Citigroup’s hedge-fund returns jump as Volcker rule looms

Citigroup Inc. (C), which took a $45 billion U.S. bailout
after losses on subprime home loans, is boosting profits from a hedge fund that
bets the bank’s money on mortgage debt — a practice regulators plan to
restrict.

Citigroup’s Mortgage/Credit Opportunity Fund climbed 16
percent in the first four months of 2011, almost doubling its pace last year,
according to internal reports obtained by Bloomberg News. About 90 percent of
the $395 million invested in the fund is the bank’s own capital, said a person
with direct knowledge of the matter.

The fund, run by Rajesh Kumar, 41, has posted profits every
year since it began in 2008, letting New York-based Citigroup benefit from an
asset class that almost caused its collapse. The firm may seek new investors
for the vehicle before regulators implement the Volcker rule, which Congress
passed last year to force bank holding companies to cease bets with their own
money.

“If the Volcker rule gets defined the way it was originally
intended to be defined, then they’re probably going to need to divest their
interest,” said Charles Whitehead, an associate professor of law at Cornell Law
School in New York. “But why kill the goose before you have to?”

Citigroup, led by Chief Executive Officer Vikram Pandit, 54,
himself a former hedge-fund manager, invested the initial $200 million when
Kumar started the Mortgage/Credit fund. Kumar had joined the bank in 2008 from
New York-based Halcyon Asset Management LLC, where he was a managing principal.

Profits Every Year

He oversees investments for the bank in commercial and
residential mortgage bonds, including those tied to subprime loans. His team
also bets company money on real estate investment trusts, government bonds and
derivatives, internal reports show.

The fund returned 17 percent for the eight months of 2008
after its inception, 23 percent in 2009 and 26 percent last year, according to
the documents, which include estimates for this year’s performance. Annualized,
the 2011 return through April was about 47 percent.

“We remain bullish on the growth prospects of the overall
U.S. economy and on the commercial real estate sector in particular,” Kumar
wrote in a March report. “Mortgage product looks like a great relative value!”

Hedge funds worldwide have gained 3.5 percent this year through
April, and those focused on fixed-income products rose 3.2 percent, according
to May 11 estimates by researcher HedgeFund.net. Last year, the HFRI Weighted
Composite Index, which tracks the performance of more than 2,000 hedge funds
that manage at least $50 million, climbed 10 percent.

Patel, Franklin

Kumar’s hedge fund is part of Citi Capital Advisors, which
oversees about $16 billion in so-called alternative funds, including private
equity and venture capital funds, according to a person familiar with the
matter. The division, led by Jonathan Dorfman, 49, and James O’Brien, 51,
manages about $5 billion of Citigroup’s own money, said the person, who spoke
on condition of anonymity because the figures aren’t public.

The Mortgage/Credit fund is outpacing Citigroup investment
vehicles including the Event Driven Fund, managed by Mukesh Patel, a
risk-arbitrage trader. That fund gained 7.1 percent this year through April,
according to estimates in the internal reports. The Emerging Markets Special
Opportunities Fund, managed by Mark Franklin, a former Salomon Smith Barney
emerging-markets executive, is up 4.2 percent, the records show.

Fund Declines

The Global Macro Fund, managed by Kevin Bespolka, dropped
6.9 percent this year through April, according to the estimates. Managers of
so-called macro funds seek to gain from global trends, and Bespolka’s fund uses
“nimble” strategies to bet on government bond and currency markets, according
to the bank’s website. Macro funds have gained 2.8 percent this year through
April, data compiled by Bloomberg show.

The documents don’t list any of the funds’ sizes or indicate
what share of their capital belongs to the bank. An April 2010 marketing
brochure for the Event Driven Fund said that it “consists of only proprietary
capital.”

Danielle Romero-Apsilos, a bank spokeswoman, declined to
comment on the funds’ performance.

Citigroup slipped 30 cents to $41.24 at 9:40 a.m. in New
York Stock Exchange composite trading. The stock is down 13 percent this year,
after surging 43 percent last year.

The bank posted losses totaling almost $30 billion for 2008
and 2009, much of it linked to subprime mortgages. It repaid the taxpayer
bailout last year, giving the Treasury Department a profit of about $12
billion, including dividends and proceeds from stock sales.

Kumar’s team separately managed two collateralized debt
obligations tied to subprime bonds which were liquidated in 2008 and 2009 and
“have lost most of their economic value,” according to the April 2010 brochure.
CDOs package assets such as mortgage bonds into new securities with varying
risks.

Goldman, Morgan Stanley (MS)

U.S. lawmakers passed the Volcker rule last year to curb
risk-taking by banks that get federal assistance, such as deposit insurance.
Regulators are set to release a final proposal in October for implementing the
proprietary-trading ban, which is named after former Federal Reserve Chairman
Paul Volcker. The Fed said in February that banks would generally have two
years to comply once the rule takes effect.

Goldman Sachs Group Inc. (GS) is among firms that already
have wound down some proprietary funds in advance of the Volcker ban. Morgan
Stanley said in January it would turn one such unit into an independent firm by
the end of 2012, while retaining an option to buy a preferred stake in the
business. Both companies are based in New York.

“Citi wants to leave all the long-shot bets on its plate,”
said Edward Kane, a finance professor at Boston College. “The riskier the
investment, the more valuable it is to the shareholders of Citigroup.”

 

 

Citigroup’s Hedge-Fund Returns Jump as Volcker Rule Looms

By Donal Griffin – May 18, 2011

Citigroup Inc. (C), which took a $45 billion
U.S. bailout after losses on subprime home loans, is boosting profits from a
hedge fund that bets the bank’s money on mortgage debt — a practice regulators
plan to restrict.

Citigroup’s Mortgage/Credit Opportunity Fund climbed 16
percent in the first four months of 2011, almost doubling its pace last year,
according to internal reports obtained by Bloomberg News. About 90 percent of
the $395 million invested in the fund is the bank’s own capital, said a person
with direct knowledge of the matter.

The fund, run by Rajesh Kumar, 41, has posted profits every
year since it began in 2008, letting New York-based Citigroup benefit from an
asset class that almost caused its collapse. The firm may seek new investors
for the vehicle before regulators implement the Volcker rule, which Congress
passed last year to force bank holding companies to cease bets with their own
money.

“If the Volcker rule gets defined the way it was originally
intended to be defined, then they’re probably going to need to divest their
interest,” said Charles Whitehead, an associate professor of law at Cornell Law
School in New York. “But why kill the goose before you have to?”

Citigroup, led by Chief Executive Officer Vikram Pandit, 54, himself
a former hedge-fund manager, invested the initial $200 million when Kumar
started the Mortgage/Credit fund. Kumar had joined the bank in 2008 from New
York-based Halcyon Asset Management LLC, where he was a managing principal.

Profits Every Year

He oversees investments for the bank in commercial and
residential mortgage bonds, including those tied to subprime loans. His team
also bets company money on real estate investment trusts, government bonds and
derivatives, internal reports show.

The fund returned 17 percent for the eight months of 2008
after its inception, 23 percent in 2009 and 26 percent last year, according to
the documents, which include estimates for this year’s performance. Annualized,
the 2011 return through April was about 47 percent.

“We remain bullish on the growth prospects of the overall U.S. economy and on the
commercial real estate sector in particular,” Kumar wrote in a March report.
“Mortgage product looks like a great relative value!”

Hedge funds
worldwide have gained 3.5 percent this year through April, and those focused on
fixed-income products rose 3.2 percent, according to May 11 estimates by
researcher HedgeFund.net. Last year, the HFRI Weighted Composite Index, which
tracks the performance of more than 2,000 hedge funds that manage at least $50
million, climbed 10 percent.

Patel, Franklin

Kumar’s hedge fund is part of Citi Capital
Advisors
, which oversees about $16 billion in so-called alternative
funds, including private equity and venture capital funds, according to a
person familiar with the matter. The division, led by Jonathan Dorfman, 49, and
James O’Brien, 51, manages about $5 billion of Citigroup’s own money, said the
person, who spoke on condition of anonymity because the figures aren’t public.

The Mortgage/Credit fund is outpacing Citigroup investment
vehicles including the Event Driven Fund, managed by Mukesh Patel, a
risk-arbitrage trader. That fund gained 7.1 percent this year through April,
according to estimates in the internal reports. The Emerging Markets Special Opportunities Fund,
managed by Mark Franklin, a former Salomon Smith Barney
emerging-markets executive, is up 4.2 percent, the records show.

Fund Declines

The Global Macro Fund, managed by Kevin Bespolka, dropped
6.9 percent this year through April, according to the estimates. Managers of
so-called macro funds seek to gain from global trends, and Bespolka’s fund uses
“nimble” strategies to bet on government bond and currency markets, according
to the bank’s website. Macro funds have gained 2.8 percent this year through
April, data compiled by Bloomberg show.

The documents don’t list any of the funds’ sizes or indicate
what share of their capital belongs to the bank. An April 2010 marketing
brochure for the Event Driven Fund said that it “consists of only proprietary
capital.”

Danielle Romero-Apsilos, a bank spokeswoman, declined to
comment on the funds’ performance.

Citigroup slipped 30 cents to $41.24 at 9:40 a.m. in New York Stock Exchange
composite trading. The stock is down 13 percent this year, after surging 43
percent last year.

The bank posted losses totaling almost $30 billion for 2008
and 2009, much of it linked to subprime mortgages. It repaid the taxpayer
bailout last year, giving the Treasury Department a profit of about $12
billion, including dividends and proceeds from stock sales.

Kumar’s team separately managed two collateralized debt
obligations tied to subprime bonds which were liquidated in 2008 and 2009 and
“have lost most of their economic value,” according to the April 2010 brochure.
CDOs package assets such as mortgage bonds into new securities with varying
risks.

Goldman, Morgan
Stanley (MS)
 

U.S. lawmakers passed the Volcker rule last year to curb
risk-taking by banks that get federal assistance, such as deposit insurance.
Regulators are set to release a final proposal in October for implementing the
proprietary-trading ban, which is named after former Federal Reserve Chairman Paul Volcker. The Fed said
in February that banks would generally have two years to comply once the rule
takes effect.

Goldman Sachs Group Inc. (GS) is among firms
that already have wound down some proprietary funds in advance of the Volcker
ban. Morgan Stanley said in January it would turn one such unit into an
independent firm by the end of 2012, while retaining an option to buy a
preferred stake in the business. Both companies are based in New York.

“Citi wants to leave all the long-shot bets on its plate,”
said Edward Kane, a finance professor at Boston College. “The
riskier the investment, the more valuable it is to the shareholders of
Citigroup.”

 

Citigroup Inc. (C), which took a $45 billion U.S. bailout
after losses on subprime home loans, is boosting profits from a hedge fund that
bets the bank’s money on mortgage debt — a practice regulators plan to
restrict.

Citigroup’s Mortgage/Credit Opportunity Fund climbed 16
percent in the first four months of 2011, almost doubling its pace last year,
according to internal reports obtained by Bloomberg News. About 90 percent of
the $395 million invested in the fund is the bank’s own capital, said a person
with direct knowledge of the matter.

The fund, run by Rajesh Kumar, 41, has posted profits every
year since it began in 2008, letting New York-based Citigroup benefit from an
asset class that almost caused its collapse. The firm may seek new investors
for the vehicle before regulators implement the Volcker rule, which Congress
passed last year to force bank holding companies to cease bets with their own
money.

“If the Volcker rule gets defined the way it was originally
intended to be defined, then they’re probably going to need to divest their
interest,” said Charles Whitehead, an associate professor of law at Cornell Law
School in New York. “But why kill the goose before you have to?”

Citigroup, led by Chief Executive Officer Vikram Pandit, 54,
himself a former hedge-fund manager, invested the initial $200 million when
Kumar started the Mortgage/Credit fund. Kumar had joined the bank in 2008 from
New York-based Halcyon Asset Management LLC, where he was a managing principal.

Profits Every Year

He oversees investments for the bank in commercial and residential
mortgage bonds, including those tied to subprime loans. His team also bets
company money on real estate investment trusts, government bonds and
derivatives, internal reports show.

The fund returned 17 percent for the eight months of 2008
after its inception, 23 percent in 2009 and 26 percent last year, according to
the documents, which include estimates for this year’s performance. Annualized,
the 2011 return through April was about 47 percent.

“We remain bullish on the growth prospects of the overall U.S. economy and on the
commercial real estate sector in particular,” Kumar wrote in a March report.
“Mortgage product looks like a great relative value!”

Hedge
funds
worldwide have gained 3.5 percent this year through April, and those
focused on fixed-income products rose 3.2 percent, according to May 11
estimates by researcher HedgeFund.net. Last year, the HFRI Weighted Composite
Index, which tracks the performance of more than 2,000 hedge funds that manage
at least $50 million, climbed 10 percent.

Patel, Franklin

Kumar’s hedge fund is part of Citi Capital
Advisors
, which oversees about $16 billion in so-called alternative funds,
including private equity and venture capital funds, according to a person
familiar with the matter. The division, led by Jonathan Dorfman, 49, and James
O’Brien, 51, manages about $5 billion of Citigroup’s own money, said the
person, who spoke on condition of anonymity because the figures aren’t public.

The Mortgage/Credit fund is outpacing Citigroup investment
vehicles including the Event Driven Fund, managed by Mukesh Patel, a
risk-arbitrage trader. That fund gained 7.1 percent this year through April,
according to estimates in the internal reports. The Emerging Markets Special Opportunities Fund, managed
by Mark Franklin, a former Salomon Smith Barney
emerging-markets executive, is up 4.2 percent, the records show.

Fund Declines

The Global Macro Fund, managed by Kevin Bespolka, dropped
6.9 percent this year through April, according to the estimates. Managers of
so-called macro funds seek to gain from global trends, and Bespolka’s fund uses
“nimble” strategies to bet on government bond and currency markets, according
to the bank’s website. Macro funds have gained 2.8 percent this year through
April, data compiled by Bloomberg show.

The documents don’t list any of the funds’ sizes or indicate
what share of their capital belongs to the bank. An April 2010 marketing
brochure for the Event Driven Fund said that it “consists of only proprietary
capital.”

Danielle Romero-Apsilos, a bank spokeswoman, declined to comment
on the funds’ performance.

Citigroup slipped 30 cents to $41.24 at 9:40 a.m. in New York Stock Exchange
composite trading. The stock is down 13 percent this year, after surging 43
percent last year.

The bank posted losses totaling almost $30 billion for 2008
and 2009, much of it linked to subprime mortgages. It repaid the taxpayer
bailout last year, giving the Treasury Department a profit of about $12
billion, including dividends and proceeds from stock sales.

Kumar’s team separately managed two collateralized debt
obligations tied to subprime bonds which were liquidated in 2008 and 2009 and
“have lost most of their economic value,” according to the April 2010 brochure.
CDOs package assets such as mortgage bonds into new securities with varying
risks.

Goldman, Morgan
Stanley (MS)
 

U.S. lawmakers passed the Volcker rule last year to curb
risk-taking by banks that get federal assistance, such as deposit insurance.
Regulators are set to release a final proposal in October for implementing the
proprietary-trading ban, which is named after former Federal Reserve Chairman Paul Volcker. The Fed said
in February that banks would generally have two years to comply once the rule
takes effect.

Goldman Sachs Group Inc. (GS) is among firms that already
have wound down some proprietary funds in advance of the Volcker ban. Morgan
Stanley said in January it would turn one such unit into an independent firm by
the end of 2012, while retaining an option to buy a preferred stake in the
business. Both companies are based in New York.

“Citi wants to leave all the long-shot bets on its plate,”
said Edward Kane, a finance professor at Boston College. “The
riskier the investment, the more valuable it is to the shareholders of
Citigroup.”

 

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