more attractive.

Although the equities strategies have a $4bn capacity, according to Mr Ewing, he is looking for more managers on that side of the business to add to the 26 already hired. He also wants to expand the range of strategies. “Long-short was the first leg,” he says. “Debt is the second leg. But those two are only half of the investment universe. After that there is real estate that is another 26 per cent of it. And then there is unconstrained investing, best ideas funds and other niche strategies.”

Expansion could well be via more acquisitions. “We could grow organically and get managers in one by one but it is often better and faster to buy in a team with a five-year track record,” Mr Ewing says.

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