Citigroup cuts technology support for hedge fund start-ups

Date: Thursday, November 27, 2008
Author: Stephanie Baum, Wealth Bulletin

Citigroup has ended a technology support service offered to start-up hedge funds following a downturn in hedge fund launches and as part of wider cutbacks at the embattled bank.

The business consulting group helped prime brokerage clients with technology issues and their infrastructure. A fee was not charged for the service, which was offered as part of a broader service package to hedge funds, according to a source familiar with the situation.

The source declined to say how many jobs may be cut at the bank but said the decision will be in line with the pattern of consolidation in the hedge fund industry. The source added that Citigroup has shifted its focus to servicing larger hedge fund clients.

The source also confirmed the departure of Alexis Fosler as the head of prime brokerage in Singapore, following media reports earlier this week. Citigroup expanded its prime brokerage team for the Americas earlier this year with two hirings from the now-defunct Lehman Brothers. Sean McGinty is the head of product development and has been focused on developing services. Norman Escoffery is the head of technology and has a mandate to improve trading, reporting, stock borrowing and related functions.

In addition, Citigroup has hired Christopher Greer from Forest Investment Management to serve as head of prime finance sales and has made him responsible for business development and capital introductions.

A shift among major prime brokerage firms to focus on larger hedge fund managers with greater assets under management follows increased consolidation of prime brokerages this year.

Barclays Capital took over the prime brokerage business of Lehman Brothers as part of its partial acquisition of the bank. JP Morgan acquired Bear Stearns Asset Management in April while Bank of America sold its prime brokerage to French bank BNP Paribas before its subsequent acquisition of Merrill Lynch.

Don Steinbrugge, a hedge fund consultant and third party marketer, said the prime brokerage marketplace is being segmented where many of the larger investment banks have either exited or decided to raise minimum assets under management favouring larger hedge funds.

Steinbrugge said: “One reason is some prime brokerages have made the determination that smaller hedge funds are not as profitable while others have made the change because of reductions in staff.” The shift in focus has expanded growth opportunities among medium and smaller hedge fund managers for companies such as Jefferies and Merlin Securities, he added.

Citigroup is in the middle of a new round of job cuts, expected to be as high as 50,000 following thousands of layoffs made earlier this year. It is receiving money as part of a government bailout program following losses at the bank stemming from risky investments in securities tied to the mortgage market.

—Write to Stephanie Baum at sbaum@efinancialnews.com