Name: Kenneth C. Griffin
Born: Daytona Beach, Florida in 1968.
Affiliation: Citadel LLC (formerly known as Citadel Investment Group, L.L.C.)
Kenneth C. Griffin is one of world’s top ranked hedge fund managers. He is the founder and CEO of Citadel, a Chicago based investment firm. Citadel is ranked amongst the largest and most successful hedge funds in the world with approximately $20 billion of assets under management.
Investment Management Career
Griffin graduated with Honors from Harvard College with a B.A. degree in Economics. While still a student at Harvard he started trading options and started two funds from his dorm room. His enthusiasm for trading could be gauged by the fact that he installed a special satellite link to his dorm to access real-time market data so that he could trade between classes.
After graduating, he met a famous hedge fund investor named Frank C. Meyer, (founder of Glenwood Capital) through a bond trader in South Florida. Meyer was so amazed with Griffin’s performance at such a tender age that he provided him $1 million to invest on his own. Griffin began trading with a convertible arbitrage strategy he had developed while he was studying at Harvard. The strategy was based on a model which seeks to exploit arbitrage opportunities in the convertible bonds market. He successfully employed his strategy and returned 70 percent that year. Griffin exceeded Meyer’s expectations, and as word of his strong performance spread, investors were persuaded to back Griffin.
In 1990, he founded his own hedge fund company and named it “Citadel”. The company was so named to suggest strength in times of volatility. Since inception in 1990, citadel has generated remarkable returns for its investors. Using sophisticated quantitative research and a wide array of trading strategies, Citadel deploys its assets across multiple asset classes and markets, seeking “high risk adjusted returns” for its clients.
Like most great hedge fund investors, Griffin tries to take advantage of divergences from typical patterns to make money. “What makes Citadel a worthwhile investment is its uncanny ability to go where other people are not—and make a lot of money there,” says Mark Yusko, former chief investment officer at the University of North Carolina’s endowment fund. Collapse of Enron provided him with such an opportunity and he sent a team around the country to interview hundreds of energy traders, meteorologists and quantitative researchers. He hired seven to start an energy trading business. Another opportunity which griffin exploited to its best was when Amaranth, the $9.5 billion hedge fund went into deep trouble as a result of its failed bets on natural gas. Griffin’s Citadel collaborated with J.P. Morgan to buy the book of energy trades. This venture proved to be a huge success for Citadel.
Citadel is a quantitative hedge fund which uses complex mathematical models to pick investments. Griffin himself has the ability to program advanced computer codes and write complicated mathematical formulas. The firm has brought together mathematicians, physicists, engineers, investment analysts, advanced computer technology, and confidentiality agreements with its employees across the globe. The company believes that this unique blend of state-of-the-art technology and their exceptionally talented team of professional traders provide citadel an edge over its competitors. Unlike other hedge funds where quantitative trading is restricted to selective areas, each and every one of their trading strategies is backed by technology.
Leverage and Risk Management
Hedge funds are typically thought of as highly risky investments. One driving factor in Citadel’s success is its ability to control risk better than others. Citadel attempts to dilute risk by efficient portfolio diversification. Citadel’s leverage tends to be moderately higher than that of its peers. However, they feel comfortable utilizing such high levels of leverage given their superior risk management capabilities. Citadel’s strategy is to eliminate beta (systematic risk) risk such that portfolio’s overall exposure to movements in broader markets is very low.
Over the years, Griffin’s Citadel has been successful in attracting a diverse group of clients, primarily because of its emphasis on risk mitigation and approach towards evaluation of returns on a risk adjusted basis. Instead of looking for a specific return per trade, they allow a certain risk per trade. For example risk taken on a fixed income arbitrage trade is often a fraction of that taken on a risk arbitrage trade. For hedging, citadel uses a wide array of products from shorting securities to shorting futures. Citadel uses proprietary mathematical models and advanced computer systems to help make all of its investment decisions, from pricing various financial assets to calculating the risk of its stock holdings.
Management Style/Corporate Culture
Griffin admits that he is a tough boss to work with and emphasizes the importance of hard work and dedication as a key ingredient for success. “We’re here to win, not to go through the motions,” he says. “Griffin is a great fan of Jack Welch, one of America’s most famous business leaders and tries to imitate his management style. “I admire Jack Welch and his conviction of the role of the individual in the firm,” Griffin says.
Like Welch, Griffin meets with small groups of employees every few weeks for lunch, during which he encourages them to make suggestions or voice complaints. He promotes employee participation in setting specific goals which are realistic and achievable. Griffin’s continuing goal is to focus on leadership development and team building. “To earn ‘A’ results, you have to have an ‘A’ team”, he says. Their outstanding human resource combined with their superior electronic trading ability gives them an edge over competitors.
Citadel has the reputation of being a harsh place to work evident by its high employee turnover. Commenting on this reputation, Griffin has said, “People say…’it’s a tough place to work. It’s demanding. It’s unrelenting.’ I look at these as strengths inherent in strong companies… I’m very proud that we have a sterling reputation when it comes to doing what we say we’re going to do.” When market conditions are challenging, employees are expected to put extraordinary efforts in order to meet investors‘expectations. Over the years Citadel, like any other company in the industry, has experienced challenging market conditions. What distinguishes Citadel from others is that it has been successful in converting such challenges into opportunities to grow, to learn and profit.
Drawdown in 2008 financial crisis
During the 2008 financial crisis, Griffin’s Citadel faced darkest moment of its history as it suffered double digit drawdown. The markets were rational and there was dramatic contraction in funding which led to a near collapse of banking system. Citadel had enormous exposure to de-leveraging by the investment and commercial banks. It had one of the strongest balance sheets in all of the financial services with committed ‘term credit facilities’ and enormous cash reserves. The term credit facilities enabled Citadel to fund its balance sheet in a period when many others could not, but funding does not mitigate mark-to-market risk. Lehman’s collapse was just the beginning of the debacle and in response Citadel liquidated certain portfolios to maintain liquidity. It was asked by several major banks to post additional collateral to cover big losses on its investment. Griffin decided to suspend redemptions at the end of 2008 and made a plan to navigate through the disarray in the global market by repositioning its flagship funds, maintaining investment grade rating and increasing unencumbered cash position. Griffin successfully executed his plan generating over $5 billion of investment gains, reversing majority of losses in 2008. It modernized its balance sheet to reflect end of Shadow Banking System. It disposed off tens of billions of derivatives and dramatically reduced Level 3 assets and other holdings. Today Citadel operates in three broad segments of investment strategies: Inter-Asset Class Strategies, Intra-Asset Class Strategies and Macro Strategies. Its investment philosophy is centered around liquid assets and it focuses on major asset classes in the world’s largest financial markets. It now relies on less balance sheet incentives, liquid assets, skill-based strategies, observable outcomes and diversified team of risk takers.
Kenneth Griffin has earned several billion dollars during his tenure at the company. Griffin has appeared numerous times in the Forbes 400. In 2008, his wealth was estimated at $3.7 billion. By 2010, Forbes estimated that his wealth had fallen to $2 billion, making him the 488th richest person in the world. In 2004, Griffin married Anne Dias-Griffin. Dias is the founder of Aragon Global Management, another Chicago-based hedge fund firm. Together, they have one son.
Kenneth Griffin, apart from being a successful hedge fund manager is also an active philanthropist. He has contributed generously to a variety of philanthropic activities, notably in the field of education. Griffin’s charitable foundation, the Citadel Group Foundation, has contributed to public education, the Children’s Memorial Hospital in Chicago and the Chicago Symphony Orchestra.
Griffin is also a great admirer of modern art. In 2004, Kenneth and Anne Griffin were listed by Art News in the magazine’s ranking of the ten most active art collectors in the world.
“Risk is what you make of it.”
“Capital markets reward you for what you learn that other people have yet to ascertain.”
“Every organization has two choices. Choice one is to grow. Choice two is to die. If you decide not to grow, it’s a clear-cut message to talented people that it’s time to leave.”
By Muhammad M Raheel