NEW YORK - Citigroup Inc  is in advanced talks to sell its $4 billion hedge fund business to SkyBridge Capital LLC, a New York firm that invests in start-up fund managers, a person familiar with the matter said on Wednesday.

Hammered by the credit crisis and bailed out by taxpayers in 2008, Citigroup said last year it would get rid of billions of dollars worth of businesses outside its core commercial banking and capital markets activities.

Among the assets for sale is Citi's hedge fund business, which includes about $1 billion invested in hedge funds, $2.5 billion in hedge funds that it manages and $500 million worth of stakes in small hedge funds, the person told Reuters.

SkyBridge has emerged from preliminary rounds as the final, exclusive bidder, the source said.

An agreement is expected to be reached by the middle or end of next week. But no formal agreement has been negotiated yet and the talks could still fall apart, the source said.

Among other things, the Citigroup business manages a '40 Act fund that, the source said, requires shareholder approval before the fund can be transferred to new owners.

Citigroup spokeswoman Shannon Bell was not available for comment. SkyBridge declined to comment on the deal, reported by the Wall Street Journal on its website late on Tuesday.

Citi Alternative Investments has been managing funds-of-hedge-funds since 1994. The unit is led by Raymond Nolte and employs about 30 professionals.

Employees at the hedge fund unit would keep their jobs if SkyBridge prevailed. The New York firm, led by managing partners Scott Prince and Anthony Scaramucci, provides capital to hedge fund managers in exchange for a share of its fees.

The deal would not include Old Lane Funds, a hedge fund business launched by Vikram Pandit in 2006 and acquired by Citigroup in April 2007, the source said.

The Old Lane deal brought Pandit to Citigroup, which began suffering big losses on mortgages and other debt. By the end of that year, Pandit was named chief executive of the bank. (Reporting by Joe Giannone; Additional reporting by Clare Baldwin and Dan Wilchins; Editing by Kim Coghill and Gerald E. McCormick)