The Great Citigroup Hedge Fund Giveaway

Among Vikram Pandit’s last jobs as Citigroup’s chief executive officer was deciding the fate of its hedge fund unit, which employs some colleagues from his days at Morgan Stanley and Old Lane Partners. Citi needs to get out of the business to comply with the Volcker rule’s restrictions on banks’ hedge fund investments and proprietary trading. Before he left in October, Pandit agreed to turn over a chunk of the hedge fund business to his former colleagues, according to people with knowledge of his plan who requested anonymity because the terms aren’t public. While Citigroup is keeping a 25 percent stake, they say, managers at Citi Capital Advisors will pay nothing for the remaining 75 percent of the business as it becomes a new firm managing as much as $2.5 billion of the bank’s money.

Citigroup, they say, will pay the new firm fees while gradually pulling out assets to comply with the Volcker rule, part of the 2010 Dodd-Frank Act. “They’re getting a couple of years to diversify the client base away from Citi and to build a stand-alone firm,” says Craig Cognetti, a partner with New York-based financial adviser Grail Partners who analyzed the potential value of the Citi spinoff based on performance data provided by Bloomberg News. CCA co-heads Jonathan Dorfman and James O’Brien, who worked with Pandit at Morgan Stanley and will run the new company, will split 25 percent of the firm. Portfolio managers and other employees will share the other 50 percent.