Citigroup Faces Challenges Pioneering a New “Hybrid” Business Model

Friday’s WSJ (Sep. 22) contains a story that illustrates an important lesson about the combination of hedge funds and traditional long-only assets. The story is about the resignation of Tanya Beder, the head of Citigroup’s hedge fund initiative, Tribeca Global Management.  But it contains a deeper message about the rapidly shifting landscape of the asset management business… 

“In the past few years, several big banks have flirted with the idea of breaking into the top tier of the hedge-fund industry. And with big rosters of wealthy clients, they potentially could be a major force. But so far, few have figured out how to make running a hedge fund a big part of their overall business.”

“Embedding a hedge fund in a giant bank and then trying to make the two work in sync is a difficult task, says David Smith, the London-based chief investment officer at GAM, a fund of funds that is part of Swiss bank Julius Baer Group.

“‘To date, a lot of the models of investment banks with hedge funds have been ill-conceived because they don’t understand what makes a hedge-fund manager tick,’ Mr. Smith said. ‘Key profit makers don’t want to be beholden to the bank, they don’t want their destiny to be controlled by another group.'”

Indeed, according to the WSJ, the very culture of entrepreneurialism that underpins the hedge fund industry may have contributed to Ms. Beder’s departure…

“Ms. Beder’s management style and her desire to retain independence led to struggles with some of her Citigroup bosses, another person familiar with the matter said.”

A recent study by KPMG underscores the challenges faces by traditional asset managers as they try to integrate hedge funds – or at least hedge fund “thinking” – into their existing businesses.  That report argues:

“By popularizing the rise of absolute returns, hedge funds have forced other fund managers to revamp their business models in order to create clear focal points for the separation and generation of alpha and beta.”

No doubt this was Citigroup’s goal – to “revamp their business model”.  But what other options did they have?  The KPMG report goes on to highlight a variety of methods in use to integrate hedge fund ideas into traditional asset management businesses:                

















Interestingly, setting up an “independent boutique with its own governance” ranked as the 8th most popular strategies (of 11) for traditional asset managers to enter the hedge fund industry.

While there seems to be little agreement among the long-only community about the best way to adopt alpha-centric investing ideals, there seems to be more agreemet about the need to do so.  The KPMG study finds that 80% of instituitonal investors either already provide hedge funds or anticipate doing so in the near future… 














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  1. informationarbitrage
    September 26, 2006 at 2:01 pm

    Having run a large internal hedge fund platform (DB Advisors within the context of DB AG), I can tell a few keys to making this hybrid model work:

    1. Senior management needs to be on board with the fact that the on-platform managers will get compensated in a manner somewhat similar to external hedge fund managers. Sure, the structure of the comp plan may be different but in order to guard against adverse selection (what top manager would possibly want to be inside a bank?) the comp levels have to be “market.” This means you may have an “employee” that makes many times more than the CEO of the whole institution. And that’s ok – that is if your culture can handle it and if you want to be successful. Otherwise, don’t play.

    2. Senior management needs to be on board with the fact that these managers may, at some point, want to set up their own shops and have their own name on the door. This has to be ok – if it’s not, then you are instantly creating a win-lose situation which the institution will invariably lose. Create a flexible platform that can accomodate a successful manager “spinning out” with the support of the firm, provided that the bank has guaranteed capacity rights, the ability to monetize their capacity down the road, etc. In fact, my sense is that it is the unusual manager that has an attractive long-term track record that does not want the “ego food” of running their own show. Unless the are really introverted, hate dealing with business operations and investors and/or don’t have a great President/COO. In this case it may be better to be on someone else’s platform, give up a little economics but be 100% focused on investing.

    3. Have the operation domiciled within Asset Management and not the broker/dealer. Potential conflicts, real or perceived, can place inordinate stress on legal, compliance and business management when this business, even if walled off from the b/d, still rolls up into the b/d.

    I could say much more but think this gets at the core of the issue. Bottom line is yes, senior management needs to have a clue about “what makes managers tick.” Without this the effort, regardless of the resources thrown at it, is doomed to fail. However, if senior management DOES get the joke, then this can be one hell of a profitable and scalable business.

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