Citigroup Faces $180 Million Loss on Loan to Asia Fund
The episode shows that banks are beginning to feel some of the pain that’s besieged the hedge fund industry this year.
(Bloomberg) -- Citigroup Inc. faces losses of as much as $180 million on loans made to an Asian hedge fund whose foreign-exchange wagers went awry, prompting board-level discussions and a business shakeup, according to a person briefed on the matter.
The hedge fund, managed by a unit of GF Holdings (Hong Kong) Corp., and Citigroup are in discussions on the positions and how they should be valued, said people with knowledge of the talks, who asked not to be identified because the discussions are private. The situation is fluid and the eventual losses may end up being smaller depending on how the trades are unwound, one of the people said.
The matter was escalated to Citigroup’s board, one person said. The bank is also reorganizing its prime brokerage business as a result of the expected financial hit, the person said. It’s taking the FX prime brokerage unit out of the currency trading division and placing it under the oversight of its prime finance and securities services unit, according to a memo from the bank.
Chris Perkins, who leads the bank’s over-the-counter clearing business, will become head of the FX prime brokerage, the company said in the memo Tuesday. Sanjay Madgavkar, who ran the FX prime brokerage unit and has worked at Citigroup for more than 20 years, is leaving the firm, the person said. Madgavkar declined to comment, as did Scott Helfman, a spokesman for the New York-based lender.
GF Holdings is owned by Guangzhou-based brokerage GF Securities Co., according to its website. It has four wholly-owned subsidiaries: GF Securities (Hong Kong) Brokerage Ltd., GF Capital (Hong Kong) Ltd., GF Asset Management (Hong Kong) Ltd. and GF Investments (Hong Kong) Co., the website shows.
GF Holdings Chief Executive Officer Tang Xiaodong declined to comment when reached on the phone by Bloomberg News and didn’t reply to a follow-up email. Another representative for the firm wasn’t immediately able to comment. GF Holdings is separate from GF Fund Management Co., another unit of GF Securities.
The episode shows that banks are beginning to feel some of the pain that’s besieged the hedge fund industry this year as geopolitical tensions around the world have spurred dramatic swings in asset prices. The $3.2 trillion industry is on track to post its worst performance since 2011, and hedge funds with a focus on Asia are particularly struggling.
Citigroup Chief Financial Officer John Gerspach said earlier this month that momentum in rates and currencies trading hadn’t carried over from the third quarter and the firm would likely post a year-over-year decline in fixed-income trading revenue this quarter.
The reorganization comes as Citigroup has been expanding the prime finance business, which is a part of its equities trading division and helps hedge funds in borrowing stocks, funding, transactions and risk management. At the firm’s investor day last year, Citigroup said it had increased balances from prime brokerage clients by 40 percent since 2014 and noted its revenue growth in the business doubled that of its Wall Street peers.
But lending through the prime brokerage can bring the risk of large swings in revenue. The firm said in July 2015 it would take a $175 million charge from prime finance when it cut the value of collateral underlying loans to facilitate customer trading activity. Three months later, the lender reversed $140 million of the valuation adjustment.
--With assistance from Bei Hu and Sridhar Natarajan.
To contact the reporters on this story: Donal Griffin in London at dgriffin10@bloomberg.net;Jenny Surane in New York at jsurane4@bloomberg.net;Cathy Chan in Hong Kong at kchan14@bloomberg.net
To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, ;Ambereen Choudhury at achoudhury@bloomberg.net, Dan Reichl
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