London-based Portman Square Capital was founded by Citigroup's former head of proprietary trading Sutesh Sharma last year but is yet to start trading. It has scaled back funding plans to $200 million from an original $500 million target, said two sources who spoke on the condition of anonymity because of the sensitivity of the matter.

The smaller asset base has forced Portman to review its fixed costs and it has concluded it can no longer afford to keep Andrew Mack, formerly of Morgan Stanley, as CEO after just five months in the job.

Mack, who stepped down as CEO this week after joining the company in September, will remain at the firm in an advisory role, a Portman spokeswoman confirmed. She declined to comment on the fund's asset raising or expected launch date.

Last month portfolio manager Paul Godfrey left Portman after the hedge fund decided to narrow its trading strategy, the two sources also said, although the fund will continue to trade a range of assets.

Portman's fortunes underline the tough times for new hedge funds as investors choose to put their cash in bigger, established managers. Some prominent start-ups have also shut down after failing to make money.

Portman has its origins in Old Lane Partners, a $4.5 billion hedge fund Sharma co-founded with ex-Citi CEO Vikram Pandit. The decision to scale back its fundraising target is a far cry from the success some Portman members enjoyed at that firm.

Old Lane landed Pandit with $165 million personally when he sold the firm to Citi in July 2007 for $800 million.

Citi then shut Old Lane, leaving Sharma to become its proprietary trading head while Pandit went on to run the U.S. bank until an abrupt exit last year following a boardroom clash.

Sharma and his team began moves to set up on their own when Citi decided to shut down its Principal Strategies unit ahead of new regulations restricting banks' use of their own capital to make bets.

Other Old Lane employees now at Portman include Lalit Kishore Das, the Financial Services Authority register shows.

Prime brokers had touted Portman, which takes its name from the address of the London offices where the team sat while at Citi, to become one of largest launches since the financial crisis.

The firm initially attracted prominent staff from the banking world. Before joining Portman as CEO in September, Mack had spent several years at Morgan Stanley, including as head of Europe for its investment management division.

Under the scaled back team, Sharma will add the CEO brief to his role while Sylvain Imbert, who also worked at Citi, will become chief risk officer in place of Mack.