Citi Managers Will Own Part of Hedge Fund Unit

by Jon Lewin on February 17, 2012

Managers of the Citi Capital Advisors division, or CCA, will receive a significant” stake in managing the funds, says chief operating officer John Havens, Bloomberg reports.  The move will come as Citigroup withdraws its own money in compliance with the forthcoming Volcker rule, which limits banks that take deposits from placing bets using their own capital.

“Our competitors are an owner-operated model,” Havens told Bloomberg. “It was always in the plans but you have to actually have a business that you’re comfortable with to go do it.”

Under the Volcker as it is currently proposed, banks could not own more than 3% of hedge funds and private-equity funds. They could not invest more than 3% of Tier 1 capital in funds.

“We’re trying to create a client-centric, alternative asset-management business, and this is the final stage of putting that in place,” Havens said. “Clients like independent asset managers.”

In August, Citigroup said that CCA managed $18.2 billion in hedge, private-equity and venture-capital funds, with former Morgan Stanley executives James O’Brien and Jonathan Dorfman in charge.  At least $5 billion of Citigroup’s money was in the funds. In the third quarter, Citigroup invested around $800 of its own money in internal hedge and private-equity funds.

If Citigroup wants to keep the funds open once they withdraw their money, they will need to attract capital from external sources. If the company wanted to keep their $5 billion with CCA and meet the 3% cap of the Volcker rule, they would need to raise $161.7 billion from external investors.

Havens said that offering stakes in CCA will enable Citigroup to attract leading managers.

Havens would not say if Citigroup would keep shareholder money in the funds after the Volcker rule goes into effect.

“We are a big believer in alternative asset management and we have huge faith in the management team at CCA,” Havens said. “I don’t put money in businesses I don’t like.”

Havens said that “We are pleased with the performance in that, on an asset-weighted basis, we’re top quartile in our hedge-fund strategies.”

Net income at the securities-and-banking division, which holds Citigroup’s trading and investment-banking divisions, fell 24% in 2011 to $4.86 billion.

Havens would not give out CCA’s 2011 performance, but that won’t be a problem once the Volcker Rule goes into effects, since shareholders will no longer have to worry about the bank risking their own money in such ventures.

Jon Lewin is a Feature Writer for the Compliance Exchange and Wall Street Job Report. He is also a columnist for the Faster Times and a blogger for Subway Squawkers. Lewin’s work has appeared in the New York Daily News, Huffington Post and Digital Innovation Gazette as well as the “Cambridge Companion to Baseball” and the Daily News history essay collection “Big Town Big Time.”

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