Citigroup Adds Hedge-Fund Service Amid Scrutiny, Rules

Date: Friday, December 10, 2010
Author: Kelly Bit, Bloomberg

Citigroup Inc., the third-biggest U.S. bank, said its prime finance business is starting a consulting service for hedge funds amid increased scrutiny from investors and new requirements from regulators.

Citi Prime Finance is adding an advisory business to its prime brokerage, financing solutions and capital introductions units as it anticipates growing demand from hedge funds for advice on how to answer investors’ demands for transparency and new regulations.

“A lot of the traditional clients that we have at Citi’s prime brokerage are facing new challenges around their organization, operational and technology maturity,” said Sandy Kaul, head of U.S. operations for the business advisory practice. “There’s a whole new level of depth around the scrutiny that’s being put into the evaluation of allocating to a hedge fund.”

Citigroup seeks to profit from a lack of services offered to hedge funds with more than $3 billion in assets, since consulting at prime brokers usually targets smaller firms, according to Kaul. Credit Suisse Group AG, the second-biggest Swiss bank by assets, hired Lesley D. Goldwasser in August to oversee a new effort to offer capital-markets financing to hedge funds along with advice and services.

Most hedge-fund managers must register with the U.S. Securities and Exchange Commission, which last month proposed requiring hedge funds and private-equity funds to submit to inspections and new disclosure requirements.

SEC Registration

“The primary challenge in the first and second quarter is ensuring that firms who register with the SEC have all of the right pieces in place to meet external compliance needs,” said Rich Webley, U.S. head of management consulting services at Citigroup.

Citigroup will advise hedge funds on how to explain fee structures to clients. Funds have traditionally charged 2 percent of assets per year in management fees plus a 20 percent slice of profits above their performance benchmarks. Some clients have negotiated lower fees for new funds in the wake of 2008’s record losses for the industry.

Hedge funds declined the most in six months in November as the European debt crisis pushed stock markets lower across the globe. The Bloomberg aggregate hedge fund index fell 1.5 percent, the most since May, when a sudden selloff in stocks caused the Dow Jones average to briefly lose almost 1,000 points and prompted investors to cut risk.

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net