In the aftermath of the financial crisis, Citadel was on the brink of collapse. Many thought it was beyond rescue.
Today, after navigating the market fallout from the coronavirus pandemic, the Chicago-based hedge fund has cemented its position as one of the industry’s titans — and one of its most prominent magnets for criticism.
The change in fortunes marks a dramatic rehabilitation engineered by the group’s self-assured founder Ken Griffin, 52, who bragged in 2015 that Citadel manufactures money like an automaker manufactures cars.
The firm’s assets under management have more than trebled over the past decade to more than $34bn, 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 fund Wellington returned 24.4 per cent in 2020 — more than twice the average hedge fund’s gains — and is up 6 per cent 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 wealth is estimated at about $16bn by Forbes.
Last year’s performance was in sharp contrast to Citadel’s near-death experience in 2008. “We fired on all cylinders,” said Griffin in an interview, recalling how one of his investors recently compared the firm to an F-22 fighter jet.
“A lot of other firms are fighting in a biplane, and in moments of turbulence they’ve got to retreat to safer ground,” he added. “Now, this doesn’t make us impervious, but we have made the investments over decades to be more sure-footed in moments like these.”
But Citadel has also found itself the subject of scrutiny and controversy this year. It played a prominent role in the GameStop stock market mayhem, 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 other “meme stocks”.
Citadel stepped in with a $2bn cash injection to help Melvin Capital, one of the biggest hedge funds burnt in the tumult. Meanwhile its sister company Citadel Securities, which is the biggest market maker in US stocks, was blamed by Redditors for brokerage Robinhood’s decision to curtail trading in GameStop at the height of the frenzy.
While Griffin testified in Congress that neither of his firms played any role in Robinhood’s decision to halt trading — debunking a popular conspiracy theory peddled by Reddit traders — Democratic congresswoman Rashida Tlaib captured the popular mood towards hedge funds when she fulminated against Griffin at the hearing. “You are irresponsible and it [the market] is set up in a way that helps only the wealthy,” she said.
Griffin brushes off the political opprobrium as grandstanding. He said he is convinced the “incredibly positive impact” of Citadel and Citadel Securities will shine through.
“I haven’t thought of us as having emerged in this position [as a populist bogeyman], because so much of what we do is so clearly constructive for capital markets, and widely appreciated by regulators and policymakers around the world,” he said.
Citadel is today almost unrecognisable from the company started in 1990, when Griffin parlayed his dorm-room hobby trading convertible bonds at Harvard University into a seed investment from investor Glenwood Capital.
The fledgling firm made a name for itself from recording steady and strong returns — and profiting from others’ misfortune, picking over the carcasses of rivals such as LTCM, Amaranth, Sowood and Enron for distressed assets and trading talent. Then came 2008. Citadel lost $8bn that year and was forced to freeze investor withdrawals as markets plummeted.
Insiders and outsiders say Citadel’s rebound from the financial crisis largely came down to three related factors: swift adaptation to a changing financial ecosystem; a business model that supports heavy investments in technology and talent; and Griffin’s exacting demands.
In response to the 2008 financial crisis, regulators clamped down on banks’ risk-taking, and the “proprietary” bank trading desks that had once resembled vast internal hedge funds were jettisoned. That allowed hedge funds such as Citadel to scoop up the best talent.
The group’s cost structure has boosted its ability to do this. Citadel operates 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 on directly to investors in lieu of a management fee.
Like Israel Englander’s Millennium Management and Michael Gelband’s ExodusPoint, this has enabled Citadel to hire traders aggressively — knowing that the cost is borne by investors — and quickly cull those that perform badly.
Yet even in a sector known for ruthlessly firing underperforming traders, Griffin has a reputation as a tough boss. “There’s not a lot of empathy,” said a former employee. “That can be an asset when things are going crazy, as I don’t think he feels stress the same way as everyone else. There’s just this desire to be the best at everything, and everyone is either helping him accomplish that, or not.”
Another former executive argues that Griffin’s relentlessness raises the bar: “He will often pore over legal agreements, bits of code or analyst models. And if you know Ken might look at your work you double-check it.”
Griffin is unapologetic about the firm’s culture: “If you’re wired to enjoy being a good competitor, you love working here.”
Jack Woodruff, who left Citadel in 2019 to set up his own hedge fund described Griffin as “tough, but fair” and the firm as a Darwinian platform: “If you do well you’re rewarded, and if you don’t, you’re fired. It’s not a political place at all. It is capitalism in its purest form.”
Some investors have been deterred by the cost of the pass-through model, which often amounts to far more than the flat management fee of 1-2 per cent of assets that most hedge funds charge. But for others, its long-term returns net of all costs make it a sought-after investment. Citadel’s waiting list of clients wanting to get into its funds running into tens of billions of dollars, according to a person close to the firm.
This is despite what some investors describe as a fairly opaque business. “It’s a black box investment. Very little transparency,” said one former investor whose money was returned. “But our long-term returns were excellent, and we were sorry to be redeemed.”
There have been missteps along the way, most notably an aborted attempt after the financial crisis to build an investment bank, and repeated flirtation with a public listing that has never materialised. More recently, critics say Citadel’s aggressively leveraged Treasury trades were only saved by the Federal Reserve’s extraordinary stimulus in March 2020.
Some worry about its quiet influence on regulators and policymakers. Treasury secretary Janet Yellen was paid almost $800,000 by Citadel to give the firm a series of speeches after stepping down as Fed chair in 2018, and Citadel retains former Fed chair Ben Bernanke as an adviser. Citadel Securities has hired several former senior SEC officials, and last week snapped up Heath Tarbert, until recently the head of the main US derivatives regulator.
Griffin’s fortune has not appeared to dent his ambition.
The hedge fund industry is still balkanised compared with most other sectors, he said. There are thousands of firms and Citadel only accounts for roughly 1 per cent of the industry’s total assets under management.
One insider observes that Griffin sees every dollar that Citadel returns to investors as a defeat — as it will only be funnelled to a rival instead.
Nonetheless, in a veiled barb at many of his competitors, Citadel’s founder is vehement that he will not compromise on returns just to amass a bigger war chest. Instead, the hedge fund is investing in areas like machine learning, corporate bond trading and better data to steadily expand 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,” said Griffin. “[But] I would rather engage in the pursuit of excellence than the pursuit of assets.”