Citigroup Inc. is closing a trading desk that specializes in distressed debt, and it plans essentially to outsource the business to a new hedge fund, according to a person familiar with the matter.

The New York company is shutting its global special situations group, which uses Citi's capital to buy and sell fixed-income investments. Two of the group's managing directors, Jeff Jacob and John Humphrey, along with several associates, plan to launch a distressed-debt hedge fund, the person said Friday. The fund, expected to by early next year, would be seeded by capital from Citi, according to the person.

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