Big Trouble At Citi As Funds Sink

Feb 15 2008 | 12:31pm ET

A pair of Citigroup hedge funds have run into trouble, with one suspending withdrawals after an avalanche of redemption requests and another admitting its fallen by half during its short life.

CSO Partners, a $500 million corporate debt fund, barred withdrawals after investors tried to yank more than 30% of its assets, The Wall Street Journal reports. Granting those requests, portfolio manager Michael Micko told investors, “would be to the detriment of all investors.”

The fund, which fell by 11% last year, has been in turmoil since last summer, when former manager John Pickett ordered hundreds of millions in leveraged loans on a private auction, reportedly exceeding internal trading limits. Amid the downturn in the credit markets, the banks running the auction allocated the then-$700 million fund a bundle of loans costing $730 million.

Pickett objected, accusing the banks of changing the terms and arguing that it was his fiduciary duty to cancel the order, proposing that the fund sue the banks. Morgan Stanley, the lead auctioneer, protested, and Pickett’s boss, ex-Morgan Stanley executive John Havens, agreed, directing Pickett not to sue and hammering out a settlement in December that cost CSO $746 million and sent it to a 10.9% loss last year. Citi injected $100 million into CSO last month.

Pickett, who had run the fund since its inception in 1999, resigned a week after the settlement.

Haven’s own former fund, Old Lane, which he founded with new Citi CEO Vikram Pandit after both left Morgan Stanley, isn’t doing great either: The fund gave back a big chunk of its 2007 gain, dropping 1.8% in January. Old Lane returned 2.8% last year.

Meanwhile, a brand-new Citi levered credit fund plunged 52% in its first three months of trading, the firm told investors this week. The Journal reports that Falcon Plus Strategies, which launched on Sept. 30, suffered huge losses in the fourth quarter, with its collateralized debt obligation portfolio declining by as much as 75%.

In effect, Citi launched the fund, a levered version of its Falcon Strategies Two fund, at precisely the wrong time, betting that the worst of the credit crisis was over.

“The magnitude of the on-going crisis is significantly outside of our expectations both in terms of velocity and magnitude,” the fund explained in its mea culpa.

The series of funds on which Falcon Plus is based, Falcon Strategies, lost about 30% over the same period.

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