Is Citadel Unwinding A $50 Billion Portfolio In The Aftermath Of The Surveyor Debacle

Two weeks ago, before the market was shaken by the most recent bout of volatility, one which led to the dramatic outcome of Birdgewater's Pure Alpha suffering two consecutive 5% weekly losses as reported earlier, we received a tip from an insider that as a result of substantial losses at Citadel's internal hedge fund Surveyor, Ken Griffen's organization was not only laying off numerous portfolio managers and traders, but that the unwinds of the associated portfolios were a direct reason for the selloff suffered at the beginning of the month.

Without going into detail, we quizzed our readers the following on February 3:

Today, the WSJ has confirmed what we heard, when Rob Copeland wrote that Citadel "cut more than a dozen members of its investment staff this week in the wake of early losses for the firm in 2016." This is true, however, when adding all the other PMs and investment managers who have quit or left on their own in the past month, the number is far greater.

The WSJ continues:

The Chicago-based firm, led by billionaire Kenneth Griffin, parted ways with analysts, associates and portfolio managers in its multibillion dollar Surveyor Capital arm. Surveyor is one of Citadel’s three internal units that bet on and against stocks worldwide. Last month, the firm replaced the longtime head of Surveyor, Jon Venetos. The unit recently had about 200 employees, with a majority considered investment staff.

Further validating our information, the WSJ notes that "through the second week of February, Citadel’s main fund is down 6.5% this year, a person familiar with the matter said." As Copeland notes, "Mr. Griffin grapples with a money-losing stretch unusual for one of the hedge-fund world’s marquee names."Perhaps the HFTs are no longer profitable?

In any case, that is only part of the story.

Here is what the WSJ missed.

As our source reveals, Citadel is quietly trying to unwind the $50 billion leveraged Surveyor portfolio.

Following massive losses last year by a Boston-based trader Scott Carmel (who lost over $150 million from 2015 through January 2016 trading financial stocks, and was fired for performance last month), Ken Griffin, angered by the underperformance of Surveyor vs the core Global Equities book, ordered the dismissal of several teams. As the WSJ confirmed today, more employees have been fired since.

Not surprisingly, Carmel promptly scrubbed his LinkedIn profile to remove any trace of association with Citadel although it still remains in the google cache.

As the WSJ also reported today, the head of Surveyor - Jon Venetos was demoted and quickly quit, leaving the unit in disarray.

What the WSJ did not note is that "now there is a desperate scramble to try to unwind a massively leveraged equities portfolio (over $50 billion gross)."

Our source concludes that "Citadel investors do not know the truth of what is happening here. They are trying to maintain the illusion but there is chaos amongst employees."

Well, now Citadel investors are fully aware of what is happening there, even though Ken Griffen is doing his best to maintain the image that all is well by splurging $500 million on artwork by de Kooning and Jackson Pollock.

 

But what matters to our readers is whether or not Citadel's unwinding of this major portfolio has concluded, or still a work in progress. Because quietly liquidating $50 billion in securities in a market as illiquid and choppy as this one, would be certain to move it and not in an upward direction.