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Citadel Lowers Management Fee: Beginning Of The End, Or New Beginning?
Citadel is no stranger to headlines: in late 2008, the firm was a prominent fixture in the news, typically mentioned in the same paragraph as some (now long former) LP who had attempted to redeem capital from Ken Griffin's firm only to hear redemptions were indefinitely, and without warning, halted, followed up by an expletive laden tirade. After all it is only called a hedge fund: in reality it is merely a levered bet that Moody's assumption that nothing can ever go lower, is correct. Well it wasn't, and as a result in 2008 Citadel lost more than half of its assets. The net result is that with profits of 62% in 2009 and 4% YTD, the firm (and, incidentally most other funds) has no chance of hitting its high water mark for a second year in a row. Which brings us to today's surprising news that Ken Griffin (allegedly perceived in the industry as arrogant beyond comparison, so this must hurt overtime) has finally decided to eat humble pie and to lower its management fee. As hedge fund veterans know too well, this is often the first step of the beginning of the end, as it may indicate either a i) liquidity shortage, ii) a surge in redemptions, iii) a performance that is far worse than officially represented, iv) a megalomaniacal dictator at the head of it all, or v) all of the above. Most of all, it indicates that very soon every LP in Citadel will demand the same terms, making profitability for the hedge fund turned market market turned investment bank turned FRBNY collaborator into a living hell of razor thin margins. As for the title, it is rhetorical.
More from Bloomberg:
Citadel LLC is considering cutting fees on its two main funds as it attempts to attract clients during the worst climate for raising money in two decades, said two people with knowledge of the firm’s plans.
Citadel lost 55 percent of assets as markets tumbled in 2008, and when investors sought to take out $1.2 billion the firm suspended redemptions before restoring them in late 2009. Even after last year’s 62 percent return and this year’s 4 percent gain, the funds would still need to climb about 30 percent to make clients whole. Assets fell from $13.5 billion a year ago as money was returned to customers.
“Investors will never forget how Citadel acted in 2008,” Brad Alford, who runs Alpha Capital Management LLC in Atlanta, said in an interview. His firm farms out money to hedge funds and is not a Citadel investor.
Citadel also may make it easier for clients to withdraw money from their funds, said the people, who asked not to be named because the information isn’t public. Some investors in the two funds can take out money quarterly, subject to restrictions. Other clients are subject to longer lock-ups.
And speaking of high water marks, all those who believe hedge fund managers will make a killing this year will be soundly disappointed.
Incidentally, and funniest of all, is that Citadel's 55% loss in 2008 would have been far greater had the fund not then employed a Russian under the name of Misha Malyshev, who then ran Citadel's HFT pracice. As we reported over a year ago:
The fallout from Citadel's nebulous future is spreading. Russki Algo
trading genius Misha Malyshev, who was classified as Citadel's Head of
High-Frequency Trading, and who was responsible for some of the only
profits at Citadel last year, generating 40% returns for the two funds
under his control has left the firm.
His gains paled when compared to the 55% losses by the two biggest
funds, Kensington and Wellington. This was also likely an issue when
calculating his "bonus" and his eventual career decision. It is unclear
as of yet where Misha has resumed trading at a high frequency. The
high-frequency trading group at Citadel is (or rather was) part of the
Capital Markets group, headed by Rohit D'Souza who was poached from
Merrill last year, and manages about $2 billion. Will be curious who, if
anyone, will be dragged in to replace the stern looking Misha.
Curiously, one would have thought that Citadel would at least have been grateful to Misha (who later left to found Teza, where he hired one Sergey Aleynikov), but no such luck. Instead, during a hearing seeking the (still ongoing) injunction of Teza, Citadel's lawyer said that Teza is a "veritable pirate ship of illegal activity." And he should know, after all Misha ran HFT for the world's then most successful HFT operation in the world. One wonders just how much about the "veritable piracy" of his former employer Misha would disclose if given a sufficient incentive.
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as it may indicate either a i) liquidity shortage, ii) a surge in redemptions, iii) a performance that is far worse than officially represented, iv) a megalomaniacal dictator at the head of it all, or v) all of the above.
LMAO!! Hey, Kenny G.! Don't worry, perhaps once the portfolios get down to a third of their previous values you can get a bid from some 3rd tier buyout firm... Reputation saved!
Ok all you HFT wannabees, here is the algo that is currently winning: F(delta s)^e(3.141823 . . . Oh, wait, they're coming...
Never met Ken Griffin but we exchanged emails. He didn't strike me as arrogant, but he is running one of the most successful hedge funds. Griffin, Cohen and other "super hedgies" might be arrogant, ruthless and shrewd, but they're extremely successful. As Derek Murphy at PSP used to tell me: "You can be arrogant but you better be good". On fees, it's only the beginning, more will follow.
Leo - extremely successful, as in down 50% in one year and no liquidity for LP's?
Huh.
OT: Go silver!
So by successful you mean able to put up gates to prevent redemtions while causing investments to generate those awesome -55% returns.
Yes, and the only reason these guys made any sort of "bank" in 2009 was, without almost a shred of a doubt, complicit cooperation from the Federal Reserve and frontrunning of the Fed in order to stoke a coordinated "asset price recover".
Paltry.
most likely it was someone else that Griffen pays to be nice to the clients and may have verbally answered your questions to that someone.
Also this guy was charging more than the standard 2/20 if i remember right. Great deal, he backs down to the standard 2/20 after he has shitty losses and shows just how bad he can perform. Lets remember losing 55% and then gaining back 55% doesn't get you back to par as there is a bias.
Eerrrrr.......Bloomberg is going the way of CNBC here as this "news" from the Bloomberg link has easily got to be 1,5 years old, and it's so inaccurate across the Board that whoever wrote it unfortunately and appearently knows nothing about Citadel.
Except Citadel didn't charge fees, as in a 2% management fee in the standard 2 and 20 format, they charged expenses--and well north of 2%.
Also from the Bloomberg article:
"The Kensington and Wellington hedge funds at Chicago-based Citadel, the $11.1 billion firm founded by Ken Griffin, are among a handful that pass along all expenses to clients rather than charging the industry-standard 2 percent annual management fee. Expenses at the firm have reached as much as 8 percent of assets, and typically range from 4 percent to 6 percent."
So Citadel, in cutting fees, is just returning from a stratospheric level to the typical level...
What idiots are paying these huge expenses? Better to burry your money in the backyard!
Survivorship bias. We only see the successful, arrogant traders - because the arrogant traders that blew up aren't included in the sample. Sure there are plenty of those in Wall Street these days.
Snob appeal and discounted rates don't mix.
fab fab says he'll txt tomorrow sometime.... and is thankful that cork didn't drop into the bottle
As long as they are operating under the laws of the land HFs are fine - as are folks who make inflatable dolls, crocs plastic shoes or whatever. hey its capitalism.
My problem is with the bozos entrusted with retiree money who hand capital over to funds. Do they know what they are doing? Do they care?
has anyone looked at resumes of the managers of the large pension funds etc and compared them to the resumes of a typical hedgie?
pension guy; makes 150k and is thrilled . Probably went to a state college - accounting major, etc etc
hedgie: makes 300K base, 2++ Million annual bonuses. Ivy league, harvard/stanford etc business school etc ec.
get the picture? Mano-a-mano the pension guy does not stand a chance and is probably thrilled that gus like that actually treat him like a pal and invite him to baseball games. He is a sitting duck - Prey.
We need Predators running our money .And we should treat them harshly if they are careless with their fiduciary responsibilities.
It's bigger than that. Look at guys like Mark Anson who used to run CalPERS. Guy was/is supra genius going by education credentials... and CalPERS is still underfunded by half a trillion. Smartest guy in the room doesn't always = high returns or successful money mgmt. Also, look at LTCM... what were the "top minds" in the investment world blew themselves into oblivion.
:D
Um. Hopefully no one is forgetting about how etrade shareholders were fleeced ***wink wink nudge nudge** for several billion. God only knows how they use data from etrade for direct dredge.
Has anyone read anything on the long term capital allocation impact of the decline of fundamental investment analysis versus algo investing.
It seems pretty obvious that robot trading is here to stay.
I have never met Ken Griffin but dealt regularly with his pre-crisis crew in Asia. They were indeed an arrogant lot and - as was proven - without really knowing what they were doing. I saw a number of deals from them where they tried to get leverage from us. We declined each of those trades... and not only that - we even worked together with them on the due diligence and told them what we thought did not add up. They invested anyway - and lost in many instances that later became public restructurings.
I have never met Ken Griffin but dealt regularly with his pre-crisis crew in Asia. They were indeed an arrogant lot and - as was proven - without really knowing what they were doing. I saw a number of deals from them where they tried to get leverage from us. We declined each of those trades... and not only that - we even worked together with them on the due diligence and told them what we thought did not add up. They invested anyway - and lost in many instances that later became public restructurings.
I found lots of interesting information here. I love zerohedge.
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