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Citadel Investment Group is an global financial institution based in Chicagomarker, Illinoismarker. Founded in 1990 by trader Kenneth C. Griffin, the firm today deploys investment capital across multiple asset classes and strategies. Current activities include equity options market-making, hedge fund administration, investment banking advisory, and a fund of funds business that deploys capital with unaffiliated managers.

Activities

With over $15B in assets under management (AUM), the firm remains one of the world's largest hedge fund managers and its daily trading volume amounts to approximately 3 percent of average daily trading activity in Londonmarker, New Yorkmarker, Hong Kongmarker and San Franciscomarker. Additionally, the firm's Citadel Securities businesses execute and route more than 30 percent of average US listed equity options trading volume and more than 8 percent of average NASDAQ and NYSE equities volume. Although Citadel employs over 1,400 individuals globally, its flagship operation is located in the Citadel Center a $355 M office tower in the heart of downtown Chicago; in 2006 the tower was purchased for $560 M by Robert Gans.

Citadel also has offices in New York, Hong Kongmarker, San Franciscomarker, and LondonmarkerOf the 100 largest hedge funds, Citadel's is the only one based in Chicago.Citadel is the eleventh largest hedge fund manager in the world ; it is also the second largest multi-strategy hedge fund manager in the world.

Citadel Securities

Since Griffin founded the firm 18 years ago, it has diversified its business from a hedge fund to a financial institution focused on alternative investment management and advisory, attempting to fill the demand gap created by the collapse of Lehman Brothers and Bear Stearns. The firm's investment banking unit, Citadel Securities, is comprised of investment banking advisory, a sales and trading platform, and an industry leading market making franchise. Proud of Citadel’s growth, Griffin has stated, “The name Citadel means strength and it speaks to our culture of performance, risk management and our ability to succeed in volatility."

Credit Market Derivatives Exchange

In March of 2009, Citadel and the CME Group announced they had received SEC approval to launch a joint clearing and exchange solution for the $43 trillion credit default swap (CDS) market, called the Credit Market Derivatives Exchange, or CMDX . In addition to improving transparency, the exchange offers immediate confirmation of trades, avoiding the operational risks associated with unconfirmed CDS transactions. In an interview Citadel's Ken Griffin and Craig Donahue, CEO of the CME Group, confirmed that the platform is up and ready and that interest has been high.

A credit default swap is an unregulated derivative contract between two counterparties where the buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. Credit default swaps also play an important role in a company's risk management procedure, which has made CMDX a compelling solution as institutions seek "transparent, secure and liquid market alternatives,” said CME Group Executive Chairman Terry Duffy . The creation of the exchange was proposed as a solution to one of the many causes of the financial crisis of 2007–2009, as its transparency can provide regulators with immediate access to positions and trading information.

Fee structure

An April 2005 Bloomberg news article noted that David Shaw's D.E. Shaw & Co., which then had $14.7 billion in assets under management, and Tudor Investment Corporation both had less than half as many employees as Citadel does. It stated that unlike most other hedge funds where investors are charged a flat management fee of 1-2 percent of assets and 20 percent of profits, Citadel investors bear the entire cost of running the company, a bill that historically has equaled 3-6 percent of assets for the computer systems and larger-than-average staff. Morgan Creeks' Yusko was quoted as saying "Their expense structure is high compared with others. Ultimately, we overlooked it because their returns were so high." However, in 2008, Citadel “gave back about $300 million in fees it had collected during money-losing months.”

Corporate culture

The local press has called Citadel "Chicago's revolving door". (People close to the firm say turnover is on a par with a typical investment bank's.) Commenting on this reputation, Mr. Griffin has said, “People say...’It’s a tough place to work. It’s demanding. It’s unrelenting.’ I look at these as strengths inherent in strong companies...I’m very proud that we have a sterling reputation when it comes to doing what we say we’re going to do.” Mike Pyles, Citadel's Head of Human Resources stated that "When the markets change, we don't accept lower returns. We aren't that kind of firm. We expect the manager to go and figure out how to make money in the new market. We make no apology for it."

A 2005 Bloomberg interview noted that "[Griffin] keeps a row of management-theory books on a credenza behind his desk, and he says he tries to emulate one of America's most celebrated business leaders, former General Electric Co. CEO Jack Welch."Griffin is the son of a former GE project manager.

Philip Halpern, former endowment manager of the University of Chicago, stated "I like to see some broad experience set when I invest in managers. My concern is that Citadel doesn't have that. The turnover has been too high over the years."

Ownership and financing

Despite prior talk in Wall Street that Citadel was considering an IPO and that Mr. Griffin mentioned the possibility in an interview, in April 2006, a spokesperson for Citadel said the firm currently has no such plans.However, in November 2006 Citadel became the first hedge fund to issue bonds. In a bond offering led by Lehman Brothers and Goldman Sachs, Citadel announced it would sell $2 billion worth of notes. The bonds have been given an investment-grade rating by Standard & Poor's.Citadel has repurchased approximately $200M of its debt on secondary markets since March 2008.

Recent developments

In October 2008, Citadel named Rohit D’Souza as CEO for the firm’s growing capital markets business. The capital markets platform also includes Citadel Solutions, a hedge fund administration business launched in 2007 that serves hedge funds with a total of more than $30 billion in assets under administration.

In the same month, S&P lowered the outlook for Citadel's Kensington and Wellington Funds from 'stable' to 'negative', citing a 'heightened risk of significant redemptions, challenging performance prospects due to highly volatile capital markets and a very difficult funding environment'.

Citadel held a conference call [26] on October 24, 2008 with its noteholders stating that performance year to date was -35 percent for Kensington and Wellington and that the fund maintained a liquid cash position in excess of 30 percent of capital and had undrawn capacity of $8 billion in its tri-party credit lines. Based on the 2006 Securities and Exchange Commission filing at the time of its bond offering, the company's leverage ratio was in excess of 7.8 to 1, although some reports suggest this has been reduced to 4 to 1 presently. This implies a ratio of at least 7.5% of cash to assets.

A 2006 report from Dresdner Kleinwort Benson raised concerns that hedge funds could pose systemic risk to the financial markets, using Citadel's disclosed information as a case study and stating that "at face value, and without being able to look into the black box, the balance sheet of today’s Citadel hedge fund looks quite similar to LTCM." LTCM is the now-defunct hedge fund that was widely thought to have almost brought down the financial system in the fall of 1998 before the Federal Reserve organized a capital injection from existing creditors and counterparties.

On October 27, 2008, following persistent market rumors about Citadel, the Wall Street Journal reported that officials from the Federal Reserve Bank had been checking with counterparties of Citadel Investment Group, Sankaty Advisors, and other large hedge funds to evaluate the impact of any failure on counterparties.

On October 30, 2008, it was announced that Citadel is winding down its $1 billion Fusion fund of funds, and has reallocated these assets to emerging hedge fund managers. No disclosure on recent performance of Fusion has been made, but it is expected that most of the remaining capital will be shifted into its Discovery and Pioneer seeding funds.

On October 31, 2008 Fitch Ratings downgraded the Issuer Default Ratings and senior debt ratings of Citadel's Kensington Global Strategies Fund, Citadel Wellington LLC and Citadel Finance LLC, placing the ratings on Rating Watch Negative pending notification of redemptions. Despite buybacks of $100 million of debt, $400 million of debt remains outstanding.

Fitch stated that they are "concerned that the recent performance of Kensington and Wellington and future challenges to the broader market may increase redemption requests in 2008 and into 2009, eroding the funds' capital cushion". Despite this concern, Fitch analysts also noted that “Citadel will be a long term survivor of this market shakeout given its innovation in funding and expansion into businesses that move beyond asset management.”

On November 6, 2008, the Wall Street Journal reported that Citadel Investment Group had been asked by several banks to come up with more collateral to cover investment losses. It stated that "Citadel's biggest hedge fund has fallen almost 40 percent this year, causing the company to hold talks with lenders including Goldman Sachs, Deutsche Bank and Merrill Lynch".

On November 7, 2008, Reuters reported that Citadel is closing CIG Re, its Bermuda based collateralized reinsurer because the company's cost of capital is now too high.

On November 18, 2008, S&P downgraded the counterparty rating for its Kensington Global and Wellington hedge funds to BBB/A-3 from BBB+. This reflected the investment losses from September and October and ratings might be further lowered if performance does not stabilize. However, the agency did note that “Redemptions for the quarter ending December 2008 are reported to be less than 10 percent of investment capital of the funds and sources of borrowing are still diversified”.

On December 4, 2008, the Wall Street Journal revealed that the largest Citadel funds lost 13 percent in November, bringing the losses for the year to 47 percent. By comparison the Hedge Fund Research HFRX US Global Hedge Fund Index is down 22 per cent this year. Losses came from positions in convertible bonds, bank loans and investment grade bonds. Michael Rosen, principal at Angeles Investment Advisors was quoted as saying "Digging out of this hole may be tough for them", [given the lack of trading in the credit markets].

Kensington and Wellington, two largest Citadel funds with about $10 billion assets under management, lost 49.5 percent of their value between 31 December 2007 and 5 December 2008. As investors sought to take out $1.2 billion, Citadel decided to halt withdrawals. Withdrawals may resume on 31 March 2009. Rating agency [A. M. Best] has placed its A- rating of Citadel-owned insurer New Castle Re's under review, given "continued deterioration faced by their primary investors, Citadel Kensington Global Strategies Fund Ltd. and Citadel Wellington LLC" New Castle Re is going to transfer renewal rights of its contracts to Torus Insurance Holdings, signalling the continued withdrawal of Citadel from Bermuda's reinsurance market.

In a 2005 interview with Harvard College Investment Magazine, Griffin had previously observed [203169] “I don’t think any industry has attracted as much capital over such a short period of time throughout history. With that much capital flowing into the business, it is reasonable to conclude that the prospect for better than market returns going forward is bleak.” He noted the same year that "We're subject to the same forces of capitalism that have built the entire American economy. Strong returns induce more capital flow, which creates more competitors, and you have to evolve and get better, or you die." [203170]

On December 8, 2008, Bloomberg News said that Citadel would be closing down its Tokyo Office and Asian principal investments operations, cutting more than half its jobs in the region and running its remaining Asian operations from Hong Kong.

Mr. Griffin has also recently said that the recent turmoil has created the best opportunities he's seen since he started trading roughly 20 years ago: "We're very excited about the positions in our portfolio in the months and years ahead.” Also, Mr. Griffin noted that “Citadel's market-making business has performed ‘spectacularly’ this year and will be a major growth driver for the firm in future” .

Some market participants have noted with concern the resonance with Merriwether's ill-fated September 1998 letter to limited partners of LTCM that stated "[w]e see great opportunities in a number of our best strategies and these are being held by the Fund". [203171]

Ken Griffin has in the past six months been vocal in his support for providing a solution to move the $43trn credit default swap (CDS) market from its existing over the counter (OTC) format to being cleared via an exchange.

Investments

In 2004, Citadel founded CIG Re, a Bermudamarker-based catastrophe reinsurer . In 2005, the hedge fund founded a $500 million catastrophe reinsurer in Bermuda called New Castle Re .

Citadel also has multiple subsidiaries such as Kensington Global Strategies (Citadel's largest fund ), Wellington Partners (Citadel's oldest fund and its flagship fund ), Citadel Equity Fund , Citadel Finance [203172], and Citadel Derivatives Group, which controls 10% of the Philadelphia Stock Exchangemarker [203173]. In 2000, Citadel's Wellington affiliate achieved a 52.6% return [203174]. Since January 2005, Citadel Derivatives Group has been a Lead Market Maker on the trading floor of the Pacific Coast Exchange [203175]. In a strategic partnership with about ten other financial institutions, Citadel Derivatives Group is also a joint owner of the International Securities Exchange [203176].

In 2006, Citadel and JPMorgan Chase acquired the energy portfolio of the failed hedge fund Amaranth Advisors, which had suffered a 65% ($6 billion) loss in assets [203177] [203178].

In 2007, Citadel acquired a sizable stake in online brokerage E*TRADE [203179]. A Bloomberg News story on 5 September 2008 reported that Joe Russell, a Citadel senior managing director who led the negotiations to acquire E*Trade left after his division suffered losses on the year. Citadel acquisition of E*Trade was announced when its shares were trading at $4.82. A Reuters story on 21st Nov 2008 reported that E*Trade's continued existence would likely depend on whether it received funds from the US Treasury under the Troubled Asset Relief Program (TARP). Its shares traded at 87 cents, down approximately 84% from the time Citadel acquired its $2.55 billion stake implying a possible loss of as much as $2.14 billionn for Citadel on its equity stake. No figure is publicly available for any losses on the credit portfolio purchased from E*Trade at the time of the acquisition.

Other information

Citadel Investment Group is not related to any of the following organizations:

Notes

  1. http://www.chicagobusiness.com/cgi-bin/mag/article.pl?id=31032
  2. Insert http://online.wsj.com/public/resources/documents/kennethgriffin.pdf
  3. http://www.chicagobusiness.com/cgi-bin/mag/article.pl?id=31032
  4. http://cmegroup.mediaroom.com/index.php ?s=43&item=2730&pagetemplate=article
  5. http://online.wsj.com/public/resources/documents/kennethgriffin.pdf
  6. http://online.wsj.com/public/resources/documents/kennethgriffin.pdf
  7. http://www.bloomberg.com/apps/news?pid=nifea&sid=asibq1F2VEMk
  8. http://online.wsj.com/article/SB123111803544652709.html
  9. http://www.bloomberg.com/apps/news?pid=nifea&&sid=asibq1F2VEMk
  10. http://www.portfolio.com/executives/features/2007/03/29/Opening-Up-the-Citadel?page=0
  11. http://money.cnn.com/magazines/fortune/fortune_archive/2007/04/16/8404298/index2.htm
  12. http://www.reuters.com/article/pressRelease/idUS174065+20-Oct-2008+BW20081020
  13. http://www.efinancialnews.com/homepage/content/2452119074
  14. http://www.efinancialnews.com/usedition/index/content/3352338074
  15. http://biz.yahoo.com/bw/081031/20081031005893.html
  16. http://www.marketwatch.com/news/story/sp-downgrades-debt-citadels-main/story.aspx?guid=percent7B3A3949B5-CB84-4803-97F1-3AA9DCCE258Fpercent7D
  17. >
  18. [1]
  19. http://en.wikipedia.org/wiki/Credit_default_swap


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