Mystery is shrouding the apparent collapse in the last few days of Dynamic Decisions Capital Management, the London-based hedge fund management operation led by Italian university professor Dr Alberto Micalizzi.

According to press reports, two of the major investors in the firm’s DD Growth Premium hedge fund – Strathmore Capital and Cadogan – have filed a lawsuit in the Cayman Islands calling for the funds to be placed into liquidation and alleging “gross mismanagement and malfeasance” on the part of the investment manager.

Meanwhile, Micalizzi has been prohibited by the directors of the fund from communicating directly with investors. In a letter to “friends” that was circulated yesterday, Micalizzi disputes the press reports, stating that he “vehemently” denies the “unfounded allegations”.

The news article referred to a broadcast to investors on 13 March in which Micalizzi was supposed to have said that the fund “had substantial losses last year and that assets may have fallen as low as $20 million, excluding illiquid assets, from $550 million at the end of 2008”.

However, Micalizzi states – which has been confirmed by others with knowledge of the matter – that he was not on the investor call, which was actually run by the board of the fund.

“I was not allowed to attend and present my views,” said Micalizzi in his letter, which was expressly sent to ‘non-investors’ only. “Since 27 February my colleagues at DDCM and I have been prohibited by the board from communicating with investors. I will be addressing this and other issues raised with legal counsel in due course.”

Details are sketchy. But some sources say that problems began to surface last year involving issues such as the late calculation and confirmation of NAVs and a switch of prime broker away from Morgan Stanley that appears not to have been communicated properly to investors.

Despite the fact that at least some of the firm’s investors are said to have started redeeming their money towards the end of last year, Dynamic Decisions was itself continuing to report growth in assets – claiming assets under management of some $550 million at the end of last year in the two versions of the DD Growth Premium fund.

But what is clear is that something very odd happened late last year with the investment strategy of the fund, which had been a quant-based pairs trading strategy focusing on liquid large-cap European stocks – and which had appeared to perform well since its inception in January 2005 and especially well in the hideous equity market environment of 2008.

However, it appears that Micalizzi and his colleagues embarked on a dramatic change of course in the final months of last year – investing much of the fund in asset-backed bonds that were convertible into oil.

In his own account, Micalizzi says this was done to protect the fund and its investors from the massive spike in options market volatility starting in September after the Lehman collapse – which, according to him, made the pairs trading strategy impossible to operate.

“In order to seek shelter from this volatility, we took a position in asset-backed bonds convertible into oil to temporarily ride out the storm and preserve value for and in the fund,” he wrote in his circular.

However, Micalizzi goes on to say that – while he was attempting to sell the bonds in February – the board of the fund received legal advice that raised questions relating to the counterparties to the oil sales contracts that lie behind the bonds.

According to the letter, both the board of the fund and Micalizzi/DDCM have separately engaged consultants to undertake investigations into the counterparties and the bonds themselves.

“It is my honest belief that the bonds are genuine and have value - and can still be sold so as to pay out redeeming investors and creditors in whole or in part,” says Micalizzi.

Micalizzi says he is cooperating fully with all parties, including the provisional liquidators appointed to the two Dynamic Decisions feeder funds – and that the only reason that investors have been unable to reach him is that he has been prohibited by the board from speaking to them about the situation.

At this stage, the only certainty seems to be that there will be more bizarre information to emerge – with one investor describing the situation as “simply staggering”.

“I look forward to reporting back to you as this set of circumstances unfolds,” said Micalizzi as the parting shot in his letter.