Stories have been swirling over the troubles of hedge fund Old Lane Partners (co-founded, incidentally, by Citigroup CEO Vikram Pandit) for almost as long as the bank has owned it (11 months, to be exact). Or it sure seems that way. But what could have been the final nail in the coffin for a fund that, just last month, announced to its trading partners it had secured a "substantial" amount of fresh capital?

Citigroup Inc. is closing a hedge fund co-founded by Chief Executive Vikram Pandit, 11 months after Citigroup bought the fund's management company for more than $800 million.

Old Lane Partners has been dogged by mediocre returns and the loss of top managers. Citigroup plans to shut it and buy what is left of its assets, according to people familiar with the matter.

Mr. Pandit personally reaped at least $165 million when Citigroup bought Old Lane in July 2007, following its founding the previous year. At the time, many large banks and brokerages saw hedge funds as a lucrative new business. Citigroup was also willing to pay a premium to land Mr. Pandit, who quickly moved up the ladder and became chief executive in December.

But as the fund struggled, Citigroup was forced to choose between pumping new money into it or shutting it down. That created an awkward situation for the new CEO. Mr. Pandit removed himself from the deliberations to avoid the perception of a conflict of interest.

Citigroup officials considered a plan to replenish Old Lane with anywhere from $1 billion to $3 billion of the bank's own capital. In a memo last month, Old Lane's CEO, Guru Ramakrishnan, told trading partners and lenders that the fund had secured a "substantial" amount of fresh capital, according to people who saw the document.

The memo was premature. Citigroup later decided against an infusion, in part because its resources were too strained to devote new capital to Old Lane, people familiar with the situation said. Pummeled by falling housing prices and the credit-market mess, the bank has reported losses of nearly $15 billion for the past two quarters, forcing it to make layoffs and other cutbacks. Citigroup has responded to those losses by raising about $39 billion in capital since last November.

Old Lane's demise is the latest embarrassment for banks that operate hedge funds or have bought stakes in them. Bear Stearns Cos., Goldman Sachs Group Inc. and UBS AG also have stumbled badly in hedge funds during the credit crunch, piling up billions of dollars in losses for themselves or their clients. The problems suggest that hedge funds, typically known for their independence and entrepreneurial spirit, may have trouble thriving within huge financial institutions.

Mr. Pandit was a longtime Morgan Stanley executive and seen as a CEO contender there until his ouster in 2005. The next year, he co-founded Old Lane. Mr. Pandit delivered a sterling reputation, a thick Rolodex of contacts around the world and a team of hedge-fund colleagues with deep expertise in India and other fast-growing emerging markets.

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