Citigroup Inc. (C) has moved Ramakrishna Putcha, a former proprietary trader, into an internal hedge fund that makes bets with about $200 million of the firm’s money after the portfolio slid 14 percent last year.
Putcha, 61, was named co-portfolio manager of a credit fund in the Citi Capital Advisors unit, or CCA, according to Danielle Romero-Apsilos, a spokeswoman for the New York-based lender. For now, Citigroup owns about 97 percent of the fund and bank employees own the rest, according to a person with direct knowledge of the operation.
Chief Executive Officer Vikram Pandit, a colleague of Putcha’s for almost three decades, is among Wall Street bosses grappling with the new Volcker rule, which is designed to restrict banks from gambling with shareholders’ money through hedge funds and the proprietary trades that were Putcha’s specialty. The bank has disclosed plans to withdraw cash from hedge funds and replace it with assets from outside investors.
“If they can improve performance, they may be able to avoid a loss and perhaps realize a return as they attract money from third-party investors,” said Charles Whitehead, a professor at Cornell Law School in Ithaca, New York. “Better to go ahead and hope for the performance to turn around than close it down and take the loss now.”
Whitehead, who published a paper last year about the Volcker rule’s impact, was a Citigroup executive until 2004 and has no personal knowledge of the company’s hedge-fund strategy.
Putcha’s presence may boost returns at the Strategic Credit Fund, which lost 14 percent last year, people who were invited to invest said in February. Credit funds gained 0.6 percent on average in 2011, according to data compiled by Bloomberg.
“There is a risk in backing the fund, since it may continue to perform poorly,” Whitehead said in an e-mail. “But over time, continued support may yield higher returns.”
The fund is outperforming peers so far this year, returning about 6 percent through the end of May, according to the person, who asked for anonymity because the results are not public. Credit funds climbed 4 percent for the same period, data compiled by Bloomberg show.
“This fellow is one of those unique baseball players who constantly gets singles and doubles -- he’s not hitting a home run and then striking out,” said Bradley Hintz, an analyst with Sanford C. Bernstein & Co. and a former Morgan Stanley treasurer. “This is certainly one of the names I would like to keep if I were Vikram.”
Putcha is working with Fred Hoffman, 47, who oversees a group of Citigroup credit funds, according to the bank. The Strategic Credit fund trades in riskier bonds and collateralized loan obligations, or CLOs, the person said. CLOs are derivatives that pool high-yield, high-risk loans and slice them into securities of varying risk and return.
Former Morgan Stanley executives Jonathan Dorfman and James O’Brien oversee CCA, which manages about $18.6 billion overall, including money for clients. About $5 billion of this is shareholders’ cash, according to another person familiar with the matter, who requested anonymity because the data is confidential.
Citigroup does not disclose whether the CCA division makes a profit. CCA’s hedge funds invest in assets including subprime mortgages to people with weak credit, leveraged loans and high- yield European bonds and distressed debt, according to the bank’s website. The unit also operates venture-capital and private-equity funds.
Regulators are pushing banks to cut riskier trades as they draft the Volcker rule, named after former Federal Reserve Chairman Paul Volcker. The proposed rule would bar banks from owning more than 3 percent of hedge funds and private-equity funds and from investing more than 3 percent of Tier 1 capital in the funds. The Volcker rule is not yet in effect.
The bank will let managers of its hedge funds acquire part of the business in advance of the Volcker rule’s proposed restrictions, Citigroup Chief Operating Officer John Havens said in February. This stake will increase as the lender takes out its own cash, Havens said.
The Volcker rule also would ban banks’ trading desks from buying and selling stocks and bonds for their own benefit, known as proprietary trading. Putcha worked for the Principal Strategies team, Citigroup’s proprietary-trading unit, until the bank shuttered the desk earlier this year, citing “regulatory initiatives and changes.” The team was partly responsible for equities-trading revenue plunging by $1.3 billion in 2011, Citigroup said.
Putcha and Pandit
Most of Putcha’s colleagues were expected to leave the company, according to the memo. Sutesh Sharma, the London-based head of the unit, intends to start a hedge fund, people familiar with the plan said last August.
Putcha’s career has followed Pandit’s for almost three decades. The two are originally from India -- Putcha from Hyderabad, Pandit from Nagpur -- and they joined New York-based Morgan Stanley within two years of each other in the 1980s. Putcha became a managing director, using the firm’s money to buy and sell bonds, while Pandit rose to head of sales, trading and investment banking.
Pandit, 55, quit Morgan Stanley in 2005 after a dispute with then-CEO Philip Purcell. He founded a hedge fund called Old Lane Partners LP and lured Putcha and other Morgan Stanley traders to the firm. Citigroup bought Old Lane in 2007 for $800 million, in a deal that returned about $165 million to Pandit and led to him becoming CEO. The bank shut Old Lane soon after Pandit became CEO, taking a $202 million writedown.
The Old Lane traders moved into different parts of the bank. Putcha is now among former colleagues Mukesh Patel, Kevin Bespolka and Manu Rana, who help to run CCA hedge funds as they wait for regulators to complete the Volcker rule.
“He’s a really good prop trader,” said Hintz, who worked with Putcha at Morgan Stanley. (MS) “Why would you want him? Because he’s able to generate stable returns. Can you keep him? That’s a different issue.”
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