Citadel Denies Rumors of Trouble

Kenneth Griffin of Citadel called rumors “categorically false.” (Phil McCarten/Reuters)
The hedge fund manager Kenneth C. Griffin said that any rumors about liquidation, Fed intervention, or forced selling are “categorically false.” Rumors swirled that both the Federal Reserve and U.K. Financial Services Authority visited Citadel’s offices on Friday, October 24, discussing how to deal with a potential collapse of the $20 billion alternative investments giant. The rumors included word that Citadel was down 60 percent.

In the emergency conference call that transfixed Wall Street, Mr. Griffin said, The firm, which is based in Chicago, has ample cash and financing facilities on hand, and its investors have withdrawn only a small amount of their money

Mr. Griffin also said the Chicago-based hedge fund maintains 30% of its capital in cash. The recent market turmoil has been rough for hedge funds with many of them reporting record losses. Citadel has taken a hit and has reported returns that have dropped 26% to 30%, according to the Wall Street Journal.

The firm's largest hedge fund, known as Kensington/Wellington, had fallen 35% so far this year, through the end of Oct. 20. Still, Mr. Griffin noted that most of the losses happened in the month after Lehman Brothers collapsed and stressed that performance has been better recently. In contrast, Citadel's market-making business has performed "spectacularly" this year and will be a major driver for the firm in future, Mr. Griffin said during a conference call with holders of the firm's medium-term notes. Still, Citadel will have to change its business to reflect unprecedented de-leveraging and fear in the markets. Some businesses, such as long/short equity trading, won't be affected much, but others will have to be more efficient in their use of Citadel's balance sheet, Griffin explained.

Earlier in the month Mr. Griffin sent a letter to investors saying September was the "single worst month, by far, in the history of Citadel. Our performance reflected extraordinary market conditions that I did not fully anticipate, combined with regulatory changes driven more by populism than policy."

Mr. Griffin is not only famous for buying assets cheaply. Citadel in the past has been strong when others were weak. Mr. Griffin has often called his competitors at their weakest moments and offered pennies on the dollar for their portfolios. Some of his recent winnings came from trouble at E*Trade, and the collapse of the hedge funds Sowood Capital and Amaranth Advisors.

While Gerald Beeson, the company’s chief operating officer, said that the firm worked with a variety of prime brokers and had credit lines with commercial banks. Citadel has not tapped $8 billion of that credit, and the company has 30 percent of its capital in cash.

Citadel is leveraged just under 3 to 1 in its equity and credit-related businesses, which means it borrows $3 for every $1 it has in capital. That is a decrease from past levels.

Citadel also repurchased some 10 to 20 percent of its own debt in the last few days when approached by bondholders, according to a person with knowledge of the matter. Its bonds were put on negative watch by the ratings agencies in recent weeks. Mr. Beeson said that most of the funds’ losses were mark-to-market losses, which he thought were caused by a lack of liquidity and not by weakened assets. Earlier this year, investment banks said their losses were being caused by similar liquidity problems. Asked how Citadel’s paper losses differed, Mr. Beeson said, “This is not a portfolio of illiquid real estate assets. It is a portfolio principally consisting of bonds, equities and related assets.”


Related Posts :

1. Rumors: The Fed is visiting some midwest hedge fund
2. 10/24/2008 Market Recap - Global Investors Retreat (Update 1)
3. Nouriel Roubini: Stay away from 'risky' assets
4. 10/23/2008 - October Blues
5. Trading in the panic mode, futures halted
6. Markets are in absolute freefall

Sources :

1. Fox Business: Citadel Investment Group Stamps Out Rumors, October 24, 2008
2. Fox Business: Citadel: Main Hedge Fund Down 35% This Year Through Oct. 20, October 24, 2008
3. The New York Times: Citadel Chief Denies Rumors of Trouble, October 24, 2008

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