Citadel's Year to Forget

Posted by: Matthew Goldstein on December 31, 2008

Investors in Citadel Investment Group’s two main hedge funds can take solace in the fact that 2008 has finally come to an end. Of course, that won’t ease the pain of seeing those two porfolios lose about 53% of their value going into the final week of the year.

The latest numbers from Ken Griffin’s Chicago-based investment empire are only marginally better than the performance figures posted by Citadel’s two biggest funds for the past several months. As of Dec. 24, Citadel’s once giant Kensington and Wellington funds were down 9.35% for the month. That’s a slight improvement over the funds’ 14.27% November decline and October’s horrific 22% slide.

The big plunge at Citadel is far worse than the 20% average decline this year for hedge funds and greater than the 35% decline in the Dow Jones. That’s a big blow to Griffin’s reputation as one of the titans of the fast-shrinking hedge fund industry—a trader many have tried to emulate over the years because of his long proven track record of success.

Then again, Citadel investors are still better off than the thousands of investors who entrusted their money with Bernard Madoff, whose investment firm collapsed in a what federal authorities say may have been a $50 billion Ponzi scheme. But the performance numbers from Citadel show that even superstar traders like Griffin, who had a long history of posting double-digit gains, can be rocked by turmoil in the markets.

Things started going terribly wrong at Citadel in September after the collapse of Lehman Brothers. The investment bank’s bankruptcy not only sparked a global financial meltdown, it crushed the market for convertible bonds—which constituted a sizeable chunk of holdings in the Kensington and Wellington funds.

There’s been speculation that Griffin, who began the year managing more than $20 billion and plotting plans for an eventual initial public offering, may look to wind down his two big funds in light of the dreadful performances. Sources close to Citadel have denied that’s under consideration. But in early December, Griffin barred investors from pulling out any money out of the troubled funds until at least the spring.

Some see Citadel eventually transitioning itself away from traditional trading—at least managing mega funds. It could move more into a trade processing and a credit derviatives market maker or financier to small businesses. It also has a hedge fund administration business which generates big fees. Citadel is part of a joint venture with CME Group to create a credit default swaps clearing house. The Commodity Futures Trading Commission recently gave its approval to the joint venture, which could launch early next year.

People close to Citadel say despite the miserable performance of its two main funds, which now have under $10 billion in assets, the investment firm has a better source of funding than other hedge funds and can weather the financial crisis. Two years ago, Citadel raised cash through the private sale of bonds. Citadel also likes to point out that it has two smaller hedge funds that are both up more than 40% this year.

May be the performance of those two smaller funds is something Griffin can build on going into 2009.

Reader Comments

The Comicpro

December 31, 2008 12:05 PM

The Masters of the Universe have crashed and burned and the investing world smells a rat! Yet they will continue to sucker in the people who believe their drivel. Shameful.

PB

December 31, 2008 6:03 PM

Isn't their loss really greater than 53%? Reason being that on the way up, the investors got shaken down (or more like willingly handed over) for the 2/20. I surmise that the losses are probably > 65%.`Don't you just love hedge funds? Heads, I win. Tails, you lose.

Chapter11

January 1, 2009 4:54 PM

Shutdown these dirty hedge funds.

It's time to say good bye.

Dirty Gamblers

January 2, 2009 5:19 PM

Their investments can produce returns ONLY if they can artificially inflate stock values. Basically they are dirty gamblers who turned stock markets into filthy casinos. Close them down at once all together. The world does not need leeches.

Mick

January 7, 2009 9:49 AM

Hedge funds are amongst the most innovative and efficient investment vehicles operating in the marketplace today. It is no accident that hedge funds have exploded in popularity over the last few years. Hedge funds play an important role in the marketplace, taking risk that few other players will, in the hope of generating big returns. Also, it is worth noting, that no hedge funds have required a taxpayer bail-out unlike so many of our venerable Wall Street banks. So it seems that our banks are the real leeches, not hedge funds.

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About

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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