Citigroup Inc. is seeking to raise money for a new hedge fund without putting its own cash into the venture, in a test of investors’ willingness to buy in when the bank isn’t sharing risk, said two people briefed on the plan.
The lender, which is preparing for U.S. curbs on lenders investing their own capital, seeks to raise $50 million to $75 million from outside investors for the fund, said one of the people, who asked not to be identified because Citigroup hasn’t disclosed the information publicly. The pool will trade in so-called collateralized loan obligations, or CLOs, according to marketing materials obtained by Bloomberg News.
Chief Executive Officer Vikram Pandit, 55, who helps oversee a group of company-owned hedge funds, is grappling with the advent of the Volcker rule, which seeks to restrict banks from owning more than 3 percent of any fund. New York-based Citigroup has said it plans to withdraw cash from other funds, some of which exceed the proposed rules, and replace it with money from outside investors.
“It’s as close as you can get to what Volcker was trying to achieve,” said Gerald Hanweck, a former Federal Reserve economist who’s now a finance professor at George Mason University in Fairfax, Virginia. “If the fund collapses, fine. If it doesn’t, fine. There are no ramifications at all for the corporation.”
The fund will be part of the Citi Capital Advisors unit, or CCA, which contains Citigroup’s venture-capital, private-equity and hedge funds. CCA manages about $18.6 billion, including about $5 billion that belongs to the bank, a person familiar with the matter said last month.
Serhan Secmen will run the fund, which will focus on the riskier parts of CLOs, according to the documents. CLOs are derivatives that pool high-yield, high-risk loans and slice them into securities of varying risk and return. Secmen, who previously traded CLOs for Lehman Brothers Holdings Inc., will report to Fred Hoffman, who oversees a group of internal credit funds, the documents show.
Citigroup, the third-biggest U.S. bank by assets, is seeking outside investment for other CCA funds so it can withdraw its own money to comply with the Volcker rule, named for former Fed Chairman Paul Volcker. Most of the cash in Hoffman’s $200 million Strategic Credit Fund and the $400 million Mortgage/Credit Opportunity Fund belongs to shareholders, people familiar with the matter said in February.
Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment. The marketing of the fund was reported earlier by Absolute Return + Alpha, published by Euromoney Institutional Investor Plc.
Institutional investors prefer employee-owned hedge funds, such as those run by Bridgewater Associates LP and Brevan Howard Asset Management LLP, said Don Steinbrugge of Agecroft Partners LLC, a Richmond Virginia-based advisory firm. Bank-managed funds have suffered from instability as employees left to start their own firms, Steinbrugge said.
Citigroup plans to let employees acquire part of the CCA unit, said Chief Operating Officer John Havens.
“Our competitors are an owner-operated model,” Havens said in February. “Clients like independent asset managers.”
Investors in funds managed by banks such as Citigroup also prefer that the firm take a stake, Steinbrugge said. The Volcker rule’s restriction will hurt banks’ ability to market internal funds as a result, he said.
“People want to invest in a fund where the person managing the fund has skin in the game,” he said. “They want to make sure that the hedge fund’s interests are in line with investors.”