Bloomberg News

Hedge Funds Ejected Citigroup as Shares Slid in Third Quarter

November 16, 2011

Nov. 15 (Bloomberg) -- Paulson & Co., Lansdowne Partners LP, and Lone Pine Capital LLC were among investment firms that cut stakes in Citigroup Inc. as shares of the bank slid 38 percent in the third quarter.

Paulson & Co., founded by billionaire John Paulson, sold about 8.4 million shares of New York-based Citigroup during the quarter while Lansdowne, Europe’s biggest equity hedge fund, sold 1.3 million and Lone Pine disposed of 3.8 million, according to regulatory filings. Hedge funds collectively sold about 30.8 million shares, based on data compiled by Bloomberg from 757 managers.

Citigroup was the quarter’s fourth-worst performer in the 24-company KBW Bank Index, helping to slash more than $4 billion from hedge-fund portfolios, the filings show. Investors also fled Bank of America Corp. amid slower U.S. growth and concern that lenders could face losses tied to Europe’s debt crisis.

“In August there was concern about worldwide recession,” said Charles Peabody, an analyst with Portales Partners LLC in New York. “Citi shares came under the most pressure because of their internationally diversified franchise. That contrasts with the thinking in the first quarter of 2011 when people were looking for international exposure.”

Bill Ackman’s Pershing Square Capital Management LP and Eton Park Capital Management LP were among hedge funds that added to their holdings, buying more than 7 million shares combined, the filings show. Citigroup shares have gained 11 percent since the end of the quarter through yesterday.

Cutting Stakes

Other funds that reduced their Citigroup stakes included David Tepper’s Appaloosa Management LP and Maverick Capital Ltd., which sold about 8.5 million shares combined, the filings show. Jim Chanos’s Kynikos Associates LP exited the bank as he sold more than 85,000 shares, and Bruce Berkowitz’s Fairholme Capital Management LLC, which runs mutual funds, sold about 1.5 million, according to the filings. Citigroup had about 2.9 billion shares outstanding at the end of the quarter.

Appaloosa and Lansdowne also cut their holdings of common stock in Bank of America, ranked second by assets in the U.S., while Berkshire Hathaway Inc., run by billionaire Warren Buffett, placed bets on the lender’s preferred stock and warrants. Citigroup is third-largest among U.S. lenders by assets and New York-based JPMorgan Chase & Co. is first.

Tepper, who counted Bank of America as his largest holding last year, sold Appaloosa’s remaining 10 million shares in the period. Mark Kingdon, founder of Kingdon Capital Management LLC in New York, disposed of all 11.5 million, regulatory filings show. In September, Berkshire bought $5 billion of preferred stock and received a warrant to buy 700 million common shares.

Mortgage Costs

The changes in holdings show how some of the world’s most influential investors disagree about the wisdom of investing in Charlotte, North Carolina-based Bank of America. The lender, led by Chief Executive Officer Brian T. Moynihan, plunged more than 50 percent this year amid investor concern that it may sell shares to replenish capital after booking about $40 billion of expenses tied to faulty mortgages.

“I don’t know in the world of high finance if anyone feels like they have the time horizon that Buffett has or if they feel BofA can produce the level of returns that can be made elsewhere,” said Douglas G. Ciocca, CEO of Kavar Capital Partners LLC in Leawood, Kansas, which manages about $225 million in assets. “I’m not sure investing in BofA is the best use of your capital.”

Holdings Eliminated

Lansdowne, founded in 1998 by Paul Ruddock and Steven Heinz, sold all of its 5.08 million Bank of America shares in the three months ended Sept. 30. Highfields Capital Management LP, the Boston-based hedge fund run by Jonathon Jacobson, also eliminated its holdings.

Investors betting on a Bank of America rebound included Berkowitz at Miami-based Fairholme, which added 5.36 million shares in the third quarter and held 105 million as of Sept. 30, according to a filing. In August, Berkowitz organized an open conference call with Moynihan to reassure investors his bet on Bank of America would pay off.

Jon Diat, a spokesman for Citigroup, declined to comment and Bank of America’s Jerry Dubrowski said the bank doesn’t comment on investor activity. Spokesmen for the investment firms either declined to comment or didn’t respond to inquiries.

--Editors: Rick Green, Steve Dickson

To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net


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