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Home > Cases > Citigroup > Storm Clouds Darken Over Citigroup Hedge Funds

Storm Clouds Darken Over Citigroup Hedge Funds

Turmoil in the credit markets has decimated a number of once-successful hedge funds lately. And no one knows this better than Citigroup.

Millions of dollars in losses by two of its hedge funds - Falcon Strategies and ASTA/MAT - have fueled lawsuits by investors who allege Citigroup's brokers and fund managers sold them the funds as low-risk investment alternatives capable of producing stable cash flows. As of March 31, the Falcon fund was worth 25 percent of its original value; the ASTA/MAT fund was down nearly 90 percent.

Brokers who sold the hedge funds apparently targeted high net worth investors, marketing the funds as an ideal investment for retirees. For a while, both funds lived up to those promises, producing strong and stable returns.

Last summer troubles first began to surface for Citigroup, following a downturn in the credit markets. In February 2008, Citigroup threw a $500 million lifeline via a line of credit to the Falcon Strategies hedge funds. The bank also consolidated the funds' $10 billion in assets and liabilities onto its own balance sheet.

As the performances of Falcon and ASTA/MAT went downhill, Citigroup's management continued to assure brokers and clients a recovery was in sight. That didn't happen, and investors stopped receiving distributions as the funds' shares plummeted in value.

The Falcon fund invested in municipal bonds, mortgage-backed securities, bank loans and other debt instruments, while the ASTA/MAT emphasized municipal bonds. Reportedly, the funds' demise has prompted Citigroup to scale back future marketing efforts of hedge funds to retail customers.

The recent failure of the Citigroup hedge funds, as well as other prominent hedge funds, has generated calls for tougher, mandatory federal oversight of the $1.75 trillion hedge fund industry. In this year alone, more than a dozen major hedge funds - such as Peloton Partners LLP, which liquidated its largest fund after making bets on high-risk mortgage-backed securities - have closed shop, halted redemptions or been forced to secure outside capital in order to remain afloat.

Hedge funds are loosely regulated. Currently, the Securities and Exchange Commission (SEC) exerts only minimal supervision over them, and offers very little protection for investors. At issue is the ability of many hedge funds managers to make high-risk bets with borrowed money, as well as the ability and expertise of lenders and regulators to appropriately assess the risks in which the funds are exposed.

As is evidenced in Citigroup's hedge funds troubles, tighter disclosure policies and stricter risk management standards may have cushioned the massive financial losses now facing countless numbers of investors.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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