Powe forced to liquidate flagship fund

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Powe Capital Management has been forced to liquidate its flagship Modulus Europe hedge fund after poor performance triggered redemptions. The €330m (£261m) fund, which invests in small and medium-size companies, has lost 21 per cent of its value this year as the financial turmoil has prompted investors to turn away from such companies to more liquid investments.

Rory Powe, Powe Capital's founder, said: "The fund has had disappointing performance in the last 14 months and as a result it has had redemptions. The main problem this year is that fundamental stock picking has not been rewarded. The fund's exposure to small and medium-sized companies really suffered because liquidity in those names was poor."

He said three of his 10 employees would lose their jobs and that Powe Capital would continue to operate its smaller Principia and Tensor funds.

Powe Capital used "gates" to defer redemptions in Modulus on 1 July, 1 August and 1 September to protect remaining investors from the consequences of paying out all the redemptions at once because those investors would have been left with interests in the least liquid stocks.

Mr Powe said a gate could have been used again on 1 October but that with more redemptions coming up it was decided liquidation was the fairest outcome for all investors. "Over the course of 2008 we brought the exposure right down which puts us in the position to do this," he said.

PricewaterhouseCoopers, the liquidator, will distribute 80 per cent of the fund's holdings to investors in cash, with Powe Capital retaining 20 per cent of the most illiquid shares to be disposed of over time.

Trading in smaller companies is traditionally light and the financial turmoil has seen investors flee less liquid stocks for safer assets such as cash, government bonds and blue-chip companies. "There are buyers of these stocks but you need time and you have to be careful how you handle it," Mr Powe said. In a letter to investors, Mr Powe said he regretted the need to hold back 20 per cent but that it was the best way to liquidate the holdings and that there would be no management fee.

Mr Powe, formerly a star fund manager at Invesco, launched Modulus in early 2002. The fund is up 65 per cent since its launch. He left Invesco after his European Growth Fund's value plunged following the bursting of the dotcom bubble.

Mr Powe declined to discuss the Principia and Tensor funds. In the letter to investors, Mr Powe said the €110m (£87m) Principia fund had an "excellent track record" since launching in 2006 with "its compressed and liquid gross exposure rendering it ready to take advantage of opportunities". The €17m Tensor fund "has struggled in its small-cap universe where liquidity has been dreadful".