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Citi Hedge Fund Woes

After a run of previous failures, the Citibank is now closing its $400 million Tribeca Convertible LP arbitrage fund. It is the final chapter in Citigroup’s plan to shut down its Tribeca Global Investments hedge fund.

Investor redemptions are thought to be the reason behind the fund closing. According to an Aug. 4, 2008 article on Bloomberg.com, Tribeca Convertible was down less 5% this year, after rising 5% in 2007 and 20% in 2006. Tribeca Global Investments was created in 2004 as Citigroup’s flagship hedge fund group. At the time, the fund intended to raise $20 billion. Instead, it attracted $2 billion.

Cititgroup’s latest hedge fund troubles have become something of a pattern for the nation’s largest bank and its asset management business. In February, Citigroup suspended redemptions in CSO Partners, after investors tried to withdraw more than 30% of the fund’s $500 million in assets. In March, it was the bank’s Falcon strategies funds to encounter problems.

Despite attempts to stabilize the fund with more than $600 million, Falcon closed. And in June 2008, Citigroup shut down Old Lane Partners after investors redeemed more than $200 million. Citigroup’s CEO Vikram Pandit was one of the founders of Old Lane Partners, before selling it to the bank in 2007 for $800 million.

Volatile market conditions and credit concerns have created hard times overall for the hedge fund industry. In 2008, new hedge fund launches are half of what they were only a year ago. Meanwhile, liquidations continue to rise.

Several of the hedge funds closed by Citigroup initially had been pitched to investors as fixed income products – safe and secure investments designed to provide higher yields. As in the case of the ASTA and MAT funds, that wasn’t the reality. Instead, the funds were highly leveraged municipal bond funds whose assets had been invested in risky and speculative subprime mortgages.

The funds’ managers assured brokers and clients alike that they would rebound even as the ASTA fund and MAT fund began to plummet in value. In the end, the funds lost up to 90% of their original value.