In 2002, Citigroup’s Smith Barney brokerage unit started marketing six MAT/ASTA hedge funds to its clients. These Citigroup proprietary funds were trusts, which used borrowed money to buy municipal bonds, and were supposed to make profits based on the spread in interest rates between borrowed and invested funds. Total assets in these funds were approximately $15 billion.
The strategy the funds engaged in is called municipal arbitrage. More bluntly, it has been described as “picking up nickels in front of a steam roller.” Supposedly, the highly leveraged funds hedged their risk, but, as is often the case, things did not work as planned. Interest rates on municipal bonds fell as yields on the borrowed money escalated. And then products, which investors assert they were led to believe were conservative and perfectly suitable for investors looking to preserve capital, sustained losses of up to and even over 90%.
By April 2008, the Wall Street Journal was reporting on the losses in MAT/ASTA funds and another called Falcon, under the headline “Inside Citi, a Hedge-Fund Push Blows up: Brokers’ Pitch to Investors Was One of Low Risk.”
Investors who believe that they were misled about the safety and suitability of MAT/ASTA and other supposedly safe places to invest money (after all, most people regard fixed income funds as an alternative to risky stocks and stock funds) have been successful in recovering losses through FINRA arbitration.