The stock market news wire is humming this morning on an announcement that Citigroup (NYSE: C) has barred investors in its CSO Partners hedge fund from withdrawing their investments. According to the Wall Street Journal, investors in the fund attempted to withdraw almost 1/3 of fund assets due to fear concerning mortgage backed securities. However, the fund has refused, explaining that they would have to sell valuable securities at huge discounts (which would hurt all investors).
So, is that Really so Bad?
True, the fund did make disproportionately large investments in leveraged securities (even breaking trading policies set within the firm). However, the fund was down only about 11% in 2007, and the previous manager has since been replaced. If you are a diversified institution this fund should only be a small percentage of your portfolio. Therefore, a loss of 11% is not so bad given the amount of risk involved (whether or not all information is truly available about the underlying securities).
Further, according to various sources, CSO is a corporate debt fund, not a fund focused on mortgage backed securities. By keeping investors from redeeming assets, Citigroup is essentially preventing them from making a knee jerk reaction that will guarantee all investors lose money.
Where There’s Smoke, is There Fire?
However, uncertainty drives the market and institutional fund managers are under pressure to “not do worse” than market benchmarks. This will lead many to head for the door as soon as they can. Their argument will undoubtedly be the proverbial: “where there’s smoke there’s fire”. Given the current market situation, I guess I can’t say I blame them.
Tags: citigroup, stock market news