Citi Hedge Fund Blow Up Hurts Clients—And Sends Advisors Packing

While Smith Barney tries its darnedest to hold on to the money of wealthy clients that were invested in two of the firms’ failing hedge funds (subscription required), it’s also having a hard time keeping some of its best brokers. With all the uncertainties and troubles facing Citi, the firm’s prized retail brokerage operation has become a favored target of recruiters, say recruiters.

While Smith Barney tries its darnedest to hold on to the money of wealthy clients that were invested in two of the firms’ failing hedge funds (subscription required), it’s also having a hard time keeping some of its best brokers. With all the uncertainties and troubles facing Citi, the firm’s prized retail brokerage operation has become a favored target of recruiters, say recruiters.

According to a Journal’s “Heard On The Street” column today, the firm is offering to cover some of clients' losses in the Falcon and ASTA/MAT hedge funds. That is, just as long as they sign an agreement promising not to sue the firm at a later date. (At least one investor who put in $500,000 already filed a federal lawsuit against Citi, says the Journal. The suit alleges Smith Barney misrepresented the risk profile of the hedge funds, and that the investments were unsuitable.)

According to one Smith Barney advisor, more than a few of the brokers departing the firm in the past few months have had financial troubles of their own. One reason, he says, is directly related to those two hedge funds. “There are definitely some guys who overcommitted clients to these funds, and now they’re leaving the firm. They’re leaving the firm with the mess, saying, ‘Look what they [Citi] did.’”

Other advisors lost big money of their own, he says, having invested in what only a year or two ago anyone would have considered a far less-risky asset: Citi stock. According to this rep, “plenty” of brokers owned millions of dollars in leveraged Citi stock that they began to buy more of in the past couple years. “When they got margin calls that was it. There’s plenty of guys like that who need money,” he says, “plenty.”

A Citigroup spokesman says, “We appreciate the impact of recent events on our clients and advisors, but our attrition is in line with recent quarters and it’s impossible to speculate on the personal financial matters of individual advisors.”

As for the hedge funds, Citi said in a statement: "Our disclosure and marketing materials sufficiently outlined the inherent risk in the funds and their leveraged strategies. These funds suffered from unprecedented market dislocations, and Citi made the business decision to support the funds and their investors."

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