It's not just hedge funds that are blowing up left and right: so are the banks that are lending them money.
Citigroup is facing losses of up to $180 million on loans made to an unnamed Asian hedge fund which saw major losses on its FX trades Bloomberg reports citing a person briefed on the matter. The hedge fund and Citi "are in discussions on the positions and how they should be valued" which is usually a bad sign as when it comes to FX the mark to market is, at least, instantaneous. Bloomberg adds that the situation is fluid and the eventual losses may end up being smaller depending on how the trades are unwound.
While the loss may seem nominal, the matter was reprotedly escalated to Citigroup’s board; as a result of the expected financial hit, Citi is also said to be reorganizing its prime brokerage business: 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.
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.
Needless to say, this is a second order indication that the pain that has hammered the hedge fund world is finally starting to spread to multi-trillion prime brokerage business, and it is only a matter of time before more such episodes of "unexpected losses" start cropping up as tide goes out of from the "smart money." As we have discussed previously, the $3.2 trillion hedge fund industry is on track to post its worst performance since 2011, and hedge funds with a focus on Asia are particularly struggling.
Meanwhile, Citi's PB 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.
Ironically, during Citi's investor day last year, the bank said it had increased client 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.
And now it's time to pay the piper for all this extra generosity.