It was, according to one pundit, “the most expensive executive search in corporate history.” Those words proved to be prophetic as Citigroup, just 10 months after paying $800m for the hedge fund Old Lane Partners, which was co-founded two years ago by Vikram Pandit, has agreed to let almost all of the outside investors in the fund get there money back..

Pandit, of course, is now CEO of Citigroup, while the co-founders who came with him—John Havens and Brian Leach—now also hold top positions in the troubled financial services firm.

At the time of the acquisition there was much speculation that Pandit and his partners, who all had management experience at Morgan Stanley, were brought on board to provide more management expertise for Citi.

Obviously, the financial crisis that has enveloped Citigroup had not yet started, and Pandit was expected to get some experience—at least several years—running Citi’s alternatives and investment banking operations before being asked to take the top job.

Only last month did Citi Vice Chairman Lewis Kaden admit that Citi bought the hedge fund to acquire the services of Pandit and the fund’s other co-founders.

Also last month Citi CFO Gary Crittenden said that clients would be permitted to redeem their investments in Old Lane ostensibly because Pandit, Havens and Leach had left the hedge fund for other positions within Citi. In a regulatory filing last Friday, the bank announced that most investors wouild exercise the opportunity to take their money out of the poorly performing hedge fund by July 31.

“In April 2008, substantially all unaffiliated investors had notified Old Lane of their intention to redeem,” Citi said in the filing.

However, Citi is not quite ready to throw in the towel on the fund just yet. In a statement, the troubled financial services giant said, “we are in the process of restructuring Old Lane. Its business and its people continue to be valuable to us. We are confident that we can realize that value over time.”

While the US has been known as a litigious nation for many years, it is just now happening in the UK, especially in the area of employment law. And hedge funds are a target

According to Wendy Robinson and Ramier Mogadishu, founders and partners of Peregrine Law LLP, hedge fund managers in the UK are not paying enough attention to the potential for employment law suits brought for age and sex discrimination.

They point to the case of F&C Asset Management in London, which recently lost a sex discrimination case and had a judgment of GBP13.5m (US$26.4m) won against it by its former in-house counsel. It is the largest judgment every won from a hedge fund in the UK and Robinson and Mogadishu (who weren’t involved in the case) think it bodes ill for the future.

“Hedge funds need to be more aware of potential problems,” says Robinson. A primary example is the trading floor, according to Mogadishu. “There’s the culture on the trading floor that people can say whatever they want as long as they make money,” he says. “But the trading floor is not exempt from rules,” he says, pointing to incidents where female traders have been angered by what are perceived to be sexist comments by their male counterparts.

When hedge funds were raking in money hand over fist they tended to simply “throw money at claimants,” to settle the charges, Mogadishu says. Now, many hedge funds have smaller financial resources to pay claims, but the number of lawsuits is growing, he points out, rising by over 100% in the last 10 years.

The UK still has several advantages over the US when it comes to discrimination suits. There are no depositions with cross examination of witnesses done in the discovery stage of a lawsuit before it goes to trial in the UK as there is in the US. Cases tend to move through the system faster as well, because a claim must be filed within three months of leaving the firm, whereas in the US there is a three-year window.

Robinson and Mogadishu say there are things that can prevent suits from every happening, and that’s what their law firm is focused on. Most hedge funds don’t have large human resource departments to handle employee problems. “We offer hedge funds the ability to get advice (on employment issues) on a daily basis,” says Robinson. They now have two clients who have been guaranteed daily access to them, whenever they need it, wherever they are.

But if the retainer helps them avoid million-dollar judgments, it will prove to be a bargain.

The Middle East may be the next hot spot for hedge funds.

In Deutsche Bank’s annual Alternative Investment survey, which polled more than 1,000 investors with a whopping $1trn in total hedge fund industry assets, close to 50% of fund managers surveyed were bullish on the Middle East markets, and no firm surveyed said that it was planning to reduce its exposure to the region.

Indeed, 32% are planning to increase their exposure to the reason, while 12% surveyed indicated they plan to maintain current exposure levels.

“The results are a clear indication that global hedge fund investors are extremely bullish on the region,” said Penry Jackson, managing director-global markets at Deutsche Bank. “The Middle East is viewed differently from other emerging markets by investors, largely because it is nascent, holds tremendous potential, with very attractive company valuations. While some emerging markets might have peaked, the Middle East is seen as not having realized its full potential yet. We would expect to see many of the traditional barriers to entry in these markets being lowered in the medium term to enable further growth.”

The Middle East/North Africa is a new listing on the survey for 2008.

There seems to be just one tiny fact that these bullish investors aren’t taking into account. The Middle East is not exactly the most stable region of the world. It is a hot spot for potential wars and terrorist activities.

The study said nothing about hedge funds perhaps putting some kind of risk premium on their investments in that region. Indeed, how can one accurately measure the real risk of investing in that part of the world?

One hedge fund manager recently told me that his fund would not invest in the Middle East because his wife wouldn’t let him travel to that part of the world.

I wonder what the costs of insurance will be for executives traveling to the Middle East to visit potential investments.

Hedge fund managers are known for their propensity for risk. Seeking to invest in the Middle East sure backs that up.

“A very intelligent young man”

That’s how John Mansch, chief of the Union City, Georgia, jail, described Kirk Wright, the convicted hedge fund fraudster, who committed suicide by hanging himself in his jail cell last Saturday morning.

Mansch also told the Atlanta Journal Constitution that Wright, 37 years old, didn’t give any indication that he was under duress. Gee, you mean after being convicted of 47 counts of fraud and facing the possibility of more than 700 years in prison he wasn’t under duress?

Wright knew his game was up. Although he had been friends with some National Football League players who invested their money in his firm, International Management Associates, all they wanted from him now was their money back.

There was scant chance that Wright would ever have been able to pay all his investors back, and a good chance he would spend the rest of his life behind bars. Although there is an old maxim that “suicide is a permanent solution to a temporary problem,” it’s doubtful that Wright’s problems were temporary, at least as he saw them.

A lawyer representing some of Wright’s victims, a group of six former NFL players, said Wright’s death will not affect their lawsuit against the NFL and the players union.
Marlon Kimpson said the lawsuit, which accuses the player’s union of endorsing IMA in spite of liens against Wright, will move forward, and the union hadn’t planned to call Wright as a witness.

According to prosecutors, IMA collected more than $155m, of which Wright returned $70m to clients in a Ponzi scheme, lost $31m in his investments, and used the rest of it to live a luxurious lifestyle.