Citi will move Sutesh Sharma and at least 3 members of his prop trading unit, Citi Principal Strategies, to the firm’s hedge fund, Citi Capital Advisors, to avoid complications regarding the Volcker Rule’s new regulations, says Bloomberg.The move highlights how Citi needs to keep around talent that can attract outside investors. The firm already lost long-short equity guru, Matt Carpenter, in February. Now Sutesh Sharma is one of Citi’s highest profile prop traders.
Sharma is also close to Vikram Pandit. The pair left Morgan Stanley to launch the hedge fund, Old Lane, with $4 billion, making it the second largest hedge fund launch at the time. (Old Lane was later bought by Citi.)
Even though Citi has said multiple times that prop trading is a tiny part of their business (Pandit: “Proprietary trading is not a big part of our business at all.”), attracting outside investors to Citi’s internal hedge fund might allow Citi to continue to prop trade with the firm’s money.
Thanks to a line in the Volcker Rule which specifies trading “operations unrelated to customer operations,” as long as the “prop trading” is done for client-related purposes, it’s OK.
So Pandit’s plans for Sharma seem to be changing his role from “prop trader within Principal Strategies” to “asset manager for clients within Citi Capital.”
Citi Capital Advisors mostly oversees money for outside investors, said the people, speaking anonymously because the talks are preliminary. The bank would set up the traders as hedge-fund managers and seed their funds, then raise money from outside investors to redeem its stakes.
This explanation of Citi’s plans for Sharma are also interesting because they might help explain how Goldman and other banks plan to deal with the Volcker Rule.
We found out yesterday that Goldman (probably) plans to move their prop traders to client-related positions, but were unsure how the prop traders new roles would be defined.