Reaz Islam former Citigroup Hedge Fund Chief Lashes Out
Reaz Islam the former head of Citigroup municipal hedge funds defended his track record breaking four years of silence since he left Citigroup in August of 2008. Islam had a highly rewarding experience at Citigroup for 18 years and last 12 years he was responsible for building the largest investment management business called Citi Fixed Income Alternatives with over $5 billion capital from Institutional and High Net Worth clients unlike other units within Citi Alternative Investments with large investments from the parent. Islam says, there were no hand outs for us and we build the business from the ground up brick by brick to be where it was prior to the financial crisis in late 2007 and early 2008.
Islam’s fund along with all competitors in municipal arbitrage strategies suffered heavy losses during the crisis and has attracted much negative attention. Islam who is reserved and low key, says we never wanted publicity in good days and did not care much about how press depicted in bad days until now. Asked about why he broke his silence after four years - he said, "Someone had to speak up since no one talks about the facts and success of these funds prior to the crisis but focus only on the losses which was not in our control – it is unfair not just for me but 30 plus dedicated professionals who worked years on these funds directly." About his experience during the crisis Islam bluntly stated, "I have no regrets since none of us could have saved the funds in the end, and obviously I learned a lot from the crisis, notably to expect the unexpected at all times and how people change color in times of crisis."
Islam, also told Bloomberg that he wouldn't do anything differently.
According to Islam, no one saw the collapse of this magnitude and speed otherwise trillions of value could not have vaporized from the capital markets during the crisis. "I still think about it, given all the facts at that time, if we could have done anything differently," he wrote to Bloomberg News. "The answer is consistently no."
He said, I have had 18 rewarding and successful years at Citi and one bad year will not change anything.
Performance of Municipal Arbitrage pre-crisis
He says prior to the financial meltdown until late 2007, his Municipal Arbitrage performed very well and generated substantial returns for at least five years since he launched the first fund in 2002. According to disclosed Marketing Material for MAT Five issued in early 2007, the family of funds generated returns of 14% per year on average including tax savings and these returns were mostly realized and distributed quarterly. The funds also had an annualized volatility of 15%. Islam states, the returns as well as risks were no secrets -- due to years of strong and consistent performance these funds attracted 1000+ wealthy qualified purchasers or accredited investors and attracted almost $2 billion capital over five years he said, remarkable by any standard. Islam explains investors who were in the funds in 2002, 2003, 2004 and 2005 received realized returns as a percent of invested capital of more than 60%, 50%, 40% and 30% plus respectively, even prior to the crisis in late 2007.
"Unfortunately, like many things in life, the strategies no longer worked after the material and sustained change in correlation in early 2008, breaking 15-plus years of strong history of correlation, the key driver of the strategy," Islam explained. "Every manager in the space had the same fate, with no exception, let alone 100+ investment funds adversely impacted by the market turmoil." Islam explains – anyone logical would understand if a building that was built to sustain tremors of up to 10 in a richter scale, encounters an earthquake of magnitude of 20 in the richter scale – the impact will be catastrophic and certainly decimate the structure, and ALL other issues become a nonevents. In his view, this was very similar to what took place in the violent move in the ratio -- the key driver of the strategy, he says. “Analyzing the magnitude and speed of the adverse ratio move in last few days in February 2008, reveals exactly that. Islam says, "There was always some remote probability of this unpredictable event and that is why documents included risks that ultimately killed the strategy as extreme outliers become the reality for an extended period in late February 2008.”
Islam said, “If I knew what was about to unfold, I would not have risked my own funds let alone anyone else's. Similar analogy can also be made for now extinct Structured Investment vehicles (SIV) that had a similar fate across the board without exceptions and shattering a consistent history of over two decades.” The world has changed and none of these strategies are any longer viable, he added.
He also stated to Bloomberg -- “Despite all odds, until the final days we did everything we could to protect the investments but failed, given the speed and magnitude of the dislocation that no one predicted,” Islam lost about $2 million, including deferred compensation in these funds. “As a percentage of my net worth at that time, I do not believe anyone lost more money in these strategies as I did, not including loss of my psychological capital.”
Lashing out at the critics Islam said, "We have always operated within our risk guidelines and NEVER took on risks beyond what was expected given the risk profile and target return of the funds." Claims otherwise are “non-sense” he said - you do not get 14% returns without taking risk and risks including the leverage ratio were properly disclosed and well known. Islam says, "prior to the crisis in 2007 and 2008, I have never heard of a single complaint" and those who are now claiming they did not know of the risks, "either engaged in fraud or highly irresponsible for not even reading the three page fact card that spelled out the key risks clearly let alone the offering documents and subscription agreement investors signed as acknowledgement prior to investing. This was a high-volatility, high-return strategy and never a safe and riskless investment as claimed by a few rogue, ambulance-chasing attorneys," Islam said.
Bloomberg reported that the Financial Industry Regulatory Authority has already ordered Citi to pay ASTA/MAT investors $60 million, and there are 69 arbitration claims remaining. Bloomberg also reported Murdock and Gerald Hosier, who live in Aspen, Colorado, won $54.1 million from the bank through a Finra arbitration claim which seems to be the single claim representing vast majority of the $60 million reported by Bloomberg. Bloomberg also noted that Citigroup intends to appeal the latest decision, according to its annual filing last month. Islam mentioned that Citi's legal team never contacted him about this $54.1 million arbitration and he has no knowledge of the details and cannot comment on it. Islam said he never marketed the funds to the investors, the key issue in all the complaints. However, Islam defended the marketing materials that he was familiar with, saying, "we talked about every risk in the prospectuses" and that "the marketing materials, including the term sheet risk disclosures, were comprehensive, written in plain English and idiot-proof."
About the remarks from adversaries Islam says -- truth hurts, and reaction by certain quarters for my comments are just fine, and will not change the history, facts about the funds and I am not losing sleep over it. Islam has moved on and joined a New York based frontier fund LR Global Partner in 2008 as a managing partner and he is responsible for building its business in Asia Pacific. The firm manage about $250 million investments in frontier markets, and most of it is overseen by Islam from the Dhaka and New York Office. Company website indicates that his funds generated annualized 8.9% return since 2010, remarkable 18% above the benchmark.