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Another handicap for hedge funds

CNNMoney.com – It’s time to say goodbye to Old Lane, the hedge fund management company bought by Citigroup last July.

Citi paid a very dear $800 million to snag the fund and its founder Vikram Pandit, who now runs the entire bank, but the fund’s investors got very little out of the deal. One wonders whether Old Lane was doomed from the moment it was bought, and whether death is the fate of funds that become part of Wall Street conglomerates like Citi (C, Fortune 500), Goldman Sachs (GS, Fortune 500) and UBS (UBS) – the mega-banks that have rolled up merchant bankers, trading floors, and personal wealth management groups.

True, the hedge fund had problems independent of Citi, generating a modest 6.5% in its first year and falling about 6% amid last August’s credit turmoil. It continued to lag other multi-strategy funds thanks to bad credit bets. But problems at Old Lane are the latest in a string of blowups at banks that operate hedge funds. UBS shuttered its Dillon Read Capital Management last May due to big credit losses; and those problems gave markets a warning shot of the credit crisis to come.

The implosion of two highly leveraged credit hedge funds last June was the beginning of the end for Bear Stearns. And Goldman Sachs’ flagship Global Alpha fund began 2007 with $10 billion and ended the year with about $4 billion. Each of these debacles has had its own special flavor, but they all show how hedge funds can lose their mojo when they live within a big, bureaucratic institution.

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