Citigroup is to shut down Old Lane, the hedge fund set up by the group's recently appointed chief executive, Vikram Pandit, less than a year after buying it for $800m (£411m).
The Wall Street giant, one of the banks worst hit by the credit crunch, yesterday announced its intention to "restructure Old Lane and its multi-strategy hedge fund", and is preparing to return money to investors.
Ned Kelly, president and chief executive of the group's hedge fund business, said: "Our hedge fund offerings are important to our success and we must focus our resources and shape our organisation accordingly."
The closure of Old Lane will be a major embarrassment to the investment bank, which bought it last July. Mr Pandit received $165m for his personal stake in the company, which he co-founded, and moved to Citigroup as part of the deal.
It is understood a "key person" clause was triggered after Mr Pandit was appointed to succeed Chuck Prince as Citigroup chief executive in December, taking some of his Old Lane colleagues with him. This allowed clients to withdraw their investments.
Citigroup said: "Following the promotion of key Old Lane executives to other positions at Citi, Old Lane notified investors in its multi-strategy hedge fund that they would have the opportunity to redeem their investments in the fund, without restriction".
Investors will be able to withdraw their cash from the end of next month, the bank said. Mr Pandit and the other managers will have to keep their investment in the funds.
One hedge fund expert said: "Old Lane's closure comes as no surprise. It is rare that a big bank has bought a hedge fund and really made it work."
It has been a tough year for hedge funds in the wake of worsening financial conditions. High-profile blow-ups include Peloton Partners in March, while Citigroup's alternative investment business posted an 89 per cent slump in profits during the fourth quarter of 2007 compared to the previous year.