Citadel LLC

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Citadel
TypeLimited liability (LLC)
IndustryHedge fund
Predecessor
  • 1994–2013: Citadel Investment Group, LLC
  • 1990–1994: Wellington Financial
Founded1990; 31 years ago (1990) in Chicago, Illinois, U.S.
FounderKenneth C. Griffin (Founder, CEO & Co-CIO)
HeadquartersCorporate HQ:
Citadel Center
Chicago, Illinois
U.S.
Operational HQ:
425 Park Avenue
New York, NY 10022
U.S.
Key people
Products
AUMUS$35 billion (October 2020)[1]
OwnerKen Griffin (85%)[2]
Number of employees
1,400
SubsidiariesCitadel Securities, Citadel Technology
Websitewww.citadel.com

Citadel LLC (formerly known as Citadel Investment Group, LLC) is an American multinational hedge fund and financial services company. Founded in 1990 by Kenneth Griffin, the company operates two primary businesses: Citadel, one of the world's largest alternative asset managers with more than US$35 billion in assets under management (as of October 1, 2020);[3] and Citadel Securities, one of the leading market makers in the world, whose trading products include equities, equity options, and interest rate swaps for retail and institutional clients.

The company has more than 1,400 employees, with corporate headquarters in Chicago, operational headquarters in Manhattan, and offices throughout North America, Asia, and Europe.

History[edit]

Kenneth Griffin started his trading career out of his dorm room at Harvard University in 1987 trading convertible-bonds.[4] As a sophomore, he traded convertible bonds and hooked a satellite dish to the roof of his dormitory.[5] After graduating with a degree in economics, Griffin joined Chicago-based hedge fund Glenwood Partners. According to a New York Times report, Citadel was started with $4.6 million in capital.[6] Citadel was originally named Wellington Financial Group after its flagship fund. The company name was changed to Citadel in 1994. Within eight years, the firm had more than $2 billion in assets.[7]

In 1998, Citadel started requiring investors to accept terms that "significantly restrict[ed] their ability to withdraw their capital", according to Institutional Investor.[7] When fund Long-Term Capital Management collapsed later that year, Citadel's capital lockdown made it "a rare buyer, as desperate hedge funds unloaded bond inventory".[7] In 2006, Citadel and JP Morgan Chase took over the energy portfolio and division of failed hedge fund Amaranth Advisors, which had suffered a 65% ($6 billion) loss in assets.[8] In November 2006 Citadel issued $2 billion of investment grade bonds to enable access to borrow money at a lower rate than it would otherwise be able to.[9]

The entrance to Citadel's Chicago headquarters, 2009.

In 2007, Citadel invested $2.5 billion in E-Trade, this transaction included acquiring E-Trade's securitized subprime mortgages, collateralized debt obligations (CDOs) and second lien loans, as well as 12.5% senior unsecured notes, and 84,687,686 shares of common stock (equal to 19.99% of the then currently outstanding shares). Citadel received a seat on the board of directors.[10][11] Citadel sold its remaining stake in E*Trade in 2013.[12]

In October 2008, S&P lowered the outlook for Citadel's Kensington and Wellington Funds from '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'.[13] In October 2008, following ongoing market concerns over the performance and liquidity of Citadel and the widening of Citadel credit default swaps from 12% upfront on Sep 30, 2008 to 30% upfront on Oct 23, 2008 Citadel held a conference call on Oct 24th 2008 with its noteholders stating that performance to date was -35% for Kensington and Wellington and that the fund maintained a liquid cash position in excess of 30% of capital and had undrawn capacity of $8bn in its tri-party credit lines.[14] Based on the 2006 SEC filing at the time of its bond offering, the company's leverage ratio was in excess of 7.8 to 1, although some reports suggest this has been reduced to 4 to 1 presently. This implies a ratio of at least 7.5% of cash to assets.

In November and again in December 2008 Standard & Poor's Ratings Services lowered its long-term and short-term counterparty credit ratings on Citadel Kensington Global Strategies Fund Ltd. and Citadel Wellington LLC "to just a notch above junk and then withdrew the ratings at the company's request."[15] In March 2008, prior to the collapse of Bear Sterns, Citadel was named as a potential bidder for the business. However, Kate Kelly, who has been a writer for The Wall Street Journal, has written that the parties never met to discuss a potential acquisition by Citadel as senior Bear employees believed that Citadel was shorting the company [16] In February 2009 under pressure from banks Citadel Investment Group sold "some securities and reduce its borrowing to finance trades."[17] In 2015, the Wall Street Journal described Citadel's position in 2008 as existing "at the brink of collapse during the financial crisis, amid heavy losses and a struggle to build an investment bank."[18] During the 2008 financial crisis, the firm's Kensington and Wellington Funds lost 55 percent of their value by the end of the year.[19] Griffin said, "we were losing hundreds of millions of dollars a week, if not more," and further said "CNBC parked a van in front of Citadel waiting to break the story of our demise. … We sold assets. We closed business lines. We let people go. We suspended redemptions. Our management team absorbed $500 million in costs on behalf of our investors..."[20]

Citadel suspended shareholder redemptions, which Griffin called one of the "most difficult decisions" in Citadel history.[21] Griffin later conceded that the firm was "overly confident" it could "weather any financial storm". He covered all investor management expenses during that period.[21] Citadel's primary sources of revenue come from charging clients performance fees on their two largest funds: Citadel Kensington Global Strategies Fund Ltd and Citadel Wellington LLC.[22] Because the assets in those funds decreased by 50 percent, Citadel was unable to charge performance fees until it could make up the 50 percent lost; the company would have to make a 100 percent investment return before it could see any more revenue and begin charging clients again.[22][23] To resolve this issue, Griffin announced that Citadel would incorporate greater portfolio diversification and take up investment strategies that were easier to get out of quickly and also continue efforts to diversify beyond hedge funds, with computer-driven, high-frequency trading.[22][23] In 2009, Griffin expanded the scope of business lines at Citadel Securities, a market maker firm founded in 2001, to establish investment banking and associated financial security sales and trading capabilities.[22][23] In 2009, it was revealed that Citadel also indirectly received $200 million in U.S. taxpayer money after AIG was bailed out.[24][25]

On January 17, 2012, Citadel's flagship funds, Citadel Kensington Global Strategies Fund Ltd and Citadel Wellington LLC, crossed their respective high water marks, earning back the 50 percent of assets lost during the 2008 financial crisis.[21] Having made up the losses, Citadel could once again charge client fees for managing their money and take a percentage of profits.[21] Citadel under Griffin's leadership was reported as differentiating from hedge funds rivals post 2008 financial crisis with an "aggressive expansion."[18] Starting at the beginning of 2014, over an 18 months period the hedge fund's assets under management increased $10 billion; from $16 billion to $26 billion as a result of "a 29% rise for its main hedge funds and a flow of new cash."[18] In January 2020, Citadel Securities paid $97m in China trading settlement, after Chinese regulators ended a longstanding investigation into Citadel and other local groups.[26]

During the coronavirus pandemic Citadel Securities created a "bubble" for a class of 100 interns by renting out a luxury resort in Wisconsin.[27][28][29]

In January 2021, Citadel + Point72 Asset Management invested $2.75 billion in Melvin Capital, after Melvin Capital lost 30% of its value owing to the GameStop short squeeze.[30][31][32][33]

Citadel group companies[edit]

There are three companies: Citadel the asset manager, Citadel Securities the market maker, and Citadel Technology.

Citadel[edit]

As of January 2016, Citadel manages more than $29 billion in capital and is one of the world's largest asset managers.[34] Citadel ranks as the eleventh largest hedge fund manager in the world,[35] and in 2006 the second largest multi-strategy hedge fund globally.[36] Citadel's group of hedge funds rank among the largest and most successful hedge funds in the world.[37]

In 2014, Citadel became the first foreign hedge fund to complete a yuan fundraising as part of a program to allow Chinese investors to invest in overseas hedge funds.[38]

Investment strategies[edit]

Citadel manages funds across five different investment strategies including equities, commodities, fixed income, quantitative strategies, and credit.[39]

Commodities - Energy trading: Griffin began recruiting the energy traders from Enron the day after it collapsed for a new business including "a team of traders, meteorologists and researchers" building what in 2011 was amongst the industries biggest energy trading groups[6]

Reinsurance - Citadel wanted to allocate the investment capital with its two funds, Kensington Global Strategies Fund Ltd and Citadel Wellington LLC, to investments that the company thought to be uncorrelated to their other investment strategies.[40] To achieve this move, Citadel, through capitalization via their funds, entered the reinsurer industry, which provides insurance companies with their own policies to spread the risk of losses that they have given to their customers, in 2004 by founding CIG Reinsurance Ltd (CIG Re), a Bermuda-based catastrophe reinsurer providing $450 million in capital.[41] Citadel additionally founded $500 million reinsurer New Castle Re in 2005, seeking to capitalize on rising prices for reinsurance in the wake of Hurricane Katrina's damage to property coverage costs.[42][43][40] In 2006, Citadel's two funds had approximately 10 percent of its assets invested in reinsurance.[44]

Citadel wound down CIG Re in November 2008 because the company could not achieve a financial strength rating, and as a result could not compete in comparison to other companies in the industry.[40] Meanwhile, New Castle Re remained open and received an 'A-' rating from AM Best in November 2008.[40] However, a month later on December 17, 2008, AM Best announced that New Castle Re's rating was under review when Citadel's funds experienced increased redemption requests as a result of the financial crisis.[45] Two days later on December 19, it was reported that Citadel would not be renewing the rights in New Castle Re contracts, but that Torus Insurance Holdings in Bermuda would do so.[46] In January 2009, Citadel placed New Castle Re into run-off.[47]

Risk management - The firm's risk management philosophy is focused on three main areas: risk capital allocation, stress exposure and liquidity management.[48] Citadel's risk management center has 36 monitors displaying more than 50,000 instruments being traded within the firm's portfolios.[48] The firm runs 500 stress tests each day to simulate the impact of potential economic and geopolitical crises or other market dislocation.[48] Citadel aggregates investment positions on trading screens to calculate "more than 500 doomsday scenarios" to assess the potential of risk for the firm.[18]

In 2014, Citadel rated an A grade for risk management in the annual Institutional Investor Hedge Fund Report Card.[49]

In April 2015, Ben S. Bernanke, who was the United States Federal Reserve chairman for eight years, joined Citadel as a senior adviser on global economic and financial issues.[50] In January 2017, Joanna Welsh became the Chief Risk Officer.

Citadel Securities[edit]

Market maker[edit]

Citadel Securities was formed in 2001, and is a market maker, providing liquidity and trade execution to retail and institutional clients.[23] Citadel Securities automation has resulted in more reliable trading at lower costs and with tighter spreads.[51] Barron's recently ranked Citadel Securities #1 in providing price improvement for investors in both S&P 500 and non-S&P shares.[38] In 2009 Citadel Investment Group and the Chicago Mercantile Exchange partnered to create a credit-default swaps electronic-trading platform.[52]

Citadel Securities is the largest market maker in options in the U.S., executing about 25 percent of U.S.-listed equity options volume.[53] According to the Wall Street Journal, about one-third of stock orders from individual investors is completed through Citadel, which accounts for about 10% of the firm's revenue.[18] Citadel Securities also executes about 13 percent of U.S. consolidated volume in equities and 28 percent of U.S. retail equities volume.[54] In 2014, Citadel Securities expanded its market-making offering to interest-rate swaps, one of the most commonly-traded derivatives.[55] By 2015 Citadel Securities had become the world's largest interest-rate-swap trader by number of transactions replacing Wall Street banks.[56]

During the coronavirus pandemic, Citadel Securities doubled its profit earning $4 billion in revenue during the first half of 2020 due to an increase in volatility and retail trading.[57]

In October 2020, Citadel Securities announced it would acquire the NYSE market making unit of rival IMC.[58][59][60] Also that month, Citadel Securities filled a lawsuit against the Securities and Exchange Commission over the SEC's decision to approve a new "D-Limit" order type for IEX.[61][62]

Regulatory issues[edit]

Over a two-year period until September 2014, hundreds of thousands of large OTC orders were removed from its automated trading processes, rendering the orders "inactive" so that they had to be handled manually by human traders. Citadel Securities then "traded for its own account on the same side of the market at prices that would have satisfied the orders," without immediately filling the inactive orders at the same or better prices as required by FINRA rules.[63]

In 2014, Citadel was fined $800,000 for irregularities in its trading practices between March 18, 2010, and Jan. 8, 2013 [64]

In 2017, Citadel was fined $22 million by the SEC for misleading clients regarding the way it priced trades.[65]

In 2018, Citadel was forced by the SEC to pay $3.5 million over violations stemming from incorrect reporting for nearly 80 million trades from 2012 to 2016.[66]

In 2018, Bloomberg reported that 40% of Robinhood's revenues were derived from selling customer orders to firms such as Citadel Securities and Two Sigma Securities.[67]

In January 2020, Citadel paid a 670 million-yuan ($97 million) settlement for alleged trading irregularities dating from 2015.[68]

Citadel Securities was fined $700,000 by FINRA in July 2020 for trading ahead of customer orders.[69] They delayed certain equity orders from clients to buy or sell shares while continuing to trade the same stocks in its own account, as part of its market-making activities, according to FINRA.

In September 2020, Robinhood was probed by the SEC into whether they properly informed clients that they sold stock orders to high-frequency trader and other Wall Street firms.[70]

Investment bank[edit]

In 2008 Citadel Securities hired 70 people and Rohit D'Souza, a banker from Merrill Lynch, who left after eight months "to build an investment bank" and brokerage.[22] By August 2011, Citadel ended its foray into investment banking to instead focus on electronic trading and market making.[71]

Citadel Technology[edit]

Citadel Technology, established in 2009, is the wholly owned and independently operated affiliate of Citadel.[72][73] It offers investment management technology, developed internally at Citadel, to a wide range of firms and funds.[74]

In 2013, Citadel Technology announced a partnership with REDI. The partnership combines Citadel's order management system (OMS) with REDI's execution management capabilities (EMS).[72]

Former Citadel companies[edit]

Citadel Solutions - Citadel's fund-administration arm.[75]

Corporate affairs[edit]

Citadel ownership[edit]

In November 2006, Citadel became the second hedge fund to publicly issue debt bonds to investors in the form of senior unsecured debt totaling $2 billion, in an arrangement managed by Lehman Brothers and Goldman Sachs.[8]

Founder, CEO and Co-CIO Ken Griffin owns approximately 85% of the firm according to Bloomberg News.[76]

Employees[edit]

The fund has become known for having one of the largest personnel turnovers in Chicago gaining the nickname of "Chicago's revolving door"[77] and the New York Times reported "the firm is unique in its reputation for being a revolving door."[6][78] It is also reported that turnover is aligned with the hedge fund industry.[77]

In March 2015, Citadel received a Top 10 Great Workplaces in Financial Services ranking by the Great Places to Work Institute, based on a survey by Citadel employees.[79]

Market advocacy[edit]

Citadel has played an active role in market structure issues and has advocated for financial legislation. In 1999, Congress repealed a provision in the Glass-Steagall Act of 1933 that strictly separated banking and trading activities by financial firms. Griffin called dismantling that law "one of the biggest fiascos of all time".[80] In the aftermath of the 2008 financial crisis, Griffin and Citadel called for greater transparency in derivatives trading, a stance at odds with many other hedge funds and major financial firms. The company spoke out against Wall Street for lobbying to delay the implementation of the Dodd–Frank Act.[80][81] Griffin has also called for breaking up "too big to fail" banks and separating their banking and trading activities.[81]

Following the 2014 publication of Flash Boys by Michael Lewis, who claimed financial markets are rigged "by large, high-speed traders" (also known as high-frequency traders) Griffin, who was not interviewed by Lewis, shared his views on the book and its allegations during his second congressional hearing.[82] Griffin said in front of the Senate Banking Committee that from his perspective "the U.S. equity markets are the fairest, most transparent, resilient and competitive markets in the world."[82] Griffin expanded by saying that high-frequency trading functions to reconcile discrepancies between options tied to groups of stocks and the stocks themselves, saying, "Somebody has to keep the New York markets in line with the markets in Chicago. It all happens at an extremely low cost in the context of our capital markets".[82] During an event at Georgetown University Griffin called the book "fiction".[83]

Events[edit]

In 2014, former president Bill Clinton was paid $250,000 by Citadel to speak at New York restaurant Daniel to investors and employees in celebration of the Citadel's founders' 46th birthday.[18]

In 2015, Citadel paid pop-star Katy Perry $500,000 to perform at an event celebrating the 25th anniversary of the firm.[84][85][86]

Citadel has paid over $800,000 in speaking fees to current secretary of the treasury Janet Yellen.[87]

See also[edit]

References[edit]

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