Vikram Pandit excelled in hedge fund business but not Citigroup

Vikram Pandit knows one way to make big money in hedge funds: sell them.

In July 2007, Pandit sold Old Lane Partners LP to Citigroup Inc for $800 million and pocketed $165 million for his stake. Then he took over the bank's in-house hedge-fund group, now called Citi Capital Advisors, or CCA. He became chief executive officer of the whole company just five months later.

After the financial crisis, Citigroup closed some funds -- it won't say how many -- and investors fled others. As of mid- February, it managed $18.6 billion. The last time Citi told shareholders how CCA performed was the first quarter of 2008, when the unit lost $509 million. Four of Citi's seven biggest hedge funds have underperformed their indexes since they started, according to investors. Five of the seven lost money in 2011.

Pandit persevered. Since 2008, he has opened or purchased at least six new funds. In the third quarter of 2011, he invested $800 million of the bank's own money -- not cash from investors or clients -- into CCA, even as traders from Goldman Sachs Group Inc. (GS) and other banks were jumping ship to start their own hedge funds in advance of the Volcker rule.

Volcker Rule

That law, championed by former Federal Reserve Chairman Paul Volcker and made part of the Dodd-Frank Act, says a deposit-taking bank's proprietary capital can't account for more than 3 percent of any hedge fund.

In at least four of Citi's funds, half or more of the assets have come from Citi's own balance sheet during the past two years, not from investors or clients of its private bank, according to interviews with people familiar with the funds and documents obtained by Bloomberg Markets. That has to change by the time the Volcker rule is fully implemented; it is scheduled to take effect in July and includes a two-year transition period.

So, in February, Pandit capitulated. John Havens, Citigroup's chief operating officer and the chairman of CCA, told Bloomberg News that the bank planned to sell a "significant" portion of CCA to managers of the group.

Best Talent

The organization will ultimately be independent of Citi, which will help hedge-fund and private-equity managers raise money from outside investors, says Havens, 55, who worked with Pandit when both were executives at Morgan Stanley (MS) and co- founded Old Lane with him.

"Clients like independent, alternative asset managers," Havens says in his office in downtown Manhattan. "You can attract the best talent in the owner-operator model."

Citi plans on keeping a stake in CCA, although the percentage will drop as assets from outside investors come in and the bank takes its own money out of the funds, Havens says.

Source: EconomicTimes