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Citadel's Year to Forget


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.


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