Citigroup Inc. says its promotion of an executive to run its prime brokerage unit is an effort to develop its hedge fund servicing business in a marketplace where competitors have been more active.
Alice Hackett, head of the New York banking company's global futures division, was named head of prime brokerage and global financial sales on Tuesday. She succeeds Tim Douglass who was named head of securities finance in Citigroup's global transaction services unit in February.
Ms. Hackett will be in charge of the unit's sales effort, serving clients and developing new business. The company said her main goal will be to improve and increase the hedge fund servicing business.
The number of companies selling hedge fund services has expanded to more than 7,000, Citigroup said, and it has targeted the hedge fund and prime brokerage community as one of five areas for organic growth.
Citigroup plans to be the top hedge fund services provider within five years. Charles Prince, the company's CEO, late last year targeted prime brokerage for market share growth.
"The global finance sales and prime broker group brings together" those two units "and is crucial to the continued growth of the [global corporate and investment bank]'s prime broker business," Bill Heinzerling, the head of global short-term products, retail trading-marketing, and global finance at Citigroup, said in a memo announcing the promotion. "It enables us to deliver more specialized focus to hedge funds, which are an increasingly important client segment across the whole spectrum of fixed-income, equity, futures, and FX products."
Analysts said Citigroup has an uphill task to catch up to the banks and wire houses that have been developing their hedge fund servicing businesses since the 1970s and 1980s. Wire houses like Bear Stearns, Morgan Stanley, and Goldman Sachs Group manage two-thirds of the prime brokerage market, according to a report by Deutsche Bank Securities.
Elizabeth Rowe, a New York analyst, said it is not surprising that a big company like Citigroup would look to bulk up in this business since hedge funds continue to be a hot product, despite scandals and scrutiny. "When you are a firm the size of Citigroup, it is a glaring weakness to have any glaring holes in your portfolio," she said.
It is certainly not too late for Citigroup, which began servicing hedge funds in 1995, to get into the game, Ms. Rowe said.
"Competitors have a short-lived advantage whenever they compete against Citigroup," she said. "They are such a behemoth: Whenever they turn their focus to a specific area, they tend to do very, very well. There was a time when Citi wasn't a presence in private banking; now, when you think private banking, you think of J.P. Morgan Chase and Citi. Citi has the ability to turn nimbly on its heels and succeed."
W. Christopher Maxwell, a fund manager at Conestoga Capital Advisers in Conshohocken, Pa., said Citi is entering the hedge fund marketplace at an interesting time, as federal and state regulators intensely scrutinize the industry.
Mr. Maxwell, whose firm closed its only hedge fund in September, said this scrutiny of other companies presents Citi with an immediate opportunity.
"Whenever you get an industry in transition, it makes it easier for new entrants to gain market share," Mr. Maxwell said. "If nothing was going on in the regulatory area and it was business as usual, it would be tougher for Citi to change the status quo. I think a lot of hedge fund firms will want to move. They will want to go to a deeper-pocketed firm to assist them. That gives Citi an opportunity."
"Hedge funds are being told to act more like mutual funds and will need more professional services than they did in the past," he added. "Citi is strong. They still aren't State Street or Bank of New York when it comes to servicing, but they are strong and this can make them stronger."
