Citi to Spin-off Hedge Fund Unit - Analyst Blog

By Zacks | February 08, 2013 AAA

In accordance with the Volcker Rule, Citigroup Inc. C) is in the final stages of spinning off an internal hedge fund unit, which it independently renamed as Napier Park Global Capital. The unit was previously managed by the bank's Citi Capital Advisors (CCA) division.

The company has already obtained a regulatory approval for the spin-off. However, it is yet to receive a green signal form the investors and counterparty. Upon completion of the spinout, Napier Park is projected to have $6.8 billion in assets under management.

Earlier in 2012, Citi announced that it would branch out CCA with 75% of its stake going to the unit's management and employees. Out of this, 25% will be in the hands of the co-heads of CCA, James O'Brien and Jonathan Dorfman, whereas the remaining will be under the employees. Citi will hold only 25% stake in the independent company. Providing managers a stake in the new firm is anticipated to offer increased motivation to earn better returns.

CCA's hedge funds traded on several risky assets, including European loans, complex credit instruments, municipal bonds, mortgage-backed securities and the debts of struggling companies. Accordingly, Citi had almost $2.5 billion invested in the funds. Thus, the company is looking to steadily shed these assets to comply with the Volcker Rule, which restricts banks from trading on their own.

Citi currently carries a Zacks Rank #3 (Hold). Other major banks that are performing well include BankUnited, Inc. (BKU), Fifth Third Bancorp (FITB) and Regions Financial Corp. (RF). BankUnited carries a Zacks Rank #1 (Strong Buy) and the other two hold a Zacks Rank #2 (Buy).

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