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Citi to Double Team Helping Institutional Hedge Fund Investment

Date: Monday, March 22, 2010
Author: Bei Hu, Bloomberg

Citigroup Inc., the bank 27 percent owned by the U.S. government, plans to double the size of a team helping pension and government-backed funds manage direct hedge fund investments, said Nick Roe, its global prime finance head.

The targeted increase of the now 30-person consulting team may be completed within 18 to 24 months, London-based Roe said in an interview in Hong Kong on March 19. Asia may get a disproportionate number of the additions as the bank expands the services from Europe and the U.S. to the region, he added.

The global hedge fund industry is likely to have its first annual net capital inflow this year since the financial crisis hit in 2007. Pensions, sovereign wealth funds and foundations, which are emerging as the largest allocators, may increasingly bypass the traditional fund-of-funds investing for more direct investment in hedge funds, increasing demand for services to help manage their holdings.

“We see it as one of the major growth areas for us,” said Roe. “The pension funds, the institutional asset market are going directly to hedge funds. It was the reverse of what the investor profile was two years ago.”

Pension, sovereign wealth funds and foundations overtook endowments and funds-of-funds targeting wealthy individuals as the largest source of capital for hedge funds, Morgan Stanley said in a November report.

Funds-of-funds were among the hardest hit by redemptions after some had invested with Bernard Madoff, the U.S. financier serving a 150-year prison sentence for running the biggest Ponzi scheme in history. Family offices have been slower to reinvest the money they withdrew from hedge funds in the last two years as they are still smarting from their losses in 2008, Roe said.

Capital Inflow

Hedge funds globally may draw $222 billion of additional capital this year, bringing industry assets to $1.72 trillion, said a Deutsche Bank AG survey of investors released last week. Morgan Stanley forecast industry assets to grow 13 percent this year to $1.75 trillion, with new capital contributing 5 percent and investment profits the rest, said a report dated March 16.

Citigroup was approached two years ago by ATP, Denmark’s largest pension fund, which hired a team of former Goldman Sachs Group Inc. employees to develop a proprietary trading team.

The bank is now expanding the one-stop services, including trade clearing, fund valuation, custody, financing and maintaining managed accounts for such institutional investors to Asia. The services enable them to build in-house hedge fund teams or directly allocate to external fund managers, Roe said.

In Asia, Citigroup sees potential demand for the services from Australia’s superannuation funds and big investment companies in Singapore, said Hannah Goodwin, regional head of prime finance.

Asia Expansion

Temasek Holdings Pte, the state-owned Singapore investment company, set up a wholly owned global investment firm to manage billions of dollars of absolute return investments ranging from stocks to bonds.

Citigroup’s prime finance consulting team assesses how technology has to be tailored to meet an institutional client’s investment need, Roe said. It also helps established fund managers grow their businesses, he said.

Citigroup expanded its overall Asia prime finance team by six people since December to about 60 employees, said Goodwin.

“We will be adding around 10 percent headcount to the team in the coming year in Asia-Pacific to support our growth,” she added.

Forty-five percent of investors in the Deutsche Bank survey said they would add investments in funds focusing on Asia outside of Japan this year, contrasting with 18 percent in 2009.

New capital from investors now underweight Asia and seeking to boost their returns may increase the region’s hedge fund assets to $150 billion by year-end, from between $120 billion and $130 billion now, Harvey Twomey, Hong Kong-based head of Deutsche Bank’s Asia-Pacific prime finance institutional client group, said last week.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net