175,846,629,768 Reasons Why Ben Bernanke Joined Citadel

No, that is not the number of hits his blog posts got, neither is that what Ben Bernanke will make as the most recent employee of Citadel (at least not for a few years until the the eponymously named helicopter makes a landing and hyperinflation runs wild).

It is also not the assets under management held by HFT titan, and Bernanke's new employer, Citadel. As Citadel reminds us in its regulatory filing with the SEC, "as of December 31, 2014, in Funds managed on a discretionary basis, we had approximately $23,804,000,000 in net assets under management."

Only.

So what does the number above represent? Well, as Item 5 of Citadel's Form ARV also filed with the SEC every year just before the end of the first quarter, $175,846,629,768 is the total amount of regulatory assets held by Citadel.

 

At this point one can also add +1 to Citadel's 979 employees.

But what are regulatory assets? For the answer we go back to not only our post from April of last year in which we showed the world's "Most Levered Hedge Funds" but better yet, to a Bloomberg article from April 2012, in which we read:

In seeking to adopt a uniform method for determining who met the threshold, regulators instructed firms to count assets that most were excluding from tallies on size, including holdings obtained through loans, short sales and hedging. Traditionally, hedge-fund advisers have quoted a net number, comprising investor capital plus investment gains and losses, when disclosing their assets under management.

In other words, the only difference between net assets and regulatory assets is one simple word: leverage.

Bloomberg continued:

While some fund managers only gave information on their gross assets, 31 of the 50 largest also disclosed their net assets in a separate section known as the client brochure. For these advisers, gross assets of $949 billion were more than double their net assets of $422 billion.

 

That indicates hedge funds may be using as much leverage as they did prior to the 2008 financial crisis. On average, hedge funds held total assets that were double their net capital as recently as 2007, said Daniel Celeghin, a partner at Casey Quirk & Associates LLC, a Darien, Connecticut, adviser to asset managers.

Three years later hedge funds are using more leverage than they did prior to the financial crisis. Much more, as we also showed a year ago. This year it's even worse.

But nowhere is this greater than at, drumroll, Citadel. Again, Bloomberg from three years ago:

The amount of leverage that an adviser uses, and thus its ratio of regulatory to net assets, is often tied to the firm’s primary trading strategies. Prime brokers are often willing to lend more money to firms that make bets that aren’t tied to market swings, said Leonard Zacks, a Chicago-based money manager who oversees about $2 billion.

 

Citadel, for instance, generally seeks to follow strategies that have a low correlation to stock and credit markets. An example would be an index arbitrage trade in which a fund manager bets that futures on the Standard & Poor’s 500 Index are cheap relative to the price of the individual stocks that comprise the benchmark.

 

“From the prime broker’s point of view, they have an almost zero risk portfolio,” said Zacks, who has been running a market-neutral strategy for 15 years. He said most market-neutral strategies use leverage of three to four times capital.

 

Citadel’s gross assets were also nine times its net figure back in May 2008, when the company was bulking up on convertible bonds as part of a relative-value strategy designed to profit from small price differences in related securities. The firm had gross assets of $145 billion at the time before the bets went awry, leaving clients with a 55 percent loss for the year.

And, as the latest leverage update shows, Citadel's leverage is absolutely mindblowing and approaches that of some banks.

 

 

And that, in a nutshell, is Bernanke's job: to make sure that Citadel's 7.4x leverage only keeps rising, and that its "true" regulatory assets of $175.8 billion follow. Because if there is one thing Bernanke has experience with, it's lots and lots of leverage.