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.