Citigroup Commits $1 Bln to Shore Up Muni Hedge Funds

NEW YORK (Reuters) - Citigroup (C.N) on Tuesday said it would commit $1 billion to shore up six leveraged municipal bond hedge funds that have been hammered by steep declines in asset values in recent weeks.

The funds, managed by Citi under the ASAT Finance and MAT Finance names, have already soaked up some $600 million to allow them to continue trading and meet margin calls, said Citi. The funds held about $2 billion in bonds, backed by another $13 billion or so in debt, or leverage.

The move comes after many hedge funds were forced to sell billions of dollars of municipal bonds to meet margin calls in recent weeks as their insurers, including MBIA (MBI.N) and Ambac Financial Group ABK.N, faltered amid worries about their ability to cover defaults.

"Returns have been hurt by one of the most volatile periods for fixed income, in particular municipal markets, in recent memory," said Citi spokesman Jon Diat.

"The investment from Citi provides the funds with additional equity capital and enough liquidity to make margin calls, continue to operate and potentially recover a portion of the decline in net asset values," Diat added.

Municipal bonds, which typically finance government infrastructure projects, are considered relatively safe and rarely default. Hence, hedge funds including those managed by Blue River Asset Management, Duration Capital, 1861 Capital Management and others were previously able to magnify their returns through heavy use of leverage.

But the markets have suffered a steep erosion in asset prices as buyers have fled, similar to what has afflicted markets trading leveraged loans, mortgage-backed securities and others, forcing hedge funds into a selling mode.

Citigroup shored up another fund last month, the $500 million CSO Partners, after it suspended investor redemptions following a 10 percent loss late last year. The bank poured in $100 million or so into London-based CSO, which remains closed to investor redemptions as it looks to stabilize.

(Reporting by Dane Hamilton)