Citigroup acquires hedge fund

Vikram Pandit, the high-flying banker who dramatically walked out of Morgan Stanley two years ago, has emerged as the new head of Citigroup's hedge fund business and a potential successor to Chuck Prince, Citigroup's chief executive.

Mr Pandit is joining Citigroup after it agreed to buy his hedge fund business, Old Lane, which he founded barely a year ago.

It is thought that, including payments contingent on future performance, Citigroup could pay $800m (£403m) for Old Lane, making the deal one of the most expensive ways to hire new boardroom talent. But snaring Mr Pandit is a coup for a banking giant that is in turmoil, and which this week said it was sacking or relocating 26,500 staff to save costs.

The 50 year old Mr Pandit - who was raised in Mumbai, India - has been managing $4.5bn for Old Lane clients, and the fund's focus on India is attractive to Citigroup, which has promised to seek more business in emerging markets. The addition of Old Lane's assets takes Citigroup's alternative asset management business to $59bn.

Mr Pandit, who had been head of sales, investment banking and trading at Morgan Stanley, set up Old Lane with John Havens, who had been the group's head of equities. The pair's resignation in 2005 was among several that triggered a crisis at the bank. Although Mr Pandit had been considered a contender to run the whole group, he was passed over for promotion when Philip Purcell, then Morgan Stanley's chief executive, elevated two lesser-known favourites. Mr Purcell was ultimately fired after shareholder criticism of his ability to hold on to key talent.

Mr Prince said yesterday: "This transaction is an investment as much as it is an acquisition. It is an investment in world-class talent at Old Lane; in a senior leadership team with a track record of building profitable businesses in institutional securities; and an investment in Vikram and John."

At Citigroup, Mr Pandit will run the alternative investment division, which has been leaderless since last spring, when Michael Carpenter stepped down to focus on starting his own venture. The bank has been criticised for failing to invest heavily in hedge funds, which have become a lucrative - if potentially volatile - source of income for giant financial firms.

Robert Rubin, the former US Treasury Secretary, who sits on Citigroup's board, is reported to be a big cheerleader for Mr Pandit. The important post puts the newcomer in contention as a successor to Mr Prince, who is seven years his senior and who is unloved by Wall Street due to Citigroup's poor share price performance during his five years at the helm.

The stars of previous potential successors to Mr Prince have faded in the past year. Todd Thomson was sacked as head of the wealth management division after criticism of his lavish spending and Sallie Krawcheck was shunted sideways from the job of chief financial officer after failing to rein in overheads.