CCA manager Mark Franklin also won’t be part of the new entity and neither will his $1 billion Emerging Markets Special Opportunities fund, or EMSO, the people said. The fund, CCA’s biggest, will be part of a separate firm that he’ll run, according to the people. Romero-Apsilos declined to comment on who’ll own the business.
EMSO was one of CCA’s steadiest funds, internal data show. It bets on developing-market debt and has returned an average 10 percent annually since it opened in May 2000. The fund gained 6.8 percent this year through Nov. 8, the data show.
Franklin has also had success raising money from new investors. The New Mexico Educational Retirement Board, which manages almost $10 billion, invested $75 million this year in EMSO because it was “head and shoulders above the rest,” according to minutes of a July 2011 meeting posted on the Albuquerque, New Mexico-based pension fund’s website.
While Citigroup’s investment in CCA represents a fraction of the bank’s $1.9 trillion in assets, the unit’s strategies show the risks that U.S. lenders are still able to take while regulators prepare to enforce the Volcker rule. For Citigroup in 2012, many of those risks were rewarded.
CCA’s London-based European Credit Opportunities Fund soared 41 percent this year through Nov. 8, returning a profit to the bank, which owns most of its $232 million in assets, one of the people said. CCA executive Michael Micko invests in leveraged loans and riskier debts of European companies, according to the bank’s website.
Fred Hoffman oversees about $418 million in two CCA funds that invest mostly Citigroup’s money in complicated credit instruments, the people said. The Strategic Credit fund gained 14 percent through Nov. 8, reversing a loss of a similar size last year, the data show.
Former Old Lane and Citigroup proprietary trader Ramakrishna Putcha joined the Strategic Credit fund this year to help it profit from riskier bonds and collateralized loan obligations, or CLOs. These are holdings that bundle high-yield loans and slice them into securities of varying risk and return.
Hoffman’s Synthetic Portfolio Equity fund, which invests the bank’s money in complex credit derivative products, jumped 30 percent this year. Credit funds on average gained 10 percent in 2012 through October, according to a Bloomberg index.
Others CCA funds haven’t performed as well. Bespolka’s $239 million Global Macro Fund, which wagers on interest rates and currencies, is down about 6 percent this year, the documents show. The fund has gained less than 1 percent since its November 2008 inception, compared with the 9 percent increase in a Bloomberg index of macro funds.
CCA managers also run a $322 million fund called D-Star, which invests money for Singapore’s sovereign-wealth fund and is up about 21 percent this year. A $517 million fund called C-Star invests Citigroup’s money in other CCA funds, the people said. The fund has gained 13 percent this year, the data show.
As regulators push banks to invest in safer assets to prevent another financial crisis, keeping Citigroup money in hedge funds is “not an efficient way” to use the bank’s capital, said Mark Williams, a lecturer at Boston University and former Fed examiner.
“Citi shareholders are paying a cost right now for a decision made a decade earlier to venture into risky hedge funds,” Williams said. “They’ve got billions of dollars of shareholder capital, which is really held hostage in this hedge- fund segment.”
Pandit had to do something to respond to the Volcker rule and withdrawing too quickly from CCA funds could destroy an “immense amount” of shareholders’ money, Williams said. Still, if the new firm is a success, the deal should ensure that shareholders benefit as much as the CCA managers, he said.
“There’s got to be upside given back to the shareholders who took the risk,” Williams said. “The Old Laners should not be the ones that gain the lion’s share of the profit.”