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Can banks run hedge funds? More specifically for now, can Citi run hedge funds?

The bank has now suspended redemptions in CSO partners - a $500m fund it runs specialising in corporate debt. Not the biggest fund in the world, but still part of a trend:

CSO joins fellow Citi fund miscreants Falcon Strategies - 30 per cent down in 2007 - (invested in credit) and Old Lane Partners (alma mater of one V. Pandit) - down 1.8 per cent in January alone. Poor performance across the board for Citi’s funds contributed to a 89 per cent decline in Q4 figures at the bank’s alternative investment unit.

CSO lost 11 per cent in 2007. And Citi has only just injected $100m in capital in an effort to stabilize affairs. The fund’s manager, John Pickett (ex Salomon), has just left after what the WSJ calls a “bitter dispute” with Citi execs.

The gist of which, must surely have revolved around Pickett’s massive and singular mistimed bet on a leveraged corporate loan. The Journal writes:

Mr. Pickett’s big order last June was for several hundred million dollars of leveraged loans that a group of banks was selling in a private auction on behalf of a German media company, according to people involved in the transaction. At the time, CSO had roughly $700 million in assets, meaning that Mr. Pickett wanted to commit more than half of the hedge fund’s assets.

Could that make the investment in ProSiebenSat1?

Citi had a €1.25bn chunk of ProSieben’s €7.2bn leveraged loan to syndicate in July. And it was having trouble doing that, so - hypothetically speaking of course - perhaps that’s why Citi waived internal trading limits. Trading limits that the WSJ reports Pickett broke in bidding for the paper.

ProSieben is currently trading down 27 from par at 73.

If, as the Journal states, CSO invested roughly $350m - and assuming it was in ProSieben - that single bet would have lost just over $100m. Curious that that corresponds with the money recently injected by Citi.