Citadel Investment Group Sets the Record Straight

Ken Griffin of Citadel Investment Group has always worked hard for his big bucks, but has never been tested as he has the past few weeks. But the rumor mill is bigger than any one man, and Citadel finally had to turn to a 12 minute conference call today to squelch chatter that they had suffered losses that would likely put them out of business, and exacerbate a wave of selling that has swamped the Street:

During his 20 years in investing, Griffin said he has seen “the crash,” the terrible debt market of 1998, and the dot-com bust. “But I have never seen a market as full of panic as I’ve seen in the past seven or eight weeks.” “The world is going to change on a going forward basis,” he says. WSJ DealJournal

It is remarkable that Citadel had to hold a conference call to clear the air, but given the rumors dogging the firm it was probably the easiest way to cut down their phone bill. Most of the damage to Citadel's flagship Kensington fund was done in the days following the Lehman bankruptcy, an event that ripped a huge hole in Hedgistan. But the call did give Griffin and Co. a chance to set the record straight, and refute rumors they are down 60% in 2008.

-Kensington down 35% year-to-date, implying modest losses over this month

-30% of capital ($16 billion AUM) in cash, $8 billion available in open credit lines and several prime broker relationship functioning normally

-levered 3-to-1 in equity and credit-related business lines.

-Repurchased 10%-20% of outstanding $500 million bond issuance it completed from December 2006

-Year-end redemptions to be a “few percent of assets”

Still, all was not good with Citadel. Although they hedged various convertible bonds, bank loans and investment-grade bonds held in their portfolios with credit default swaps, the relationships between the securities held and the derivatives tied to them had witnessed “tremendous dislocation” that effectively rendered the hedges ineffective.

Citadel was betting that the gap between the default swaps and the bonds would narrow. Instead, they widened as lenders left the market and investors bet that more companies would default. Bloomberg

The events left Citadel COO Gerald Beeson flabbergasted to some extent, as he called recent events unprecedented. We have been “rewriting the world of finance in less than eight weeks” he said.

Of course not everything is good about today’s news.  Dan Loeb’s skirmish with Citadel is officially a thing of the past, as had been rumored. Citadel’s history of poaching employees would be called “recruiting” in most industries, and Loeb confirmed in an email to the New York Times that he has patched things up with Griffin, and much like the Three Amigos perhaps they have a “bromance” brewing

In 2005, the hedge fund manager Daniel S. Loeb of Third Point Capital wrote a widely circulated e-mail message to Mr. Griffin about Citadel’s poaching. Any attempts to hire his or his friends’ workers, Mr. Loeb wrote, would be considered “an act of war.”

The two hedge fund managers reportedly made up in recent years, when Mr. Loeb mailed Mr. Griffin a book on diet and exercise. Mr. Loeb said in an e-mail message Friday that he had “come to respect Ken for his intellect, competitive spirit, relentless drive and energy.”

“I’m sure he views this chaotic environment as a chance to demonstrate his impressive skills,” Mr. Loeb said.  New York Times

Loeb has gone soft on us since getting married; he has not fired off an incendiary letter in years, it would seem. But lets hope he can at least blast Chris Cox before Cox leaves office, and he clearly has Griffin watching his back. Will regulators attempt to perp walk a hedge fund manager before the soap opera ends? The bankers are the ones who deserve to be shackled.

“Unregulated” hedge funds are likely to become a thing of the past, but for now Hedgistan has circled the wagon against all enemies, perceived and real.

It even makes for some strange bedfellows, as we move into round 2 of Hedgistan vs the World

Although I would love to ask Ken one thing...just how levered were you at your peak? At the time of their bond issuance in late 2006 some analysts speculated they were running 7x or 8x, and it is possible it ticked higher into early 2007. But one thing is for sure- Griffin was caught skinny dipping when the tide receded....just another nudist on the beach Warren Buffett so accurately evoked.

Still, I have some sympathy.  Nobody is up this year, with the exception of Paulson & Co. and a few others.

Don’t jump, Ken, its only money.

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Live-Blogging Citadel’s Conference Call. Sort of.
DealJournal

Citadel Seeks to Reassure Debt Holders
WSJ

Citadel Chief Denies Rumors of Trouble
NY Times

Hedge Fund Withdrawals Stress Market; Citadel Reassures Clients
Bloomberg
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