Citadel LLC

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Citadel LLC
Type Private company, Limited Liability Company
Industry Hedge fund Management
Predecessor(s) Citadel Investment Group, LLC
Founded 1990
Headquarters Citadel Center
Chicago, Illinois, USA
Key people Kenneth C. Griffin, Founder and chief executive officer
Products Alternative Investments
AUM US$15 billion[1]
Employees 1,150
Website www.citadelgroup.com

Citadel LLC (formerly known as Citadel Investment Group, LLC) is a global financial institution based in Chicago, Illinois. Founded in 1990 by Kenneth C. Griffin, the firm today deploys capital across multiple asset classes and strategies.[2] Current activities also include equity and options market-making.

Citadel (Hedge Fund)

Citadel Asset Management manages $15bn in assets under management (AUM) and is one of the world's largest hedge fund managers.

Kensington and Wellington Funds

Citadel's flagship funds, Kensington and Wellington, posted returns of about 25 percent in 2012.[3] In 2011, the funds capped off 2 years of solid returns in 2009 and 2010 by crossing their high-water marks with gains of more than 20%, outperforming the industry average of 5% losses.[4][5][6]

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.

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.”[7]

Also in October 2008, S&P lowered the outlook for Citadel's Kensington and Wellington Fundsfrom '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.'[8]

On November 18, 2008, S&P downgraded the counterparty rating for its Kensington Global and Wellington hedge funds to BBB/A-3 from BBB+, reflecting the investment losses from September and October. 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."[9]

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 percent this year. Losses came from positions in convertible bonds, bank loans and investment grade bonds. Citadel rebounded from its 2008 losses to post a $5 billion profit through November 2009.[10]

An April 2005 Bloomberg news article noted that David Shaw's D.E. Shaw & Co., which then had $14.7 billion in assets under management, and Tudor Investment Corporation both had fewer than half as many employees as Citadel does.[11] It stated that unlike most other hedge funds where investors are charged a flat management fee of 1–2 percent ofassets and 20 percent of profits, the investors that invest in hedge funds managed by Citadel bear the entire cost of running the company, a bill that historically has equaled 3–6 percent of assets for the computer systems and larger-than-average staff.[11] 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."

It was reported in 2008 during the financial crisis that the funds were down 50%. At this time Citadel announced that they would cover a large portion of that year's operating expenses.[12]

Corporate Culture

The local press has called Citadel "Chicago's revolving door." (People close to the firm say turnover is on par with a typical investment bank's.)[13] 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.”[14] Mike Pyles, former Head of Human Resources at Citadel 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."[15]

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.[16]

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]

Proud of Citadel’s growth, Griffin has stated, “The name Citadel means strength and it speaks to our culture of performance, risk management and our ability to succeed in volatility."[17]

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 had no such plans.[18] However, in November 2006 Citadel became the first hedge fund management company to issue bonds. In a bond offering led by Lehman Brothers and Goldman Sachs, Citadel announced it would sell $2 billion worth of notes.[19] The bonds have been given an investment-grade rating by Standard & Poor's.[20] Citadel has repurchased approximately $200M of its debt on secondary markets since March 2008.[21]

Offices

Although Citadel employs over 1,150 individuals globally, its flagship operation is located in the Citadel Center, a $355m office tower in the heart of downtown Chicago; in 2006 the tower was purchased for $560m by Robert Gans.[22][23]

Citadel also has offices in New York, Hong Kong, San Francisco, Boston, Dallas and London[24]

Of the 100 largest hedge funds, Citadel's is the only one based in Chicago. Citadel is the eleventh largest hedge fund manager in the world;[14] it is also the second largest multi-strategy hedge fund manager in the world.[25]

Citadel Securities

Formerly called Citadel Derivatives Group, Citadel Securities was established in 2002 and today is one of the leading retail equity and listed equity options market makers in the U.S., executing one out of every four retail trades. It consists of a sales and trading platform, and an industry leading market making franchise. Its current CEO is Jamil Nazarali who has served as Head of Citadel Execution Services since 2011.[26] It offers services to both retail and institutional clients through Citadel Execution Services (CES) Retail and CES Institutional.

Market Making

Citadel Securities trades approximately 14% of U.S. consolidated volume in equities and 19% of U.S.-listed equity options volume.[27] Citadel Securities makes markets in more than 7,000 U.S.-listed securities and in over 19,000 OTC securities worldwide. CES accesses liquidity in over 35 countries,including every U.S. equities exchange and all major dark pools.

Citadel Technology

Included in the Citadel group of companies, Citadel Technology is an independently operated technology solutions provider. They offer investment management technology to a wide range of firms and funds.

Business Activities

Financial Crisis (2005–2008 developments)

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."[16]

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

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 also said in December 2008, 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]

Investments

Citadel also has multiple subsidiaries such as Kensington Global Strategies (Citadel's largest fund[30]), Wellington Partners[31] (Citadel's oldest fund and its flagship fund[32]), Citadel Equity Fund,[33] Citadel Finance,[34] and Citadel Derivatives Group, which controls 10% of the Philadelphia Stock Exchange.[35] In 2000, Citadel's Wellington affiliate achieved a 52.6% return.[36] Since January 2005, Citadel Derivatives Group has been a Lead Market Maker on the trading floor of the Pacific Coast Exchange.[36] 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 JPMorganChase acquired the energy portfolio of the failed hedge fund Amaranth Advisors, which had suffered a 65% ($6 billion) loss in assets.[9][37]

In 2007, Citadel acquired a sizable stake in online brokerage E*Trade.[38] A Bloomberg News story on September 5, 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's acquisition of E*Trade was announced when its shares were trading at $4.82.

On June 2, 2010 E*Trade had a one for ten reverse split, based on the current stock, $4.82 would equal $48.20 per current share.[39]

A Reuters story on November 21, 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 $2.55 billion stake implying a possible loss of as much as $2.14 billion for Citadel on its equity stake. Citadel has publicly stated in an SEC filing (2011)[40] that its losses since the fourth quarter of 2007 (pre-tax) are over $5B USD. It also chastised the current board for 'squandering' shareholder value, pressed E*Trade to eject two boardmembers, and pursue a sale of itself.

Closed, sold or liquidated business activities

Capital markets business

Hedge Fund Administration

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 billion in assets under administration.[41] In 2009, Citadel Solutions’ name was changed to Omnium LLC[42] and in 2011 Omnium was sold to Northern Trust.[43]

Investment Banking

D'Souza left the firm in October 2009, and Todd Kaplan, former head of investment bank, left in January 2010. In August 2011, the whole three-year investment banking initiative was reportedly being liquidated, with the possible sale of parts of the business.[44]

New Castle Re

In 2004, Citadel founded CIG Re, a Bermuda-based catastrophe reinsurer.[45] In 2005, the hedge fund founded a $500 million catastrophe reinsurer in Bermuda called New Castle Re.[46] Subsequently, in 2009, Citadel sold New Castle Re and CIG Re and exited the reinsurance industry.[47]

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"[48] New Castle Re was closed in 2009, when Citadel exited the reinsurance industry.[47]

Fusion fund of funds

On October 30, 2008, it was announced that Citadel is winding down its $1 billion Fusion fund of funds, and has reallocated these assets to emerging hedge fund managers.[49]

Accolades

Euromoney     

  • Best Global Hedge Fund award (2007)

Institutional Investor   

  • The Hedge Fund Report Card "Grade A" (2012)     
  • Ranked fourth overall out of 55 funds  (2012)      
  • Ranked top 5 in: Investor Relations (1), Infrastructure (2), Transparency(5), and Alpha Generation (5)  (2012)      
  • Multistrategy Hedge Fund Manager of the Year (2013) 

Hedge Fund Intelligence

Absolute Return Awards 

  • Relative Value/Arbitrage Award.(1998, 1999)      
  • Fund of the Year - Citadel Wellington (2012)      
  • Global Equity - Citadel Global Equities (2012)      
  • Long Term Performance (5 years) - Citadel Tactical Trading (2012) 

Bloomberg      

  • 100 Top-Performing Large Hedge Funds (2013)

HFM Week   

  • Single manager long-term performance (3 years) over $1bnCitadel Wellington (2012)     
  • Management firm of the year (2012)

Credit Market Derivatives Exchange

In March 2009, Citadel and the CME Group announced they had received SEC approval to launch a joint clearing and exchange solution for the $43 trillion credit default swap (CDS) market, called the Credit Market Derivatives Exchange, or CMDX.[50] In addition to improving transparency, the exchange offers immediate confirmation of trades, avoiding the operational risks associated with unconfirmed CDS transactions.[51] In an interview Citadel's Ken Griffin and Craig Donahue, CEO of the CME Group, confirmed that the platform is up and ready and that interest has been high.[50]

Credit default swaps play an important role in a company's risk management procedure, which has made CMDX a compelling solution as institutions seek "transparent, secure and liquid market alternatives,” said CME Group Executive Chairman Terry Duffy.[52] The creation of the exchange was proposed as a solution to one of the many causes of the financial crisis of 2007–2010,[53] as its transparency can provide regulators with immediate access to positions and trading information.[53]

Other information

Citadel LLC is not related to any of the following organizations:

See also

Notes

  1. ↑ Marek, Lynne. "Citadel outpaces rivals with 26% gain in 2012". Retrieved July 8, 2013. 
  2. ↑ David Snider; Chris Howard (February 16, 2010). Money Makers: Inside the New World of Finance and Business. Palgrave Macmillan. pp. 225–. ISBN 978-0-230-61401-7. Retrieved July 31, 2011. 
  3. ↑ http://www.finalternatives.com/node/22583
  4. ↑ Eder, Steve (January 20, 2012). "At Long Last, Citadel Funds Are Above Water". The Wall Street Journal. 
  5. ↑ Ahmed, Azam (January 20, 2012). "Citadel Clears Its High Water Mark". The New York Times. 
  6. ↑ Ahmed, Azam (January 12, 2012). "Citadel Pulls Off 20% Gain for 2011, Defying Industry". The New York Times. 
  7. ↑ http://biz.yahoo.com/bw/081031/20081031005893.html
  8. ↑ 8.0 8.1 http://www.efinancialnews.com/homepage/content/2452119074
  9. ↑ 9.0 9.1 http://www.marketwatch.com/news/story/sp-downgrades-debt-citadels-main/story.aspx?guid=percent7B3A3949B5-CB84-4803-97F1-3AA9DCCE258Fpercent7D
  10. ↑ http://www.opalesque.com/55926/citadel/rebounds163.html
  11. ↑ 11.0 11.1 11.2 "Citadel Returns 26 Percent, Breaks Hedge Fund Mold, Sees IPO". Bloomberg. April 29, 2005. 
  12. ↑ Zuckerman, Gregory; Strasburg, Jenny; Lattman, Peter (January 5, 2009). "Renaissance Waives Fees on Fund That Gave Up 12%". Chicago Tribune.
  13. ↑ 13.0 13.1 Vickers, Marcia (March 30, 2007). "Citadel's Griffin: Hedge fund superstar (cont.)". CNN. 
  14. ↑ 14.0 14.1 Rose-Smith, Imogen (2006 2006). "Land of the Giants" (PDF). Alpha magazine. p. 3. Retrieved 2008-03-20 (dead link).
  15. ↑ http://www.bloomberg.com/apps/news?pid=nifea&&sid=asibq1F2VEMk.  Missing or empty |title= (help)
  16. ↑ 16.0 16.1 http://www.portfolio.com/executives/features/2007/03/29/Opening-Up-the-Citadel?page=0
  17. ↑ Huiyin, Chen (April 2008). "Griffin: Arbitrage in Volatile Markets". Caijing Magazine.
  18. ↑ http://www.chicagobusiness.com/apps/pbcs.dll/article?AID=9999200016336
  19. ↑ http://www.chicagobusiness.com/apps/pbcs.dll/article?AID=9999200023009
  20. ↑ Anderson, Jenny (December 1, 2006). "INSIDER; Some Hedge Funds Decide That Relying on Banks Is Just Too Risky". The New York Times. 
  21. ↑ "Citadel Buys Back $200M in Debt". EMII.com. March 25, 2008.
  22. ↑ Carr, Robert (October 27, 2006). "Citadel Center Trades in $560M Transaction". globest. Retrieved 2006-01-27.
  23. ↑ "Dearborn Center Announces 206,146-square-foot (19,151.6 m2) Lease with Citadel". Beitler RE Corp. March 9, 2001. Retrieved 2006-01-27.
  24. ↑ "Citadel: Contact Information". Citadel. December 17, 2012. Retrieved 2012-12-17.
  25. ↑ Hutchins, william (December 8, 2006). "Citadel leads the way in financial self-sufficiency". Financial Times. Retrieved 2006-01-27
  26. ↑ "Citadel LLC". Retrieved August 31, 2011.
  27. ↑ ^ http://www.opalesque.com/55926/citadel/rebounds163.html
  28. ↑ Vickers, Marcia; Boyd, Roddy (December 9, 2008). "Citadel under siege". CNN. Retrieved April 30, 2010.
  29. ↑ Barr, Alistair (October 24, 2008). "Citadel's Griffin says firm will change amid turmoil". MarketWatch.
  30. ↑ Toomre, Lars (March 13, 2006). "Citadel Investment Group Off to Flying 2006 Start". Toomre Capital. Retrieved 2006-01-28.
  31. ↑ Mannes, George (November 15, 2004). "Citadel Storms into Google". thestreet.com. Retrieved 2006-01-27.
  32. ↑ Maday, Tom (September 2001). "Meet Ken Griffin" (PDF). Cover Story (Institutional Investor). Retrieved 2006-01-28.
  33. ↑ "Court halts investor squeeze out by DEPFA Deutsche Pfandbriefbank AG" (PDF) (Press release). Morgan Lewis. October 14, 2004. Retrieved 2006-01-28.
  34. ↑ Ahmed, Azam (January 12, 2012). "Citadel Pulls Off 20% Gain for 2011, Defying Industry". Deal Book.
  35. ↑ Ahmed, Azam (January 20, 2012). "Citadel Clears Its High Water Mark". Deal Book.
  36. ↑ 36.0 36.1 Eder, Steve (January 20, 2012). "At Long Last, Citadel Funds Are Above Water". Deal Journal.
  37. ↑ Opalesque (November 19, 2009). "Citadel rebounds from 2008".
  38. ↑ Citadel (December 17, 2012). "Citadel Execution Services For Retail Clients". Citadel. Retrieved 2012-12-17.
  39. ↑ http://finance.yahoo.com/q/bc?s=ETFC+Basic+Chart&t=5y
  40. ↑ Burton, Katherine; Levy, Adam (April 29, 2005). "Citadel Returns 26 Percent, Breaks Hedge Fund Mold, Sees IPO". Bloomberg. Retrieved 2011-07-07.
  41. ↑ "Citadel Names Rohit D'Souza as CEO for the Firm's Growing Capital Markets Business". Reuters. October 20, 2008.
  42. ↑ "Omnium LLC". Retrieved July 13, 2011.
  43. ↑ "Northern Trust to acquire Omnium from Citadel LLC". Associated Press. May 16, 2011. Retrieved 2011-07-13.
  44. ↑ Or, Amy, "Citadel said mulling investment-banking exit", MarketWatch, Aug 11, 2011, 12:04 pm EDT. Retrieved 2011-08-11.
  45. ↑ Zuill, Lilla (August 22, 2005). "Hedge fund investments in reinsurance broaden". The Royal Gazette. Archived from the original on November 29, 2005. Retrieved 2006-01-28.
  46. ↑ finanzanch (April 11, 2005). "Citadel forms catastrophe reinsurer New Castle Re – AM Best". AFX & marketwatch. Retrieved 2006-01-28.
  47. ↑ 47.0 47.1 Kent, Jonathan (July 11, 2011). "Two Torus executives leave, company confirms". Royal Gazette. Retrieved 2011-07-13.
  48. ↑ Kent, Jonathan (December 17, 2008). "Citadel's hedge fund woes threaten New Castle Re's rating". The Royal Gazette. Retrieved 2008-12-18.
  49. ↑ http://www.efinancialnews.com/usedition/index/content/3352338074
  50. ↑ 50.0 50.1 http://www.chicagobusiness.com/cgi-bin/mag/article.pl?id=31032
  51. ↑ Insert http://online.wsj.com/public/resources/documents/kennethgriffin.pdf
  52. ↑ http://cmegroup.mediaroom.com/index.php ?s=43&item=2730&pagetemplate=article
  53. ↑ 53.0 53.1 The Wall Street Journal http://online.wsj.com/public/resources/documents/kennethgriffin.pdf |url= missing title (help). 

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