Citigroup Hedge Funds: Hedge Your Bets and Good Luck. You'll Need It

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New York, NYImagine ordering a car and paying full price up front, only to have the car arrive a month later with no wheels, no seats and no engine. That is essentially what happened to investors putting their faith in Citigroup hedge funds, after a product marketed as low risk tumbled, losing the majority of its value. Citigroup is offering a one-time settlement of just under, or just over half of the portfolio value. Take it, or leave it. And if you take it, you can't sue later.


The Falcon, and ASTA/MAT hedge funds were allegedly promoted by Citigroup's Smith Barney brokerage arm to investors as being low-risk, safe places to stash cash, with no more than a five percent expectation of posted loss.

Investment RiskFive percent. The reality? Eighty percent or more, in some cases. Pity the poor investor saving for his retirement—or even already a retiree—carefully weighing the risks and only going with conservative investments in an effort to mitigate painful losses they could ill afford. A risk window of five percent seemed like a reasonable cost—money lost—if the investment didn't go well.

But things didn't go well. And after the funds practically imploded and lost anywhere from 75 to 90 percent of value, Citigroup stepped in with the unprecedented offer to reimburse investors to a minimum of 45 percent, and to a maximum of 55 percent.

Certainly, a worst-case 55 percent loss is better than an 80 percent loss, and investors might be forgiven for cutting their losses and accepting what is offered.

But wait a minute, here. Let's remember that the funds were billed as safe, with minimal risk. In reality, the funds were dangerously exposed to weakness in the credit, and bond markets. There were obligations to mortgage-backed products—and we all know what has happened to any investment tied to mortgages in the past year.

To further complicate matters, the Falcon funds appear to have been invested with other funds within the Citigroup family, which only creates a domino affect if a fund failed. None of this, apparently, was ever shared with investors.

Specifically, Falcon invested in municipal bonds, mortgage-backed securities, bank loans and other debt instruments. ASTA/MAT focused on municipal bonds. Each of the funds consisted of different funds, launched periodically.

A year ago, when launching the new Falcon and ASTA/MAT funds, brokers were encouraged to pitch the funds to their best customers. The reason, allegedly, was that Citigroup needed to raise a whack of cash to offset a 10 percent loss in the Falcon portfolio. Citigroup was hoping to stabilize their product with an infusion of cash.

They got $71 million for their efforts, and ASTA/MAT raised $800 million by September 2007. The funds were sold to retail investors as low-risk, with losses expected to be no worse than five percent.

Cut to March 31, 2008. In just six months the Falcon fund had plunged to 25 percent of its initial value. A month earlier, the ASTA/MAT funds had spiraled to less than 10 percent of its value—in five months.

The investors cried foul, and Citigroup listened. Little wonder, given the heritage associated with the name Smith Barney. The latter sold many of the investments to some of their best, well-heeled clients.

Clients that are now being offered 45 percent, to 55 percent compensation relative to initial portfolio value.

Well-heeled investors may be dismayed at the loss, whereas less-solvent investors may be panicking. And for good reason. Such an investment might have been an important part of a retirement portfolio, and for all the right reasons given the alleged promises of minimal risk associated with the product.

The next step is yet another gamble for investors, yet another roll of the dice. Do you accept the settlement and sign away your right to litigate? Do you join the class action that was recently filed in New York? Or do you go it alone and attempt to get something higher than an average of fifty cents on the dollar?

Or nothing…

One thing is for sure and something that you don't have to roll the dice to determine: the mistrust that more investors are harboring against investment firms and their agents, for not coming clean with the real risk.

In the end, it is always the investor who accepts the risk—sometimes without knowing what that risk is—and in the end, holding the bag that is more than likely empty…

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