Investors in Citi's Alternatives Search For Alternatives

If you ignore the issues with subprime mortgages, SIVs, auction-rate securities, leveraged lending and commercial real estate (just to name a few), the rest of Citi's businesses are doing well, right? Right?? Well, not exactly. The WSJ has an article this morning detailing the problems surrounding Citi's alternatives business. One only has to look at assets under management, which have shrunk from $54 billion to $14 billion in the past year to know that something isn't really sitting right with investors. The article doesn't detail how much of the shrinkage was from investor withdrawals and how much was from investment losses but one can assume it was a healthy a combination of the two.

Citi plans to scale back its approach to alternative investments by pulling back from peddling the investments to retail clients and instead focusing on private-banking and institutional customers. As if the rich and institutions are more interested in poorly managed alternative investments with terrible returns than retail clients. Nevertheless, this is Citi's new strategy and I wish them luck. However, it seems like clients are perhaps not going to go for it. I offer exhibit A as evidence: clients of a private-equity fund that amassed $3.4 billion in airport, road, and other infrastructure projects last month voted to bar it from making new investments after its co-head quit and several high-profile deals collapsed. A second, smaller fund geared towards sustainable development failed to attract clients and was shelved. It's not a very high vote of confidence when your clients tell you to stop making investments and no longer wish to invest in your brilliant new fund ideas. The funds were the brainchild of Michael Froman, former operations chief of Citigroup Alternative Investments, who was apparently so bullish on the alternatives group's prospects that he left to go work for the Obama administration in January. Another co-head of the group has also recently left. But, no hard feelings from those who remain at Citi slugging it out. After all, with the government taking a stake in Citi, they too are working for the Obama administration. Citigroup's Vice Chairman praised Mr. Froman for doing "an outstanding job" at Citigroup. Other executives agree that he assembled a strong team of managers and that his funds "were hurt by market forces beyond his control." You know, market forces such as deciding to invest in leveraged illiquid infrastructure projects at the peak of a credit bubble. Because really, you can't control market forces like that.