How Ken Griffin rebuilt the Citadel ramparts
In the aftermath of the financial crisis, the Citadel was on the verge of collapse. Many thought it was beyond the rescue.
Today, after navigating the market fallout from the coronavirus pandemic, the Chicago-based hedge fund has solidified its position as one of the industry’s titans – and one of its most important magnets for criticism.
The change in fortunes marks a dramatic rehabilitation devised by the group’s self-confident founder, Ken Griffin, 52, who boasted in 2015 that Citadel makes money like an automaker makes cars.
The company’s assets under management have more than tripled over the past decade to over $ 34 billion, in funds that trade everything from blue chip stocks to exotic debt and commodities, and it has been closed to new money for the past five years.
Its flagship Wellington fund returned 24.4% in 2020 – more than double the average hedge fund earnings – and is up 6% in the first three months of 2021, according to investors.
Citadel is now ranked by investor LCH Investments as the fourth highest grossing hedge fund in history, and Griffin’s personal fortune is estimated at around $ 16 billion by Forbes.
Last year’s performance was in stark contrast to Citadel’s near-death experience in 2008. “We’ve been firing on all cylinders,” Griffin said in an interview, recalling how one of his investors recently compared the company to an F-22 fighter plane.
“A lot of other companies are fighting in a biplane, and in times of turbulence they have to retreat to safer ground,” he added. “Now that doesn’t make us waterproof, but we’ve invested over the decades to be safer at times like these. “
But Citadel has also been the subject of intense scrutiny and controversy this year. He played a leading role in the GameStop stock market chaos, when an army of retail investors gathered on Reddit’s WallStreetBets forum to take on hedge funds betting against the video game retailer and several others ” memes actions ”.
Citadel stepped in with a $ 2 billion cash injection to help Melvin Capital, one of the largest hedge funds burned in the uproar. Meanwhile, its sister company Citadel Securities, which is the largest market maker in U.S. stocks, has been blamed by Redditors for brokerage firm Robinhood’s decision to cut trading on GameStop at the height of the frenzy.
While Griffin testified in Congress that none of his companies played a role in Robinhood’s decision to stop the business – debunking a popular conspiracy theory peddled by Reddit traders – Democratic Congresswoman Rashida Tlaib captured the popular mood towards hedge funds when she ranted at Griffin in the hearing. “You are irresponsible and he [the market] is set up in a way that only helps the rich, ”she said.
Griffin sweeps away political stigma like demagoguery. He said he was confident that the “incredibly positive impact” of Citadel and Citadel Securities will shine through.
“I didn’t think of us as having emerged in this position [as a populist bogeyman]because much of what we do is clearly constructive for capital markets and widely appreciated by regulators and policymakers around the world, ”he said.
Citadel is now almost unrecognizable from the company founded in 1990, when Griffin turned his dorm hobby trading convertible bonds at Harvard University into a seed investment from investor Glenwood Capital.
The young company has made a name for itself by delivering stable and strong returns – and by taking advantage of the misfortune of others, picking up the carcasses of rivals such as LTCM, Amaranth, Sowood and Enron for struggling assets and business talent. Then came 2008. Citadel lost $ 8 billion that year and was forced to freeze investor withdrawals as markets collapsed.
Insiders and outsiders alike claim that the Citadel’s rebound from the financial crisis was largely due to three related factors: rapid adaptation to a changing financial ecosystem; a business model that supports heavy investments in technology and talent; and Griffin’s demanding requirements.
In response to the 2008 financial crisis, regulators cracked down on bank risk-taking, and the trading desks of “owner” banks that once looked like large internal hedge funds were abandoned. This has enabled hedge funds like Citadel to recruit the best talent.
The group’s cost structure has strengthened its capacity to do so. Citadel uses a “multi-manager” model, where individual teams of traders and portfolio managers operate relatively autonomously. All costs, such as salaries, bonuses and technology investments, are passed directly to investors instead of management fees.
Like Israel Englander’s Millennium Management and Michael Gelband’s ExodusPoint, this has allowed Citadel to aggressively hire traders – knowing that the cost is borne by investors – and quickly eliminate those who malfunction.
Yet even in an industry known for ruthlessly firing underperforming traders, Griffin has a reputation for being a tough boss. “There’s not a lot of empathy,” said a former employee. “It can be an asset when things get crazy because I don’t think he feels stress the same way everyone does. There is just this desire to be the best at everything, and everyone is helping or not helping it achieve it.
Another former executive argues that Griffin’s relentlessness raises the bar: “He often looks at legal agreements, snippets of code, or analyst models. And if you know Ken might be looking at your work, you double-check it.
Griffin makes no apologies for the corporate culture: “If you’re willing to love being a good competitor, you love working here. ”
Jack Woodruff, who left the Citadel in 2019 to start his own hedge fund, described Griffin as “tough, but fair” and the company as a Darwinian platform: “If you do well, you are rewarded, and if you do. don’t, you’re fired. It is not a political place at all. It is capitalism in its purest form.
Some investors have been put off by the cost of the pass-through model, which is often far more than the flat management fee of 1-2% of assets that most hedge funds charge. But for others, its long-term returns net of all costs make it a desirable investment. The waiting list of clients wishing to enter its funds amounts to tens of billions of dollars, according to a person close to the firm.
This despite what some investors describe as a fairly opaque company. “It’s a black box investment. Very little transparency, ”said a former investor whose money was returned. “But our long-term returns were great and we were sorry to be redeemed.”
There have been missteps along the way, including a failed post-financial crisis attempt to set up an investment bank and repeated flirtations with public listing that never materialized. More recently, critics claim that Citadel’s aggressive leveraged treasury deals were only saved by the extraordinary stimulus from the Federal Reserve in March 2020.
Some worry about its quiet influence on regulators and policymakers. Treasury Secretary Janet Yellen was paid nearly $ 800,000 by Citadel to deliver a series of speeches after stepping down as Fed chairman in 2018, and Citadel retains former Fed Chairman Ben Bernanke as to advise. Citadel Securities has hired several former senior SEC officials, and last week bought out Heath Tarbert, until recently the head of the main US derivatives regulator.
Griffin’s fortune did not seem to shake his ambition.
The hedge fund industry is still balkanized compared to most other sectors, he said. There are thousands of companies and Citadel represents only about 1% of the industry’s total assets under management.
An insider observes that Griffin views every dollar Citadel returns to investors as a defeat, as it will instead only be redirected to a rival.
Still, in a veiled beard against many of his competitors, the founder of Citadel is vehement that he won’t compromise on returns just to amass a bigger war chest. Instead, the hedge fund invests in areas such as machine learning, corporate bond trading, and better data to steadily increase the productive capacity of its various strategies over time.
“We’re always trying to improve our ability to predict tomorrow, next week, next month, next quarter and next year,” Griffin said. “[But] I prefer to engage in the pursuit of excellence than in the pursuit of strengths.