Two hedge funds affiliated to CITIgoup.Inc send their investors in real panic by reporting more than 75% loss in the value of the funds. The two funds involved branded their products as less-risky fixed income ones. However, the two funds, namely Falcon and ASTA/MAT channelled most of their cash into municipal bonds, mortgage-backed securities and other debt instruments, which bear the highest risk.
CITI funds fiasco
Some of the funds’ customers are filing court suits against CITIgroup for fraud. To counteract, CITIgroup executives offer the affected fund investors $250 million as exit compensation, and the precondition to get this money is to drop all legal charges against the company. So far, the investor’s reactions to the offer are still not available.
CITI’s case does not come alone since the credit-crunch-led shockwave swept across the world. Banks are anxiously dealing with the situation while huge write-downs are reported from one to another. Last week, one of China’s first QDII (qualified domestic institutional investor) funds of Minsheng Bank was forced to dismantle its portfolio because the fund lost more than half of its capital. Investors of the fund also tried to bring the bank and fund managers to court but ended up in vain, because the fund had informed its investors of the potential risks when the fund was open to retail market.
Over confindence kills
There is one similarity for all these failed funds: they are so aggressive that they bet all the money on high-risk securities or derivatives. When they entered the market and built up portfolios, the sentiment of the market was high, however, suddenly the wind changes, huge exodus of capital appeared instantly after the horrible picture of sub-prime mortgage was unveiled last summer.
Hide the truth
Besides overconfidence, low portfolio diversity also resulted in the huge loss of the funds. What’s worse was that the fund managers did not reveal the real picture to their customers, who were initially told that the funds won’t touch any risky sectors. Customers are now told that their money was gone and the situation is irreversible because the gross prospect for the whole economy is still perceived as bleak. What can they do except for accepting the sad truth?
