For more than a year, ­Citigroup (NYSE: C - News) 's management and its share price have been haunted by the US ­company's well-publicised exposure to troubled ­mortgage securities and the global economic slowdown.

But the huge writedowns and dwindling market value of what once was a financial behemoth have partly ­overshadowed the problems at its hedge fund unit.

Citigroup Alternative Investments (CAI), which Vikram Pandit oversaw between April and December last year before he was ­elevated to the chief ­executive role at the bank, has been beset by a string of setbacks.

The most high-profile ­setback came this June when it shut down Old Lane, the fund co-founded by Mr ­Pandit and sold to Citigroup for an estimated $800m last year, after poor results.

The move forced Citi to take $9bn of Old Lane assets on to its balance sheet and take a writedown of more than $200m. Citi this year had to launch a $1bn bail-out of six hedge funds that had been caught out by the turmoil in the municipal bond market.

It emerged on Tuesday that Falcon, a fixed income fund that had $10bn under management at its peak, is being unwound, with investors likely to receive no more than 45 cents on the dollar.

Without a $250m subsidy from Citi, these investors would probably get back only half that amount, people familiar with the matter say.

According to regulatory filings, client assets in CAI fell 19 per cent this year, from $48.7bn at the end of 2007 to $39.4bn at the end of September. CAI also manages $9.9bn of Citi's own capital.

Citi said on Tuesday: "All CAI funds are subject to comprehensive internal ­fiduciary and risk management oversight and senior level management supervision.

"As with many other ­credit-based investment products, investment returns have been hurt by one of the most volatile periods for fixed income in history."

To be sure, CSO, Old Lane and the other Citi funds are not alone.

Golden Tree, a New York credit fund, had big losses in European LBO debt, as did Highland Capital which is also unwinding two of its funds.

The troubles at CAI are believed to have been part of the reason why Mr Pandit placed it under the direct control of John Havens, a former Old Lane colleague who now runs the company's securities division.

CAI is still run by Ned Kelly, a former JPMorgan and Carlyle executive, who was recently promoted to head Citi's global banking operations under Mr Havens.