Citadel Capital LLC is a Chicago headquartered hedge fund manager, founded by Kenneth Griffin in 1990 and has offices in New York, Boston, San Francisco, London and Hong Kong. Griffin is a self-made billionaire who successfully founded and transformed Citadel into one of the largest hedge funds of the world. With assets under management at about $13 billion (down from a high of $20 billion), Citadel is one of the biggest traders of securities with daily trading volume averaging about 3 per cent of total daily trading activity in New York, London and Tokyo. As of 2011, Griffen’s net worth is estimated at about $2.3 billion by Forbes magazine.
Griffin earned his degree in economics from Harvard University and is said to have started two funds from his dorm room, and would trade between classes. In order to get real-time stock quotes, Griffin even rigged a satellite dish outside his dorm room. He assembled a convertible-arbitrage portfolio with money from his family, and had short positions when the markets crashed in 1987. Impressed by investment acumen, he was offered a relatively small fund of $1 million by a hedgie Frank C. Meyer, founder of Glenwood Capital. Griffin exceeded Meyer’s expectation and more investors were persuaded to back the young fund manager. Citadel was born on Nov. 1, 1990 with $4.2 million in assets. Griffin proved his mettle and investors were rewarded with huge returns. Citadel has returned 22 per cent – net of fees, between 1998 and 2007, and employs about 1,400 people today, including engineers, mathematicians, physicists and investment analysts. Citadel was the first hedge fund manager to launch publicly traded debt bonds in 2006.
Citadel is a quant fund that runs computer programs furiously to buy and sell securities for two of its main funds; Kensington Global and Wellington, and clocks more than 3 per cent daily trading volume in London, Tokyo and New York exchanges, about 15 per cent of the options market and nearly 10 per cent of the Treasury bond market.
Griffin’s funds are highly technology driven, and have a duplicate computer system in an undisclosed location outside Chicago for disaster recovery, a practice more prevalent with big banks but unusal for hedge funds. Citadel is the only hedge fund with a market-making options business and is among the first to have its own stock loan and borrowing capabilities.
Citadel conducts fundamental research and quantitative analysis on ideas and develops multiple investment strategies across the world’s major markets through proprietary modeling and trading tools. Investment in equities involves a rigorous portfolio construction process combined with a suitable risk management framework that is beta-neutral on a daily basis. The equity group in divided in seven industry sectors – Technology, Communications, Media and Entertainment, Energy and Utilities, Healthcare, Financials, Consumer and Industrial. The investment process involves bottom-up company analysis and seeks to generate alpha by identifying under and outperforming stocks in each sector’s universe.
The macro strategy deploys capital across global macro themes based on technical trends and macro-analysis. The macro team leverages both quantitative models and fundamental analysis through a disciplined investment approach and seeks to benefit from directional and relative value investment strategies arising from the G20 and liquid emerging markets, commodities, fixed income, currencies and equities.
The firm has developed a differentiated approach for investing in convertibles that provides fundamental insight by applying inputs from Citadel’s proprietary capital structure model. The convertibles portfolio is composed of mainly US and European holdings and seeks to generate returns through multiple market cycles.
Citadel’s activity in the energy sector includes the North American natural gas and the European gas and power markets along with participation in the global crude oils and refined products market. The energy team blends quantitative analytics with fundamental market expertise to identify directional and relative value investment opportunities.
The Global Fixed Income focuses primarily on the G7 interest rate markets and deploys capital in liquid products including nominal and inflation protected government bonds, interest rate swaps, agency mortgage-backed securities, futures, and options. In order to capture pricing anomalies, the Global Fixed Income undertakes a rigorous portfolio construction process that employs macroeconomic analysis and quantitative modeling. Additionally the Global Fixed Income strategy invests in the full spectrum of US Residential Mortgage backed Securities and related instruments within the securitized products asset class.
Citadel’s Fundamental Credit strategy seeks to gain by combining research and quantitative analysis and invests in credit instruments in a beta-neutral and relative value framework. Fundamental Credit is organized by industry sector group and aims at maximizing alpha by tracking irregular credit movement based on the underlying’s issuer specific credit movement and event catalysts.
The Quantitative Credit employs Structured Credit and Credit Arbitrage strategies. Structured Credit focuses on trading opportunities across fixed income indices while Credit Arbitrage is a relative value strategy that tries to capture the value difference between bonds, CDS, fixed income indices and their constituent parts.
SHAREHOLDER LETTERS
MEDIA
Citadel’s Griffin: Hedge fund superstar – Fortune April 3, 2007
Ken Griffin Hedge Fund Manager, Citadel Investment – atrader.com June 9, 2010
Kenneth Griffin, founder of Citadel Investment, bashes his peers – nytimes.com May 13, 2008
VIDEOS
QUOTES
Quote 1 (On lack of risk management practice by banks): “When you read that UBS did not even view parts of its mortgage portfolio as having market risk, it becomes very obvious that a number of firms were not dotting the i’s and crossing the t’s when it comes to risk management.”
Quote 2 (On risk managers’ inexperience in general): “Walk across any of the trading floors – they are full of 29-year-old kids. The capital markets of America are controlled by a bunch of right-out-of-business-school young guys who haven’t really seen that much. You have a real lack of wisdom.”
Quote 3 (On lack of government oversight): “The unwillingness of the Federal Reserve and the SEC to require working capital … The sad truth of the matter is it didn’t have to be this way.”
Quote (On setting up exchanges and clearing houses for trading CDSs and derivatives): “It’s not sexy, but it’s simple, it’s cost forward, its straightforward, and it’s what we should have done after 1998. (It) is a very sad commentary on where we are from a regulatory perspective.”
