Absolute Capital Management, the $3.25 billion (£1.6 billion) London-listed hedge fund, was fighting for its survival yesterday after investors rushed for the exit in the wake of the departure of Florian Homm , its co-founder and former chief investment officer.

Absolute said that it would be forced to freeze some of its $2 billion of equity funds after it received $100 million of redemption notices following Mr Homm’s highly charged public exit.

The colourful Mr Homm, a 6ft 6in tall specialist in the German market, resigned in public yesterday, accusing the board of failing to reward the company’s top portfolio managers and claiming to have sacrificed his bonus in the interests of the business.

Mr Homm remains Absolute’s largest shareholder, despite having injected €33 million (£23 million) of his stake into funds that he managed in order to keep them afloat last month.

However, in a bitter twist for the hedge fund, which was listed only last March, Absolute admitted that as much as $500 million of “event-driven” equity investments managed by Mr Homm had been channelled into obscure American companies. These “pink sheet” investments were little regulated and mostly traded over the counter, Absolute said. This means that it could be difficult to exit, with a sale realising a lot less than the current mark-to-market value.

Shares in Absolute slumped 47 per cent yesterday, closing down 56p at 62½p. The hedge fund’s market value has collapsed from £389 million at the beginning of the week to about £65 million yesterday.

Jonathan Treacher, the chief executive of Absolute, said that the company would spend the coming days trying to convince investors not to withdraw more funds. He said that it was not clear how many investors were trying to redeem cash, although he acknowledged that “people have been calling up all over the place” in an effort to establish what was going on.

Mr Treacher, who has been in his job only since mid-August, said that Absolute’s future would become clear “over the next week”. He admitted that if Absolute were to suffer “a big run of redemptions” it would be forced to sell off assets to meet repayments.

He said: “What you want to avoid is being a forced seller of assets. The most important thing we can do is preserve investors’ money in the funds.

“We are looking at all options. Our first is to go to the people who are investors in the funds.”

Mr Treacher, who emphasised that “the ship has not sunk”, said that his options include freezing the funds to prevent further withdrawals and, if necessary, calling in administrators to arrange an orderly sale of assets.

Sandy Chen, an analyst with Panmure Gordon, cut his price target on Absolute from 750p to 150p, after the hedge fund proposed a restructuring of the equity funds so that the illiquid assets were channelled into a “side pocket” share class.

Mr Chen 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 [Absolute] will face major redemptions. We also highlight the risk of investor lawsuits as an unquantifiable threat to earnings.”

Mr Chen said that the valuation problems “could prove fatal for the equity funds”.

Absolute operates a total of about $3.2 billion of assets under management and the company emphasised that more than $1 billion of this was unaffected.

Mr Treacher said that he had not been in contact with Mr Homm in recent days and suggested that legal action against against its former investment star was a possibility. He also dismissed complaints about the company’s bonus structure, claiming Mr Homm was being “disingenuous”.

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