Investors in Absolute Capital Management are poised to demand a full investigation into the strategy of Florian Homm, the flamboyant former chief investment officer whose sudden departure last month plunged the $3.2 billion (£1.5 billion) AIM-listed hedge fund into a financial crisis.

The leading lawyer representing Absolute shareholders said yesterday that they would be demanding a thorough explanation of why as much as $500 million (£244 million) of Mr Homm’s investments had turned out to be in lightly regulated and illiquid American stocks, listed only on bulletin boards and traded over the counter. He said that investors had been unaware of the nature of the funds’ holdings.

Many Absolute investors found themselves looking at big losses after it emerged in the days after Mr Homm’s disappearance that a substantial amount of his holdings had been in bulletin board, or “pink sheet” stocks. This forced Absolute to propose an emergency restructuring of the funds, hiving off the hard-to-exit holdings into “side pockets”. Investors voted through the move at an emergency meeting over the weekend.

William Rodger, the financial litigation partner at Simmons & Simmons, which has been working for the Absolute Investors Action Group, said that the agreed restructuring was not the end of the matter for shareholders. He told The Times: “There will have to be an investigation into how the funds got into this position. My clients want explanations as to what has led to this situation. In this case, they now find themselves invested in these illiquid securities. It is accepted that they may find they have lost money.”

Mr Rodger declined to be drawn on the Action Group’s next move before discussions with investors that are expected to take place this week, but he ruled out the need for a criminal investigation.

Absolute Capital declined to comment on Mr Homm or his investment strategy, stating that it was concentrating on rebuilding the business and implementing the restructuring. Mr Homm, whose whereabouts are unknown, could not be reached.

The hedge fund will formally tell the stock market today that shareholders had voted in favour of restructurings at four funds, including the Absolute Octane Fund that was widely held by members of the Action Group. The group had joined forces with funds advised by Walkers, another law firm. Together they could have blocked the proposals.

Mr Rodger said that investors had voted in favour of the proposals because of concessions made by Absolute last week. Investors had been particularly concerned about the level of performance fees for Absolute’s managers, who could have reaped a substantial windfall if the fund rebounded in value once the restructuring had been approved. Absolute’s share price, which slumped 70 per cent in the days after Mr Homm’s exit, is expected to gain ground this week.

“Another major concern was the lack of management skills to deal with the illiquid portfolio; we wanted to see an action plan and they agreed to appoint three investment professionals,” Mr Rodger said. He added that the group “wanted to have a say in the work-out going forward”, and that Absolute had agreed to establish an investors committee to monitor its progress. Absolute said it was “very pleased the company can now get back on to a level footing”.

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