Citadel Investment Group, one of the world's largest hedge fund managers, is under heavy attack. And that's making Ken Griffin, the company's founder, fighting mad.
Chicago-based Citadel, with nearly $20 billion under management, is reeling from what Griffin is labeling the "single-worse month, by far, in the history of Citadel." He's referring to the 16 percent decline the Kensington Global Strategies Fund, Citadel's $10 billion flagship, suffered in September, which caused the fund to drop this year by 26 percent, according to published reports.
The results were so bad that Griffin, who has a reputation for being very secretive and ultra-proprietary about his business dealings, sent a letter to investors explaining what went wrong and taking personal responsibility for the problems. Copies of the letter were obtained by the press.
This is quite a reversal of fortune for Citadel, which has consistently produced returns above 20 percent.
Griffin concedes that recent market turmoil and the deepening credit squeeze caught him by surprise. However, Griffin is also peeved at the recent regulatory ban on short selling of stocks, a decision he blamed for "creating material dislocations across many of our portfolios."
Griffin, a multi-billionaire and ardent believer in free markets, said the short-selling embargo was "driven more by populism than policy." Selling short is a common hedge fund strategy used to help fund managers lessen risk.
Griffin's ire toward regulators is likely to grow.
Today, the Securities and Exchange Commission said it is extending a rule forcing hedge funds to disclose their short-sale positions. The SEC is investigating hedge fund short-selling and keeping traders on a tight leash, after Congress raised concerns that hedge fund operators were spreading rumors about companies in order to trade against its stock.
In recent years, Citadel's balance sheet has been a source of concern. A 2006 Citadel-sponsored bond offering noted the company's leverage ratio of at least 7.8-to-1, which was greater than the 5-to-1 standard considered aggressive for hedge funds, according to the Wall Street Journal.
And last year, a report from investment bank Dresdner Kleinwort voiced concern over Citadel's super-secret business approach. It added that to some outside observers, Citadel's balance sheet resembled that of Long-Term Capital Management, a hedge fund that had to be rescued in 1998.
Citadel disputes that it is overly leveraged or has something to hide. In fact, in 1999 Citadel was the first hedge fund to invite ratings agencies to audit the books of its two major funds. Those funds have always won investment grade ratings, the company notes.
In recent years, Griffin has moved to make Citadel a more diversified investment and private equity company that's less dependent on hedge funds. Right now, however, Griffin is more concerned about the fate of the stock market. In his letter, he told investors to brace for more volatility in the weeks ahead.