More Hedge Fund Problems at Citi?


Bloomberg reports that Citigroup invested approximately $800 million of shareholder’s equity in its own private equity and hedge funds during the third quarter, despite knowing that regulators are busy drafting the Volcker rule, which would curtail the practice. Citigroup reportedly classified the $800 million as Level 3 assets, which are illiquid assets that are valued by in-house models.

The proposed Volcker rule, named after former federal Reserve Chairman Paul Volcker, who is credited with slaying the inflation dragon in the 1970s and early 1980s, would restrict banks that accept deposits from making bets with shareholder money. More specifically, it would prohibit banks from owning more than 3 percent of hedge funds and private-equity funds, and restrict any such investment to no more than 3 percent of Tier I capital.

If Citigroup’s investment of $800 million in hedge funds or private equity funds was part of an investment strategy, “it would be an odd thing to do in light of the impending Volcker rule,” Charles Whitehead, an associate professor of law at Cornell Law School, was quoted as saying.

Citigroup did not identify which funds that received the $800 million or how they have performed this year. Some possible candidates include: (i) The Citi Capital Advisor Global Macro Fund, which bets on “interest-rate and currency-market volatility, is reportedly down about 3 percent through September 30; (ii) the Citi Capital Advisor Mortgage/Credit Opportunity Fund, manages $395 million, about 90 percent of which is reportedly Citigroup’s; and (iii) the Event Driven Capital Fund reportedly manages only proprietary capital.

It is difficult to tell whether the foregoing is indicative of serious problems with these funds. It should be noted, however, that in 2008, Citigroup infused hundreds of millions of its own dollars into municipal arbitrage hedge funds named MAT, ASTA and Falcon in order to try to keep them afloat as they imploded. Ultimately, however, the MAT, ASTA and Falcon became major liabilities for Citigroup.

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