Hedge Fund Bailout At Citi

It looks like Citigroup is going to compensate clients that incurred losses at its Falcon and ASTA/MAT hedge funds. Both were fixed-income funds that were hit by the recent credit crunch, with Falcon falling 75% in value and ASTA/MAT falling more than 90% in value. Before credit problems, each fund generated significant returns, with the help of leverage, of course.

Under the compromise, the wealth-management unit will absorb $250 million to allow investors in the Falcon fund to exit without incurring total loss if they agree to forfeit all legal claims against the funds and Citigroup. It is expected that some ASTA/MAT investors will get a similar offer. Of interest is how the story mentions that "some" will get a similar offer. Given that all investments are risky, and that even in a "conservative" fixed income fund there are going to be losses, Citigroup certainly sees this as an opportunity to retain some clients. Others don't agree and feel that Citigroup is worried about getting sued. If Citigroup did push the fund as a "safe" fixed-income investment, like investing in CDs, then some investors may have a case. This may also influence how they determine who gets compensation and how much. As reported in the WSJ, some feel the bank did in fact set the compensation at a level that was "just enough so they don't sue us." Nonetheless, given that there was a debate inside Citigroup about whether to even compensate these investors, I suspect is was less about getting sued, and more about keeping large clients.

Update: To add insult to injury, Citi just reported that it will sell at least $3 billion in common stock to strengthen its capital base. This comes after it recently sold $6 billion in preferred stock just a few weeks ago. The company has already raised over $36 billion in new capital through preferred stock and sovereign wealth fund investments, in part to cover $35 billions in write-downs on CMOs and bad LBO debt, among others. Maybe the hedge fund losses and disgruntled investors are still the least of their problems.

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