Citi Hedge Fund Spinoff A Management Give-Away

Dec 21 2012 | 11:08am ET

Citigroup will literally give away most of its hedge fund unit, as it seeks to come into compliance with the Volcker rule.

The bank is giving a 75% stake in Citi Capital Advisors to the division's employees under a plan negotiated by former CEO Vikram Pandit in his final days at Citi. Those employees will not have to pay for it. Pandit, a former hedge fund manager, spent much of his tenure building Citi's alternative investments business, and CCA includes many of his former colleagues from Morgan Stanley and Old Lane Partners.

Citi will retain a 25% stake in CCA, which will manage up to $2.5 billion of the bank's capital, Bloomberg News reports. Citi will also pay CCA's executives to manage its money while it redeems much of it to comply with the Volcker rule, which strictly limits banks' hedge fund investments and bans banks from proprietary trading.

The new company will have about 10 hedge funds with $3.4 billion in assets, and could be worth up to $100 million, according to Grail Partners and SFC Associates.CCA chief Jonathan Dorfman and James O'Brien will continue to lead the spun-off unit, which does not yet have a new name, and will split 24% of the firm between them. The balance will go to other CCA portfolio managers and employees.

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