International financial conglomerate Citigroup Inc. said on Wednesday it was shutting its Tribeca Global Investments hedge fund, in the first significant move since Vikram S. Pandit took over its alternative investment group.
The move is intended to eliminate about 50 jobs and improve performance as the division absorbs Old Lane Partners, a similar investment fund that Citigroup bought in April for more than $800 million (Rs3,280 crore) as a way to bring in Pandit and his partners. Old Lane, with about $4.25 billion in assets, will become a flagship hedge fund.
Still, the closing of Tribeca is the boldest step that Pandit has taken since early July, when he took control of the investment unit, a small and long-overlooked part of the global banking giant’s empire. And it comes at a time when other banks are retooling or scaling back their hedge funds in the wake of heavy losses from the crisis in the credit markets.
Bear Stearns, for example, said in July that it was forced to liquidate two asset management funds related to its exposure in the subprime mortgage market. In May, UBS closed Dillon Read Capital Management, its internal hedge fund.
Although Citigroup said it was not closing Tribeca because of losses, the fund has struggled. It gained 1.2% through July, according to Hedge Fund Research, compared with the 7.6% the average hedge fund gained. Tribeca lost 2.8% in August, bringing it to a 1.6% decline in the first eight months of the year.
“That is not the type of performance you would expect from a hedge fund with that type of resources and size,” said Bradley H. Alford, the former managing director of Duke University’s endowment, who now runs Alpha Capital Management in Atlanta.
Tribeca has about $2.4 billion in assets, with roughly $1.5 billion of that Citigroup’s money. Fund executives expect to return $500 million to investors over the next few weeks, a person involved in the matter said. That will allow Citigroup to take control of the fund, though it has not been decided whether its money will be transferred to Old Lane or invested elsewhere, this person said.
About $400 million in convertibles and Asian securities, belonging to both Citigroup and other investors, is expected to remain with the bank’s alternative investment group.
Citigroup also said it was establishing a “feeder fund” to allow individual investors in the bank’s global wealth management division to gain access to Old Lane. Previously, Old Lane took money only from institutional investors.
Citigroup executives suggested in a memo that the primary reason for closing Tribeca was related to strategy.
“We believe that we can best serve our clients by offering a single multi-strategy hedge fund platform,” wrote John Havens, who was a founder of Old Lane with Pandit and is president of the alternative investment group. “These are the first steps in creating a nimble organization, driven by performance and service.”
Tribeca Capital Management, which Citigroup began in 2004, had been troubled by bloated costs and weak results since it was founded. It has had four managers over the last three years.
But in the last two years, as rivals such as JPMorgan Chase reaped windfalls from their hedge funds, executives said that bolstering Tribeca and the overall alternative investment unit at Citigroup vaulted to the top of the list.
Yet the company’s chairman and chief executive, Charles O. Prince III, did not leap to a decision. The top job at the unit was left vacant for more than a year, after the departure of Michael A. Carpenter in March 2006. Only in April did he recruit Pandit, a former Morgan Stanley investment banker, and his Old Lane partners.
Over the summer, Pandit and his people have had frequent discussions with several of Citigroup’s top executives, including Prince; Robert E. Rubin, the former treasury secretary who is chairman of the bank’s executive committee.
About 50 of Tribeca’s 90 employees, including portfolio managers and support staff members, were told that their jobs were being eliminated, a person close to the situation said. Most of the layoffs will be in New York. With a new management team in place, Old Lane’s partners will run the hedge fund’s operations. And in a memo to employees, Havens said that the company had “numerous single-strategy products” in place and would roll out new products shortly.
Tribeca, which had about 25 trading strategies, will contribute about four strategies that will be incorporated into future fund offerings, a person briefed on the situation said. NYT