Glitter fades for Arpad Busson as he fights for his future

Arpad “Arki” Busson epitomised the confidence and glamour of the pre-2008 era in global finance when he was photographed rubbing shoulders with royalty, prime ministers and celebrities at black-tie fundraising galas for the children’s charity he co-founded, as well as alongside his one-time partners, the model Elle Macpherson and Hollywood actress Uma Thurman.

“He was absurdly good looking, went to Swiss boarding schools and was in the society pages, which helped him build his profile,” says a hedge fund manager at a rival firm who has known Mr Busson for decades. He likens him to Forrest Gump, the lovable character in the 1994 film who enjoyed incredible success by being in the right place at the right time.

In Mr Busson’s case that came down to the ease with which he straddled two distinct but affluent worlds — wealthy individuals in Europe and the nascent hedge fund industry in New York and London — and his knack for connecting them profitably.

But now Mr Busson — who as a young man dated US actress Farrah Fawcett — is battling to save his business. It has been making losses for close to a decade and faces a storm of problems including a dispute with its auditor and a battle with an investor.

The 56-year-old Frenchman is known as a pioneer of the fund of funds model, a strategy that invests money in portfolios of individual hedge fund managers on behalf of clients, and for having raised capital for Louis Bacon and Paul Tudor Jones, big names in the industry.

“He got incredibly lucky by being at the overlap of really rich Swiss and European people and up-and-coming hedge funds as they came into bloom,” the acquaintance says. “He was the only person in the world who knew the big global macro traders like Paul Tudor Jones and Louis Bacon but also the stories of incredible wealth in Switzerland. Being able to connect those two groups was extraordinary.”

Mr Busson launched EIM, his investment business, in 1992. EIM was sold to Gottex Fund Management Holdings, a Swiss investment company, in 2013. EIM had been hurt by having made a $230m allocation to funds linked to the Bernard Madoff fraud. Three years later, the group rebranded as LumX.

Gottex managed $18bn at the end of 2007 but in its latest incarnation it refuses to disclose its assets.

Having originally focused on fund of funds, LumX says it has shifted from this to multi-asset strategies and has also branched into providing risk analysis and a fund platform, services geared to institutional clients. It insists that its investment business, which primarily serves high-net-worth individuals, can recover.

Last month LumX warned it would make a loss for the ninth consecutive year but its annual report, published a few hours before a deadline imposed by the Swiss stock exchange, delivered two more unpleasant surprises.

Auditor EY took the dramatic step of stating that LumX's 2018 financial statements “do not give a true and fair view of the consolidated financial position of the group”. It added that LumX had failed to fully impair the goodwill in the business as well as overstating the value of a deferred tax asset, meaning that its full-year loss should be even larger than the net loss of $8.7m it reported.

It said the group had overstated the value of goodwill by $21.1m — the entire amount LumX lists. In effect, this means that, in EY’s view, LumX has no goodwill at all.

“Generally speaking, one thing any money manager wants to avoid are question marks over financials. It’s an industry based on reputation,” says Patrick Ghali, co-founder of Sussex Partners UK, which advises institutions on investing in hedge funds. “From outside it doesn’t look great.”

Those with the most exposure are Mr Busson and his family.

LumX’s biggest shareholder is Rozel Trustees, a Channel Islands-based trust whose beneficiaries are the Busson family, which owns more than 30 per cent, according to the annual report.

The report lists loans to “related parties” of about $7.4m at the end of 2018, up from $1.5m a year ago. About $5.2m of this comes from LumX shareholders, including $2.6m from Mr Busson and $1.3m from Rozel, effectively making the family LumX’s biggest creditors.

Asked to comment on the dire performance of its investment business, the group emailed this statement to the Financial Times: “LumX and its predecessor Gottex was badly hit by the financial crisis and then an industry shift away from its absolute return fund-of-funds model.” It said it also “suffered from legacy issues at Gottex that came to light following the 2014 merger”.

The company is not forthcoming about the size of the assets it manages, citing “the more diverse nature of the business” as the reason for not disclosing an AUM figure. It had $7.1bn in fee-earning assets at the end of June last year.

Fund of funds was popular in the run-up to the financial crisis as investors sought to tap the fast-growing hedge fund industry but money has seeped away every year since, with investors deterred by high fees. There was a $9.1bn net outflow last year, according to figures from HFR, the hedge fund data provider.

“Fund of funds in general is going through a lot of changes,” says Mr Ghali. “Many are struggling and trying to attract volume.”

LumX says it expects the business to be profitable in the third quarter but declines to estimate when the group as a whole will return to profitability.

EY’s Geneva branch made the disclosure on the accounts in what is called an “adverse opinion,” the most severe degree of warning that an auditor can give.

Adverse opinions are “incredibly uncommon” and public disagreements between company management and auditors are rarer still, says Chris Higson, a professor in the accounting faculty at London Business School.

“In public it’s incredibly rare,” he says. “These things happen in private, we are led to believe.”

He says the auditor’s stance is evidence that it is doing its job robustly at a time when the auditing sector is under scrutiny after a string of corporate failures.

EY says it does not comment on its clients or the companies it audits.

Adding to LumX’s woes is the revelation that the company is embroiled in a dispute with one of its investors — and a board member.

Mr Busson wrote that the board was seeking the removal of Patrick Maloney, a non-executive director, after an agreement with the Hong Kong-based investor turned sour.

Last year LumX disclosed a deal with China Silver Asset Management, which is headed by Mr Maloney, to issue SFr4.5m ($4.5m) in bonds to a fund it managed.

However the agreement has run into difficulty and LumX says China Silver failed to pay SFr2.5m in the second half of the year.

It says the dispute between the parties “is ongoing” and that it will recommend the removal of Mr Maloney at its annual meeting, although no date is set.

Talks are taking place between LumX and China Silver, according to a person with knowledge of the situation. Mr Maloney, a former board member at Tullett Prebon who has worked in the financial industry in Hong Kong since the early 1990s, declined to comment.

For its part LumX says its directors “consider that there continue to be significant uncertainties related to events or conditions that may cast significant doubt on the group’s ability to continue as a going concern”.

But it also disagrees with EY, arguing the assumptions used in its own impairment testing are “adequately substantiated” and that the performance of its risk analysis business alongside a recent funding injection “give assurance . . . that the value of goodwill will be recovered”.

Damaging as it is in publicity terms, there are no regulatory consequences as a result of the auditor’s conclusion.

The Swiss stock exchange says that, having reported its financial results ahead of a deadline agreed with the exchange, LumX has fulfilled its obligations.

Although LumX said in March it would be relinquishing its Swiss mutual fund licence, it remains regulated, for now, by the Swiss Financial Market Supervisory Authority.

“As a supervisor with a risk-based approach we are in contact with all supervised companies, the intensity depends on their individual and actual risk situation,” the body says, adding that it cannot comment on individual companies.

LumX is also regulated by Britain’s Financial Conduct Authority, which declined to comment.

Prof Higson says the disagreement with the auditors is unlikely to have direct legal consequences but will be a red light for any prospective investor.

“The indirect effects could be drastic. Asset management businesses are vulnerable to sentiment,” he says.

Quaero Capital, a Swiss fund manager and a top-five shareholder with an 11.3 per cent stake according to the annual report, declined to comment.

UK asset manager Artemis, a top-five shareholder in LumX, holds 5.8 per cent of the firm through its Artemis Alpha Trust. Describing itself as a long-term investor, the UK fund manager says it continues to hold LumX but did not comment further.

LumX is pinning its hopes for growth on LumRisk and LumMap, its risk analysis and fund platform subsidiaries.

“The business has outlined to both its investors and regulators a clear recovery plan and has now raised additional funding to pursue this,” Mr Busson said in an emailed comment when asked what he could say to restore confidence. He told the FT that his appearances in gossip columns were a hindrance in his professional life.

LumRisk, which provides risk analysis to institutional investors who hold large portfolios, recently received SFr7.5m funding from unidentified investors.

“They [the directors] think that LumRisk is their saving grace,” a former employee says. “Employees are definitely behind LumRisk.”

Additional reporting by Peter Smith