Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

King Ken: Recovered Citadel chief takes the hedge fund throne

Ken Griffin's rise to power
Ken Griffin's rise to power

In April, a hedge fund firm in Chicago snagged arguably the most sought after economic mind in the world: Ben Bernanke.

"He has extraordinary knowledge of the global economy," Citadel founder and CEO Ken Griffin crowed in a statement announcing that his investment shop had hired the former Federal Reserve chairman as a senior advisor. "His insights on monetary policy and the capital markets will be extremely valuable to our team and to our investors."

Bernanke's role at Citadel is part time, given his other duties as a Brookings Institution fellow and advisor to Pimco, the fund giant. But the symbolism of the estimated $1 million hire was clear: Citadel is once again a dominant force in the investment industry.

Seven years removed from a near-death experience during the financial crisis, Citadel is more powerful than ever.

The firm now manages a record $26 billion, a dramatic 170 percent increase from January 2012, when it had just recouped all of its financial crisis investment losses. That mix of performance gains and fresh client capital makes Citadel the 13th-largest hedge fund manager in the country as of January, according to a ranking by industry publication Absolute Return.

The firm's resurgence has arguably made Griffin the most powerful figure in hedge funds. (Tweet This) The 46-year-old's personal fortune increased more than any other hedge fund manager's in 2014, an estimated gain of $1.3 billion, according to Alpha.

Citadel's recent success is undeniable, but the Griffin-rising narrative isn't perfect.

Some continue to view the firm as a challenging place to work with high turnover. And some smaller business lines have been abandoned or much reduced, such as high-frequency trading, investment banking and macroeconomic trading.

King Ken

Griffin is worth an estimated $6.6 billion, placing him seventh on the Forbes ranking of investor billionaires. But those above him are either managing just personal capital (George Soros, Jim Simons and Steve Cohen) or performed relatively poorly last year (David Tepper and John Paulson).

The only more prominent person than Griffin is perhaps Ray Dalio of Bridgewater Associates, the largest hedge fund manager in the world. But Dalio, 65, has been slowly delegating control of the firm he founded in 1975. He remains as involved in investment decisions as ever, but is now assisted by two co-chief investment officers (a title he shares). Operations are led by separate co-CEOs and a president.

Griffin remains firmly in control of Citadel, which he launched with the backing of hedge fund pioneer Frank Meyer in 1990 shortly after graduating from Harvard. At Harvard, Griffin famously traded bonds using a satellite dish he installed on the roof of his dorm.

Like a Super Bowl quarterback, Griffin plays down his role and credits others at Citadel: "You can't succeed in the markets today unless you are part of a great team," he said via a spokesman. "The team is the essence of how you win."

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Citadel's resurgence has been driven by strong returns in its two main hedge funds, Kensington and Wellington.

They lost 55 percent in 2008—compared with an about 10 percent drop by the average multistrategy hedge fund, according to AR data—but have posted double-digit gains every year since, beating most peers.

The funds, which pick and trade stocks, bonds, commodities and other securities, have averaged annual gains of 20 percent net of fees since inception in 1995 and 1990, respectively—among the best long-term track records in the industry (Citadel doesn't have a chief investment officer, and Griffin delegates day-to-day investment decisions to deputies). Spokeswoman Katie Spring declined to comment on performance.

Citadel, based in a gleaming skyscraper in downtown Chicago, has also been diversifying.

While hedge funds still dominate, the tech-savvy firm has been expanding its market making unit beyond stocks and equity options, where it is already a leader. In January, the firm hired UBS veteran Paul Hamill to help build out trading execution services in fixed income, an area where the firm hopes to grow significantly thanks to Dodd-Frank Act derivatives reforms, particularly in the trading of interest rate swaps.

"They've always been two or three steps ahead of everyone else," said Mark Yusko, CEO of hedge fund investor Morgan Creek Capital Management and a longtime client of Citadel. "They are an industry model for how to run a hedge fund."

Delivering Alpha Unfiltered: Ken Griffin
Delivering Alpha Unfiltered: Ken Griffin

Employee churn

Several high-profile departures this year have reminded observers of Citadel's reputation as a challenging place to work.

Derek Kaufman, Citadel's head of global fixed income, resigned in April after nearly seven years at the firm following a $1 billion loss on various trades over 2014. Another to leave recently—despite strong performance last year—was Brandon Haley, head of global equities and a nine-year veteran (two former co-heads of equities also left in recent years, Jeff Runnfeldt in 2012 and Steve Weller in 2013).

And Oliver Weisberg, a managing director based in Hong Kong, left earlier this year to join a family office for Alibaba executive vice chairman Joseph Tsai. Three investment employees in Hong Kong also recently left as part of the reduction in Citadel's macro strategy.

To be sure, those departures are a fraction of Citadel's 500 investment staffers and 1,400 employees overall. But Citadel has a reputation for employee churn.

"Citadel has a strong record of attracting alpha producers, but turnover is very high compared to other hedge funds," said Kate Quinn, an investment industry recruiter at DHR International who has worked with Citadel in the past.

"Top performers come to Citadel because the work is demanding and they embrace the challenge," Citadel's Spring said in response to what she called "misperceptions" about the firm's workplace and turnover.

Firmwide turnover is around 10 percent annually, according to a person familiar with the situation (the figure for investment staffers specifically was unclear).

Hedge fund firms comparable to Citadel often have lower turnover—"much less" than 10 percent—according to Jacob Navon and Adam Herz of executive recruiting firm Westwood Partners.

The pair said that turnover rates depend on many factors, including firm culture, style of investing, performance and assets managed. Navon and Herz cautioned that between zero percent and 5 percent turnover can be considered natural attrition and each firm has different policies on automatic employee replacement, making direct comparisons difficult.

Citadel client Yusko acknowledged that Citadel has a reputation for turnover but said it didn't concern him. "There's a very low tolerance for B players. I think their turnover is a good sign," he said.

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Citadel receives about 20,000 resumes each year, according to a person with knowledge of the firm's hiring, and offers positions to about 2 percent of the pool. The person also said the average tenure of Citadel employees is about five years; it's nine years for senior executives.

Citadel ranked 10th for Great Workplaces in Financial Services for 2015 by Great Places to Work, the company whose employee satisfaction surveys are used to create the Fortune 100 Best Companies to Work.

Adding here, cutting there

Big structural changes at Citadel aren't uncommon.

The firm's equities investment group, a focus of its hedge fund strategies, increased its employee headcount by 60 last year, a roughly 20 percent increase. But in 2013, it emerged that Citadel Securities, the market making unit now led by Hamill, Jamil Nazarali and Peng Zhao, had cut about 10 percent of its staff.

Citadel also abandoned its investment banking efforts in 2011—which Griffin once hoped would rival Goldman Sachs—with Wells Fargo buying the business and taking on about 25 Citadel staffers and their pending deals. More recently, the firm cut its standalone macro desk, folding some traders into fixed income, and nixed all high-frequency trading.

Ditched last year, HFT was always been small part of the firm's strategy—it peaked at about $500 million—but the reason for the move was unclear given strong performance in the Citadel Tactical Trading fund, which began in 2008 as an HFT fund and grew to blend traditional long-short stock investing in 2009. Spring declined to comment.

Ultra-fast investment through powerful computers has been the subject of debate over the last year, thanks largely to market-rigging allegations in the Michael Lewis book "Flash Boys."

In July, Griffin testified before a U.S. Senate committee on equity market structure and electronic trading. Griffin said that the U.S. stock markets are the "fairest, most transparent, resilient and competitive markets anywhere in the world." But he also noted that Citadel supported a review of market structure to ensure operational stability and to "protect market quality and fairness."

Borrowed money

While a dozen or so hedge fund firms manage more, Citadel is a leader in using leverage to amplify its bets.

Hedge funds often use borrowed money to increase the size and amount of the trades they put on. While leverage inherently creates more risk by increasing the amount of money that can be lost if a bet backfires, Citadel and other fund managers have a slew of protective measures in place to limit risk.

Still, on paper, Citadel had nearly $176 billion in so-called regulatory assets under management reported with the Securities and Exchange Commission as of April 10. That implies leverage of nearly seven times given its $26 billion in actual capital, the third highest figure of the top 10 firms by regulatory assets.

The most levered hedge fund managers

Rank Firm Regulatory assets Actual assets Implied leverage
1Black River$79,913,304,001 $7,000,000,000 11.42
2BlueCrest$110,764,236,385 $12,500,000,000 8.86
3Citadel$175,846,629,768 $26,000,000,000 6.76
4Pine River$105,699,121,059 $15,800,000,000 6.69
5Millennium$181,479,206,000 $29,200,000,000 6.22
6D.E. Shaw$84,647,791,958 $36,000,000,000 2.35
7Och-Ziff$67,051,793,209 $47,200,000,000 1.42
8Bridgewater$219,117,421,080 $169,000,000,000 1.3
9AQR$169,964,038,760 $131,600,000,000 1.29
10GMO$115,050,876,968 $118,000,000,000 0.98

Source: Source: SEC for regulatory assets, firm disclosures for actual assets. Dates of figures vary slightly and are based on the most recent numbers available. Not all assets managed are hedge funds, e.g., Bridgewater, GMO and AQR.

Citadel clients contacted by acknowledge the firm's use of borrowed money but are quick to point out it's often for offsetting bets, meaning that it doesn't carry huge risk.

"Yes, the leverage is high, but's it's for relatively low-risk strategies. It's healthy for the business. I'm not concerned about it," said one investor who asked not to be identified.

Citadel is "market neutral," meaning that the size of its bets on stocks and other securities gaining in value, or longs, are in balance with its shorts.

Griffin has advocated for greater hedge fund regulation, including understanding the industry's potential systemic risk.

The federal government technically has the ability to designate nonbank firms as systemically important, giving it broad powers to intervene should trouble occur. But Citadel's balance sheet appears to be lower than the $50 billion threshold for the designation, and regulators have said they are more focused on finding risky trading activities by nonbanks as opposed to selecting whole firms based on size for additional oversight.

The most commonly cited example of a systematically risky hedge funds is Long Term Capital Management, which collapsed in 1998 and caused widespread concern. But LTCM managed $129 billion using a leverage ratio of about 28 to 1, far higher than Citadel and other hedge funds today.

Spring declined to comment on Citadel's leverage.

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