Citigroup has committed $1 billion (£498 million) to bail out six of its hedge funds hit by turmoil in the municipal bond market, adding fuel to fears that a meltdown is on the way.

Managed by Citigroup under the ASAT Finance and MAT Finance names, the funds have already used up $600 million to allow them to continue trading and meet margin calls, Citigroup said.

The bank pledged a further $400 million to the funds, which had capital of about $2 billion and total assets of about $15 billion.

A spokesman for Citigroup said: “Returns have been hurt by one of the most volatile periods for fixed income, in particular municipal markets, in recent memory.

“The investment from Citigroup provides the funds with additional equity capital and enough liquidity to make margin calls, continue to operate and potentially recover a portion of the decline in net asset values,” the spokesman added.

The main mover of markets in the past few weeks has been worry over the strength of the US bond insurers to which banks and insurers are thought to be heavily exposed.

Many hedge funds have recently been forced to sell billions of dollars of municipal bonds to meet margin calls as their insurers, including MBIA and Ambac Financial Group, worried about their ability to cover defaults.

Last week, Peloton Partners, the London-based hedge fund, was forced to liquidate its two funds and effectively shut up shop.

The problems with Citigroup’s hedge funds highlight the risks run by the many Wall Street groups that have set up or acquired hedge funds in an attempt to increase trading profits and capture high fees from investors.

Citigroup has already been forced to bail out one of its best-known hedge funds with a $100 million capital injection and it also shut the door on redemptions from CSO, a $500 million hedge fund based in Berkeley Square, London, after investors tried to withdraw almost a third of the funds. CSO specialised in the corporate credit markets.

It piles further pressure on Vikram Pandit, Citigroup’s chief executive, to stem the bank’s losses, which forced the resignation of Charles Prince, his predecessor. The world’s biggest financial services operator is still reeling from $18 billion of writedowns as a result of its exposure to sub-prime mortgage markets.

Meanwhile, Carlyle Capital Corporation (CCC), the Dutch-listed affiliate of US private equity firm Carlyle, said yesterday that banks seized and sold another $700 million of assets, bringing the total liquidated to $5.7 billion.

CCC, which invests in mortgage-backed securities, said it was still in negotiations with its banks to prevent them from liquidating the remaining $16 billion of assets.

It had asked the banks to grant standstill agreements while talks were held and said that no further notices of defaults had been received. CCC has already received $150 million in a revolving credit facility from Carlyle Group.

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