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Citadel's Woes Keep Growing

Posted by: Matthew Goldstein on October 15, 2008

Updated 9:45 p.m. EDT

Citadel Investment Group founder Ken Griffin used to be on top of the hedge fund world. Griffin’s Chicago-based fund was the envy of many, especially as Citadel routinely posted big double-digit annual gains. But not this year.

At last count, Citadel’s two largest investment funds were down a little over 26% for the year. Just a month ago, the two funds were down 20%. Sources say Griffin’s two flagship funds may have tumbled even more with Oct. 15’s big market plunge. Some of the selling may have been driven by rumors of even greater losses at Citadel.

In a letter to investors, Griffin said: “Regretfully, I did not foresee the financial disaster that was to unfold in September,” in explaining Citadel’s poor performance. He also blamed some of the funds’ problems on the decision by the Securities and Exchange Commission to ban short-selling on financial stocks and which “created material dislocations across many of
our portfolios and disrupted our ability to assume and manage risk.”

The ban on short-selling impacted one of Citadel’s mainstay strategies, which is investing in convertible bonds—debt notes that can be coverted into shares. It’s common for convertible bond investors to short—or bet against the stock of the company issuing the bond—as a way to hedge its exposure.

Meanwhile, Griffin said he expects more earnings volatility in the coming months.

Citadel now has about $17 billion in assets under management down from a little more than $20 billion earlier this year. Many hedge funds are floundering with the major market averages down 30% this year. But the average hedge fund is down about 10%. So the poor performance certainly stands out, especially given Citadel’s reputation.

Meanwhile, on Oct. 8, Standard & Poor’s reaffirmed its rating on a bond offering Citadel did two years ago to raise cash, but it also revised its outlook from stable to negative. S&P said it might lower its rating on the bonds “if ongoing poor performance is accompanied by outsize redemptions.” The report noted that it is a “very hostile operating environment” for all hedge funds.

For now, it does not appear there is any panic going on at Citadel. Many investors are locked up and can’t immediately redeem their money. That gives Griffin time to turn the funds’ performance around. Two smaller funds are said to be posting significant 30% gains. And Citadel is sitting on $4 billion in cash to cover potential redemptions and take advantage of market opportunities.

Still, if a savvy hedge fund manager like Griffin is strugglingly to navigate this brutal bear market, that doesn’t offer a lot of confidence to ordinary investors.

Reader Comments

George Soros

October 15, 2008 8:15 PM

I am still the best.

George W. Bush

October 16, 2008 12:44 AM

Don't worry George, by the time I and the rest of the Republicans are done wrecking the country, you'll be poor too.

Warren Buffet

October 19, 2008 11:58 PM

But if you do go long, just make sure you got a good long lock up in that hedge fund of yours. People don't seem to appreciate staying power these days if you know what I mean.

Muslim Obama

October 24, 2008 4:59 AM

Hedge funds are against Islam, should go.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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