Citigroup no longer considers its hedge fund administration services part of its long-term strategic direction and will move the administration function into Citi Holdings, a division where non-core assets sit and wait for the next step.
Michael Corbat, Citigroup’s CEO, made the announcement during the bank’s fourth quarter 2014 earnings call on Thursday, saying that the bank would exit several non-core businesses in order to decrease the expense base and improve net income. The next step might be a sale or a spinoff.
While day to day operations at the six-year-old administration business will continue for now, the move into Citi Holdings means “it’s a non-core business that over time we’ll exit,” says Mark Costiglio, a spokesman for Citigroup in New York. Citigroup will also move its pre-paid cards and wealth management divisions into Citi Holdings, along with certain transfer agency operations.
Hedge fund administration has become a business that requires large investments in technology and in in-house experts who can advise hedge fund clients on technological concerns such as cyber security and regulatory compliance. For investment banks that has meant either making a commitment to build their administration businesses or shed them.
J.P. Morgan is in the process of building up its administration business under the direction of Stephanie Miller, global head of fund services and alternative investment services for J.P. Morgan. Goldman Sachs ran a hedge fund administration business for 19 years, but in 2012 the bank sold its administration services division to State Street Corp.
Citigroup’s administrative service, known as Citi Hedge Fund Services, has approximately $380 billion in assets under administration. It is the fifth-largest hedge fund administrator in the world, according to the 2014 alternative fund administrator survey from the Atlanta-based research firm eVestment. The largest administrators are, in order, State Street Alternative Investment Solutions, Citco Fund Services, BNY Mellon Alternative Investment Services and SS&C GlobeOp.
John Gerspach, chief financial officer at Citigroup, said in the earnings call that “we do not believe we have the scale to generate appropriate returns” in Citi Hedge Fund Services and the other divisions that are going under the Citi Holdings umbrella. In aggregate the hedge fund administration service and the other non-core businesses generated nearly $460 million in revenues and a loss of over $80 million in 2014. “However,” said Gerspach, “roughly half of the operation’s pre-tax loss for the year was driven by repositioning and other actions directly related to the exit plans.”
