September 1, 2008 / 7:42 AM / 11 years ago

Citi prime brokerage sees strong Asia growth

HONG KONG (Reuters) - Citigroup Inc (C.N) expects to see double-digit growth in assets serviced by its recently expanded Asia Pacific prime brokerage arm, as it seeks more business with global hedge funds setting up in the region.

Pedestrians walk past a Citibank branch in San Francisco, California June 23, 2008. REUTERS/Robert Galbraith

Even with tumbling stock markets hammering the performance of most Asia-focused hedge funds, many well resourced overseas managers have stepped up their focus on the region, said Hannah Goodwin, head of Prime Finance, Asia Pacific for the U.S. bank.

“We’re seeing continued growth from the global hedge funds ... there are over 100 global hedge funds that now have offices somewhere around this region. We are positioning ourselves to be able to service them better,” Goodwin said in an interview.

“I’m not seeing anybody say they’re pulling back from the region. I think it’s pretty much business as usual with some people looking at the opportunities further down the line.”

Overseas hedge fund managers that have set up operations in Asia include Citadel Investment Group, Och-Ziff Capital Management Group and Britain’s CQS.

Citigroup said early last month that the Asia Pacific prime finance unit, which competes with U.S. peers including Goldman Sachs (GS.N) and Morgan Stanley (MS.N) to service hedge funds in the region, recently added 8 positions, growing the operation to more than 40 staff.

Prime brokers provide trade execution, stock lending, capital introduction and other services to hedge funds, whose high volume trading strategies can make them a rich source of fees for the prime brokerage arms of big financial firms.

POOR INDUSTRY PERFORMANCE

The new hires came even as many Asia-Pacific focused hedge funds, which managed more than $170 billion in assets at end-July, according to tracking firm Eurekahedge, suffer losses.

After five straight years of double-digit percentage gains, the Eurekahedge Asian Hedge Fund Index is down 15.8 percent this year and its Japanese index fell more than 6 percent. This compares with a 3.3 percent gain for its North American index.

Goodwin said many of the worst performing funds have been single-country vehicles focused on greater China and India. By comparison, multistrategy funds run by U.S. and European managers typically have the flexibility to avoid or pull capital out of poorly performing markets.

Many of these funds have also been looking to diversify the number of prime brokers they deal with, she said, adding this should boost Citigroup’s prime brokerage business.

Goodwin expects hedge fund assets under management serviced by the Citigroup unit to grow by more than 30 percent annually over the next 3-5 years.

“That’s how aggressive we want to be with this business and how well we think this business is going to develop for us.”

She declined to disclose the amount of assets the group currently services.

The former Deutsche Bank (DBKGn.DE) executive said the Citigroup Asia Pacific unit has been working to combine the equity, fixed-income and foreign exchange parts of its operation. She said this should also help it win more business with the global multistrategy funds, which can shift investments between asset classes.

“We’ll have just one complete offering for clients, which I don’t think any of our competitors are really able to do. So for the multistrats it’s going to be very beneficial to have one platform,” she said.

Goodwin said the strategy should also pay dividends as Asia’s hedge fund industry reduces its reliance on long/short equity strategies in which funds typically bet mostly on rising share prices while shorting some stocks.

Eurekahedge estimates about 56 percent of Asia-Pacific funds used a long/short equity strategy, compared with 41 percent of the U.S.-focused hedge funds.

The Asia hedge fund veteran said the increasing concern at many hedge funds about counterparty risk following the collapse of Bear Stearns should also help Citigroup in the region.

“We do have a bank behind us, which is quite a strong pull for a number of managers,” she said.

Editing by Ian Geoghegan

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