Citigroup Puts $800M in Own Hedge Funds

By Donal Griffin and Bradley Keoun - Nov 7, 2011 12:00 PM GMT+0700

Citigroup Inc. (C), the third-biggest U.S. lender, invested about $800 million of shareholder’s money in its own private-equity and hedge funds during the third quarter as regulators seek to curtail the practice.

The bank invested the money in “Citi-advised” funds while selling $1.1 billion of separate hedge-fund and private-equity assets, New York-based Citigroup said in a Nov. 4 filing.

Regulators are drafting the so-called Volcker rule, which aims to restrict banks that accept deposits from making bets with shareholder money. The proposed rule would prohibit the banks from owning more than 3 percent of hedge funds and private-equity funds and also from investing more than 3 percent of Tier 1 capital in the funds.

“The $800 million of purchases primarily relate to funding of previously committed investments in Citi’s private-equity and hedge funds, which are more than offset by divestitures and liquidations,” Danielle Romero-Apsilos, a Citigroup spokeswoman, said in an e-mailed statement. “We continue to make significant progress toward meeting the requirements of the Volcker Funds portion of the new financial bill.”

The bank invested in funds managed by the Citi Capital Advisors unit, or CCA, which is run by former Morgan Stanley (MS) executives Jonathan Dorfman and James O’Brien. The division manages private-equity, venture-capital and hedge funds, according to its website. CCA’s managers seek to gain from assets including European corporate debt, subprime mortgage bonds and Indian infrastructure while also betting on global trends and emerging-market bonds.

$5 Billion

CCA manages about $5 billion of Citigroup’s money, a person familiar with the matter said in May. The division also handles money for external clients, a business that will be unaffected by the Volcker rule, which is named for former Federal Reserve Chairman Paul Volcker. CCA oversees about $18.8 billion in total, Romero-Apsilos said.

“Citi has a relatively low percentage of Tier 1 Capital deployed to hedge-fund and private-equity investments,” Romero- Apsilos said. “We are committed to growing our Citi Capital Advisors business as an institutional alternative asset manager of third-party investor capital.”

Funds in the Citi Holdings division also gained from the investments, Romero-Apsilos said. That unit had about $1 billion of assets in “retail alternative investments” at the end of September, according to a company presentation. Chief Executive Officer Vikram Pandit, 54, formed Citi Holdings to manage and sell unwanted assets after the bank received a $45 billion taxpayer bailout in 2008.

Difficult to Value

Citigroup classified the $800 million of investments as so- called Level 3 assets, according to the filing. These assets are difficult to value because market prices aren’t available and the bank has to rely on in-house models to calculate potential gains or losses. The bank had a net decrease in Level 3 investments of $1.3 billion for the quarter, the filing shows.

The bank didn’t disclose the funds that received the investments or how they performed this year. CCA’s Global Macro Fund, managed by Kevin Bespolka, is down about 3 percent through September, according to data compiled by Bloomberg. The fund bets on “interest-rate and currency-market volatility,” according to the bank’s website. A Bloomberg index of other so- called macro funds, whose managers bet on global trends, fell 3.9 percent, the data show.

Romero-Apsilos declined to comment on how much of the bank’s capital is currently invested in the funds. CCA’s Mortgage/Credit Opportunity Fund, run by Rajesh Kumar, manages $395 million, about 90 percent of which is Citigroup’s, a person familiar with the matter said in May.

‘Proprietary Capital’

Another investment vehicle, the Event Driven Fund, manages “only proprietary capital,” according to an April 2010 marketing brochure obtained by Bloomberg News. The fund is run by Mukesh Patel, a risk-arbitrage trader.

Citigroup shut its Quantitative Strategies fund this year after manager Shakil Ahmed became head of electronic market- making. The fund managed about $400 million and had no outside investors, a person familiar with the matter said in June.

“This doesn’t strike me as a shift in investment strategy because it’s only $800 million,” Charles Whitehead, an associate professor of law at Cornell Law School in Ithaca, New York, said in a phone interview. “It strikes me as relating to something else involving those hedge funds and private-equity funds. If it were part of an investment strategy, it would be an odd thing to do in light of the impending Volcker rule.”

To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.