Citigroup’s recent bailout of its Asta and Mat hedge funds once again demonstrates to the investing public and to Wall Street that hedge funds ? whether you invest in them or manage them ? are not for the faint of heart. Francesco Guerrera wrote in the Financial Times online (ft.com) on March 11, 2008 that Citigroup has been forced to launch a $1 billion bailout of six internal hedge funds because of the turmoil in the once safe municipal bond market. Citigroup has agreed to inject $600 million in additional capital and pledged another $400 million to shore up the funds.
Fear that mounting losses on mortgage-related products might cause bond insurers to lose their coveted triple-A rating has thrown the municipal bond market into disarray. As the price of municipal bonds plunged, the Asta and Mat funds sold to Citigroup brokerage clients and wealthy private bank customers were subject to margin calls by prime brokers.
Citigroup’s bailout reflects the risks to many Wall Street firms who have set up or bought hedge funds in an attempt to boost trading profits and secure high fees from investors. It also reflects the risk to investors in hedge funds.
Investors in hedge funds are handicapped by the lack of transparency in their investments. If Citigroup had not bailed out these funds, the investors would have suffered large losses. Even with the infusion of capital, the ultimate consequences of investing in the Asta and Mat funds for investors remains uncertain.