Investment banks and their in-house hedge funds were once thought capable of building a compatible, mutually beneficial relationship. It is now clear that they are unhappy bedfellows.
UBS had its reputation marred after its in-house hedge fund unit, Dillon Read Capital Management, was forced to wind down last year just 11 months after starting to trade, having incurred losses of $124 million.
Lehman Brothers has been forced to move $1 billion of assets from three troubled internal hedge funds onto its balance sheet. A better example still is Bear Stearns, which was brought down by its two in-house hedge funds.
Citi does not seem to learn, however. First, Tribeca, its initial multi-strategy fund, was pulled when it purchased Old Lane, run by Vikram Pandit himself. Now Old Lane has shut down as a multi-strategy fund as three of the six senior managers left their positions, Pandit included. Falcon, Asta and MAT, Citi’s fixed-income hedge funds, have lost as much as 75%, forcing Citi to put up hundreds of millions of dollars to help investors recoup losses. But still, Pandit in his role as chief executive of Citi, is considering spinning some of the teams within the multi-strat Old Lane into in-house single-strategy funds.