April 13 (Bloomberg) -- Citigroup Inc. agreed to buy hedge- fund manager Old Lane LP and put co-founder Vikram Pandit in charge of the bank's private-equity, real estate and hedge-fund investments. Terms weren't disclosed.

Pandit, 50, co-founded New York-based Old Lane with former colleagues from Morgan Stanley, where he ran investment banking and trading. He will oversee $59 billion as chief executive officer of Citi Alternative Investments, New York-based Citigroup said today in a statement.

Banks including Morgan Stanley are buying hedge funds to attract more fees and business from wealthy clients. JPMorgan Chase & Co. bought a controlling stake in Highbridge Capital Management LLC in 2004. The unit now manages more than $20 billion, which helped JPMorgan overtake Goldman Sachs Group Inc. last year to become the largest U.S. hedge-fund manager.

``Ultimately this is about talent development with an end game in bolstering Citigroup's capital-markets business,'' Howard Mason, analyst with Sanford C. Bernstein & Co., said today in an interview. He has an ``outperform'' rating on the shares. ``The question is: Can you keep the people?''

Citigroup plans to cut annual spending by $4.6 billion over three years and eliminate 17,000 jobs to align costs with more-profitable rivals. Shares of the biggest U.S. bank have fallen 8.5 percent since rising to a record in December. Pandit's unit won't see cutbacks, according to an internal Citigroup memorandum.

Pandit Joins Management

The division ``does not have additional reductions to implement at this time,'' interim chairman and CEO Lewis Kaden said in the memo April 11. ``That said, it is extremely important that we continue to keep a careful and watchful eye on containing costs.''

Pandit will join the bank's operating and management committees. He's is not considered a successor to Chief Executive Officer Charles Prince, Stephen Volk, the bank's vice chairman and senior client adviser, said today in an interview.

Three other Old Lane managers will join Citigroup's management committee, according to the company.

Old Lane has $4.5 billion in assets under management and 120 employees in New York, London, Mumbai and Chennai, India.

Falling Shares

Prince's cost-cutting plan and the announcement Feb. 25 that American Express Co.'s Gary Crittenden would join as chief financial officer hasn't stopped a slide in Citigroup shares. The stock fell 5 cents to $51.60 in New York Stock Exchange composite trading. That's 8.5 percent below the record close of $56.41 in December and brings this year's drop to 7.4 percent.

``This transaction is an investment as much as it is an acquisition,'' Prince said in today's statement, citing the 20- year track records of Pandit and John Havens, an Old Lane co- founder who was head of equities at Morgan Stanley.

Kaden has been running the alternatives division since Michael Carpenter resigned as its chief a year ago. The unit has 875 employees, with $10.7 billion of the bank's own capital invested in its businesses, including hedge funds and venture capital.

Citigroup agreed to pay $800 million for Old Lane, the Wall Street Journal reported today.

Since June, Morgan Stanley has invested in hedge funds including Oxhead Capital Management LLC, Avenue Capital Group, FrontPoint Partners LLC, Lansdowne Partners LP and Brookville Capital Management. Lehman Brothers Holdings Inc. bought 20 percent of D.E. Shaw & Co., the fourth-largest hedge-fund company, last month.

Comparing Returns

Clients of hedge funds pay fees averaging 2 percent of assets and 20 percent of investment profits. The loosely regulated investment pools can bet on falling as well as rising market prices, and managers gain substantially from profits on money invested.

Dean Barr currently runs Citigroup's Tribeca hedge-fund unit. Tribeca uses a multistrategy style of investment similar to Old Lane's. Tribeca has $2.5 billion in assets and produced an 8.5 percent return last year. That compared with the 13 percent average return by hedge funds globally in 2006, according to Chicago-based Hedge Fund Research Inc.

Tribeca also lags behind its peers so far this year with a 1 percent gain through March, compared with an industry average of 2.9 percent.

Pandit left Morgan Stanley in March 2005 during a power struggle after running its biggest and most-profitable division, institutional securities, for five years. Pandit is credited with creating an electronic trading system that cut transaction costs 50 percent from 2002 to 2004 and with helping the firm win more stock offerings.

Ex-Prof

Pandit was a professor at New York's Columbia University before joining Morgan Stanley as a banker in 1983. He started Old Lane with two former colleagues from Morgan Stanley, Havens, and Guru Ramakrishnan, who ran trading technology and new products.

The fund manager started with $3.7 billion in assets, the second-largest start by a hedge fund in 2006, according to London-based HedgeFund Intelligence.

To contact the reporters on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net; Joseph N. DiStefano in New York at jdistef@bloomberg.net.

Last Updated: April 13, 2007 19:14 EDT