Citi Sheds Hedge Funds in Anticipation of ‘Volker Rule’

Citigroup (C) has agreed to sell its hedge fund assets to SkyBridge LLC for an undisclosed sum. The total value of the assets Citi is selling is $4.2 billion under management and advisory. Following the sale, SkyBridge will have $5.6 billion in assets under management and advisory.

The three Citi Alternative Investments LLC businesses being sold include Citi’s fund of funds, its hedge-fund seeding business, and its hedge-fund advisory business. SkyBridge has retained Citi’s Raymond Nolte as managing director and chief investment officer for the three businesses. An additional 20 team members will follow Nolte to SkyBridge.

Citi received $20 billion in TARP funds from the federal government in 2008, and is now about 28%-owned by US taxpayers. Citi repaid the money in late 2009, and the US Treasury has said it plans to sell its shares in Citi during 2010.

Citi’s hedge fund businesses were part of its non-core assets and businesses, and the bank has said that it plans to shed some $715 billion worth of non-core assets as it seeks to lower its risk profile. About 25% of the assets had been sold by the end of 2009.

The sale also erases Citi’s exposure to possible changes in the financial system regulations currently under discussion in the U.S. Senate. Future regulations are likely to restrict a bank’s ownership of hedge funds and other high-risk assets.

Citi has lost a number of its proprietary trading desk managers, most of whom are headed for hedge funds where high-risk trades are not under threat from something like the “Volcker rule,” which would prohibit institutions like Citi from owning hedge funds or private-equity funds.

How the potential legislation will eventually shake out is anybody’s guess. Citi isn’t waiting around to see though. Once the regulatory scheme is figured out in Congress, it will be too late to get top dollar for hedge funds and private-equity funds. They’re worth more today, and Citi is taking advantage of that.

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