Photo: flickr user: davehunt82
Last night Bloomberg Markets Magazine released a deep dive into Citigroup’s hedge fund ventures. Here’s the gist: The bank has invested a lot of money in hedge funds over the years, only to experience astonishing losses. Moreover, with Volker coming, the bank will have to rush to divest itself from its funds. It will have to move fastest on Citi Capital Advisors (CCA), its in-house hedge fund, which was managed by Vikram Pandit before he became Citi CEO. Now it’s headed by Jonathan Dorfman and James O’Brien.
In 2007, O’Brien and Dorfman put Craig Henick, a municipal bond fund manager, in charge of Citi’s muni arbitrage funds. To put it mildly, disaster ensued (from Bloomberg Markets Magazine):
In 2007, seven Norwegian towns, including Narvik, which lies above the Arctic Circle, lost $90 million investing in securities linked to a highly leveraged muni-bond fund Henick managed, according to a complaint filed in August 2009 in federal district court in Manhattan. Narvik was forced to shut off its street lights after the loss, the complaint says. The case is pending.
But that didn’t stop CCA from acquiring more funds. They bought Epic Asset Management in 2008, a New Jersey based shop run by two managers, James Duplessie and Herbert Seif, that had crashed and burned a fund in 1998, when the Russian economy crashed and Long Term Capital Management fell.
From the report, the acquisition doesn’t really seem like a good deal. Epic returned 30 per cent its first year (2003), but by 2007 it started losing and dropped 3 per cent, at the end of 2008 it was down 41 per cent.
And that’s when Citi decided to buy it. In October alone Epic was down 15 per cent, Citi bought it in November (from Bloomberg Markets Magazine).
Citigroup is now marketing a new fund, called the Middle Market Direct Lending Fund, to be run by Duplessie and Seif, even though Citi’s own cash made up 65 per cent of the existing distressed debt fund’s assets as recently as December 2010.