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… 

Read WSJ Article (subscription required)

Read KPMG Report (free)

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