Citadel Investment Group

From Wikipedia, the free encyclopedia

Jump to: navigation, search
Citadel Investment Group, L.L.C.
Type Private, Limited Liability Company
Founded 1990
Headquarters Flag of the United States Chicago, Illinois, USA
Key people Kenneth C. Griffin, Founder and Chief Executive Officer
Industry Hedge fund Management
Products Alternative Investments
Employees 1,200
Website www.citadelgroup.com

Citadel Investment Group is an international financial institution based in Chicago, Illinois. 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 and a multi-manager investment strategy that deploys capital with unaffiliated managers.

Contents

[edit] Activities

It should be noted that it has not been possible to verify numbers in this Wikipedia article since many of these are not released by Citadel as a matter of commercial policy. Capital markets are dynamic and staffing structures and market shares change over time.

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 London, New York, Hong Kong and San Francisco. Additionally Citadel's capital markets 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.[1] 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.[2] [3] Citadel also has offices in New York, Hong Kong, San Francisco, and London [4] Of the 100 largest hedge funds, Citadel's is the only based in Chicago.[5] Citadel is the eleventh largest hedge fund manager in the world [5]; it is also the second largest multi-strategy hedge fund manager in the world.[6]

In promotional material, Mr. Griffin states that Citadel’s technology capabilities “gives us a substantial competitive advantage in the market place …and that’s why, when Amaranth needs a partner or Sowood needs a solution or E*TRADE needs capital infusion or the investment banks have a large risk transference trade to do, they come to Citadel.” [7]

[edit] Fees

An April 2005 Bloomberg news article [8] noted that David Shaw's D.E. Shaw & Co., which then had $14.7 billion in assets under management, and Tudor Investment 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, with Citadel investors bearing the entire cost of running the company charging investors 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”.[9]

[edit] 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.) [1] 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.” [7] 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." [10]

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."[11] Griffin is the son of a former GE project manager.[12]

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."[13]

[edit] 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.[14] 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.[15] The bonds have been given an investment-grade rating by Standard & Poor's.[16] Citadel has repurchased a significant portion, approximately $200M, of its debt on secondary markets since March 2008. [17]

[edit] Investor Base

Currently, “Citadel’s clients include high-profile sovereign wealth funds, charity foundations, wealthy families and various financial institutions.” 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.” Proud of Citadel’s growth, Griffin recently said, “The name Citadel means strength and it speaks to our culture of performance, risk management and our ability to succeed in volatility."[18]

[edit] 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 B in assets under administration.[19]

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'. [20]

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 $8bn in its tri-party credit lines. Based on the 2006 SEC 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.[21]

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 $1bn Fusion fund of funds, and has reallocated these assets to emerging hedge fund managers.[22] 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 M of debt, $400 M 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.”[23]

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”. [24]

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.[25] 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"[26] 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.[27]

In a 2005 interview with Harvard College Investment Magazine, Griffin had previously observed [1] “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." [2]

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. [28]

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” [29].

Some market participants have noted with concern[citation needed] 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". [3]

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) [30] market from its existing over the counter (OTC) format to being cleared via an exchange.

In recent months, Citadel and the CME Group have partnered in creating a clearing and exchange solution for the $43 trillion credit default swap (CDS) market, called the Credit Market Derivatives Exchange, or CMDX [31]. The new platform is awaiting regulatory approval before trading can commence.

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 [32]. CDS instruments also play an important role as an “effective risk management” tool, which makes CMDX “more important than ever as investors seek transparent, secure and liquid market alternatives,” said CME Group Executive Chairman Terry Duffy [33]. This solution represents a compelling and straightforward response to the issues inherent in today’s opaque, over-the-counter CDS market [34].

In a recent interview with Ann Saphir of Crain’s Chicago Business, Ken Griffin and Craig Donahue, CEO of the CME Group, confirmed that, pending regulatory approvals, the platform is up and ready and that interest has been high [35].

The CMDX solution will offer the following benefits:

-On day one counterparty risk in the CDS market will be immediately reduced by migrating OTC bilateral contracts into CME Clearing

-An unmatched default solution: The CME’s $7B fund is the largest default pool by over 100percent and pool will only grow

-Greater transparency as regulatory authorities will have immediate access to trading information and all positions will be fully transparent

-Immediate confirmation of trades, avoiding the operational risks associated with unconfirmed CDS transactions

-Tested and proven infrastructure specifically designed for CDS products

-CME’s unparalleled 110 year history of product innovation and managing risk without a single default

Speaking before Congress, Ken Griffin commented that “our solution is an example of how industry in cooperation with regulators can solve complex market problems” [36].

[edit] Investments

In 2004, Citadel founded CIG Re, a Bermuda-based catastrophe reinsurer [37]. In 2005, the hedge fund founded a $500 million catastrophe reinsurer in Bermuda called New Castle Re [38].

Citadel also has multiple subsidiaries such as Kensington Global Strategies (Citadel's largest fund [39]), Wellington Partners [40] (Citadel's oldest fund and its flagship fund [41]), Citadel Equity Fund [42], Citadel Finance [4], and Citadel Derivatives Group, which controls 10% of the Philadelphia Stock Exchange [5]. In 2000, Citadel's Wellington affiliate achieved a 52.6% return [6]. Since January 2005, Citadel Derivatives Group has been a Lead Market Maker on the trading floor of the Pacific Coast Exchange [7]. In a strategic partnership with about ten other financial institutions, Citadel Derivatives Group is also a joint owner of the International Securities Exchange [8].

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 [9] [10].

In 2007, Citadel acquired a sizable stake in online brokerage E*TRADE [11]. A Bloomberg News story on 5th Sep 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 $2.55bn stake implying a possible loss of as much as $2.14 bn 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.

Citadel's daily trading activity reportedly accounts for "some 20 to 25% of all the options contracts in America" [7].

[edit] Other information

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

[edit] Notes

  1. ^ a b Fortune (2007 April 3). "A hedge fund superstar". CNN. http://money.cnn.com/magazines/fortune/fortune_archive/2007/04/16/8404298/index.htm. Retrieved on 2007-12-07. 
  2. ^ Carr, Robert (2006 October 27). "Citadel Center Trades in $560M Transaction". globest. http://www.lightstonegroup.com/press_102606.html. Retrieved on 2006-01-27. 
  3. ^ "Dearborn Center Announces 206,146-square-foot (19,151.6 m2) Lease with Citadel". Beitler RE Corp. 2001 March 9. http://beitlerre.com/story.php?id=32&PHPSESSID=46018398e1c902347809b2c3de2b1a6c. Retrieved on 2006-01-27. 
  4. ^ "Harbin Electric Closes $50.0 Million Financing". Harbin Electric. 2006 August 31. http://www.harbinelectric.com/News/08-31-06-02.htm. Retrieved on 2006-01-27. 
  5. ^ a b Rose-Smith, Imogen (2006 2006). "Land of the Giants" (PDF). Alpha magazine. pp. 3. http://www.deshaw.com/articles/Alpha.pdf. Retrieved on 2008-03-20 (dead link). 
  6. ^ Hutchins, william (2006 December 8). "Citadel leads the way in financial self-sufficiency". Financial Times. http://www.financialnews-us.com/?page=uspeoplemoves&contentid=1046717350. Retrieved on 2006-01-27. 
  7. ^ a b c Staff, Staff (2008). "Alpha Hedge Fund Hall of Fame". Alpha magazine. pp. 10. 
  8. ^ http://www.bloomberg.com/apps/news?pid=nifea&sid=asibq1F2VEMk
  9. ^ http://online.wsj.com/article/SB123111803544652709.html
  10. ^ http://www.bloomberg.com/apps/news?pid=nifea&&sid=asibq1F2VEMk
  11. ^ http://www.bloomberg.com/apps/news?pid=nifea&sid=asibq1F2VEMk
  12. ^ http://www.portfolio.com/executives/features/2007/03/29/Opening-Up-the-Citadel?page=0
  13. ^ http://money.cnn.com/magazines/fortune/fortune_archive/2007/04/16/8404298/index2.htm
  14. ^ Reuters (2005 April 29). "Citadel Investments to stay private". Crain's. http://chicagobusiness.com/cgi-bin/news.pl?id=16336. Retrieved on 2006-01-27. 
  15. ^ Reuters (2006 November 28). "Citadel to sell up to $2 billion in debt". Crain's. http://www.chicagobusiness.com/cgi-bin/news.pl?id=23009. Retrieved on 2006-01-27. 
  16. ^ Anderson, Jenny (2006 December 1). "INSIDER; Some Hedge Funds Decide That Relying on Banks Is Just Too Risky". The New York Times. http://select.nytimes.com/gst/abstract.html?res=F10A16FA355A0C728CDDAB0994DE404482. Retrieved on 2006-01-27. 
  17. ^ "Citadel Buys Back $200M In Debt". EMII.com. 2008 March 25. 
  18. ^ Huiyin, Chen (2008 April). "Griffin: Arbitrage in Volatile Markets". Caijing Magazine. 
  19. ^ http://www.reuters.com/article/pressRelease/idUS174065+20-Oct-2008+BW20081020
  20. ^ http://www.efinancialnews.com/homepage/content/2452119074
  21. ^ http://www.portfolio.com/executives/features/2007/03/29/Opening-Up-the-Citadel?page=0
  22. ^ http://www.efinancialnews.com/usedition/index/content/3352338074
  23. ^ http://biz.yahoo.com/bw/081031/20081031005893.html
  24. ^ http://www.marketwatch.com/news/story/sp-downgrades-debt-citadels-main/story.aspx?guid=percent7B3A3949B5-CB84-4803-97F1-3AA9DCCE258Fpercent7D
  25. ^ Kishan, Saijel (2008 December 13). "Citadel Halts Withdrawals From Two Hedge Funds After 50% Drop". Bloomberg. http://www.bloomberg.com/apps/news?pid=20601087&sid=afKCOsImdwgU&refer=home. Retrieved on 2008-12-14. 
  26. ^ >Kent, Jonathan (2008 December 17). "Citadel's hedge fund woes threaten New Castle Re's rating". The Royal Gazette. http://www.royalgazette.com/siftology.royalgazette/Article/article.jsp?articleId=7d8c8b73003001c&sectionId=65. Retrieved on 2008-12-18. 
  27. ^ "Torus takes New Castle Re renewal rights". The Royal Gazette. 2008 December 19. http://www.theroyalgazette.com/siftology.royalgazette/Article/article.jsp?articleId=7d8c9b730030018&sectionId=65. Retrieved on 2008-12-19. 
  28. ^ [http://money.cnn.com/2008/12/08/news/companies/citadel_vickers.boyd.fortune/ index.htm?postversion=2008120905]
  29. ^ Barr, Alistair (2008 October 24). "Citadel's Griffin says firm wil change amid turmoil". MarketWatch. 
  30. ^ http://en.wikipedia.org/wiki/Credit_default_swap
  31. ^ http://www.chicagobusiness.com/cgi-bin/mag/article.pl?id=31032
  32. ^ http://en.wikipedia.org/wiki/Credit_default_swap
  33. ^ http://cmegroup.mediaroom.com/index.php ?s=43&item=2730&pagetemplate=article
  34. ^ http://online.wsj.com/public/resources/documents/kennethgriffin.pdf
  35. ^ http://www.chicagobusiness.com/cgi-bin/mag/article.pl?id=31032
  36. ^ Insert http://online.wsj.com/public/resources/documents/kennethgriffin.pdf
  37. ^ Zuill, Lilla (2005 August 22). "Hedge fund investments in reinsurance broaden". The Royal Gazette. http://www.theroyalgazette.com/apps/pbcs.dll/article?AID=/20050822/BUSINESS/108220122. Retrieved on 2006-01-28. 
  38. ^ finanzanch (2005 April 11). "Citadel forms catastrophe reinsurer New Castle Re - AM Best". AFX & marketwatch. http://www.finanznachrichten.de/nachrichten-2005-11/artikel-1978827.asp. Retrieved on 2006-01-28. 
  39. ^ Toomre, Lars (2006 March 13). "Citadel Investment Group Off to Flying 2006 Start". Toomre Capital. http://www.toomre.com/node/326?PHPSESSID=9149edee3bfc92e3eb3e423f9eaac5d2. Retrieved on 2006-01-28. 
  40. ^ Mannes, George (2004 November 15). "Citadel Storms Into Google". thestreet.com. http://www.thestreet.com/_yahoo/tech/georgemannes/10194349.html. Retrieved on 2006-01-27. 
  41. ^ Maday, Tom (2001 September). "Meet Ken Griffin" (PDF). Cover Story (Institutional Investor). http://ddo.typepad.com/ddo/files/Citadel_2001.pdf. Retrieved on 2006-01-28. 
  42. ^ Morgan Lewis (2004 October 14) (PDF). Court halts investor squeeze out by DEPFA Deutsche Pfandbriefbank AG. Press release. http://www.morganlewis.com/pubs/DEPFA.pdf. Retrieved on 2006-01-28. 

[edit] External links

v • d • e
Hedge funds and Alternative investments
Investment
strategy
Directional
Other
Trading
Related
terms
Markets
Misc
Investors
Hedge funds • Hedge fund managers • Alternative investment firms
Retrieved from "http://en.wikipedia.org/wiki/Citadel_Investment_Group"
Personal tools