An investor with the foresight to have staked $10,000 in Citadel’s first fund when the Chicago-based hedge fund manager was launched by Ken Griffin in 1990 would now be sitting on a pot worth more than $1.3m.
A $10,000 stake in shares in Berkshire Hathaway, Warren Buffett’s company, would have grown to $315,000 over the same period, while an S&P 500 tracker fund would have increased to $131,000 (including dividends but excluding fees).
The hedge fund industry has attracted widespread criticism for its high fees and disappointing performance, but a small number of managers have achieved exceptional long-term returns.
Citadel’s flagship multi-strategy Wellington fund has delivered annualised returns (after fees) of 19.1 per cent since its inception in 1990, according to information provided to the Financial Times by an investor in the hedge fund. Citadel declined to provide performance data for this article.
Growth for the Wellington fund has slowed over the past 18 months with annualised returns dropping to 13 per cent over the course of 2017 and to 8.79 per cent in the first half of 2018.
Data compiled by HFR, the research group, show that hedge funds across all strategies produced returns of 8.6 per cent in 2017, dropping to around 1.5 per cent so far this year.
Citadel came close to collapse during the financial crisis in 2008 and was forced to suspend withdrawals, a restriction that infuriated investors. Soon after, however, it was able to snap up positions that had soured for rivals and it established two new funds that contributed to its later success.
High-frequency trading capabilities were developed from 2003 onwards under physicist Mikhail “Misha” Malyshev, who was later sued by Citadel after he left to set up his own company. Those high-frequency trading capabilities were established in 2008 as a separate fund, Tactical Trading, which has delivered annualised returns of 21 per cent since then. Tactical Trading now focuses exclusively on equities and quantitative strategies after exiting from high-frequency trading in 2014.
A global equities fund was established in 2009 which has registered annualised returns of 13.3 per cent since inception, with Citadel setting up a global fixed income fund in 2012. The global fixed income fund has delivered annualised returns of 10.4 per cent since launch.
The performance of its funds has helped Citadel return a total of $28.6bn in net profit (after fees) to its clients, ranking it as the third most successful manager behind longer-established rivals Bridgewater and Soros in the annual list compiled by LCH Investments.
The leaders of these large hedge funds have aggressively invested in their trading and risk management capabilities, curtailing the opportunities to generate alpha (excess returns) for conventional mutual fund managers.
Millions of dollars have been spent by Citadel to build a state of the art risk management system that can monitor every position across all of its funds in real time at its headquarters in Chicago.
It has also seized opportunities to snap up staff from struggling rivals. Twenty traders and analysts were recruited in April from Cumulus, a weather-focused hedge fund, as part of an effort to expand Citadel’s commodity business.
Mr Griffin has a reputation as an unforgiving boss and the firm has been plagued by high levels of staff turnover. Aptigon Capital cut 45 staff this year, about a third of the fundamental equities unit established in 2016.
