Is Hedge Fund Citadel Becoming The Next Goldman Sachs?

Last Updated Sep 11, 2009 10:29 AM EDT


Among asset management circles on Wall Street, there's a persistent rumor that just won't go away: the world's most aggressive hedge fund is gearing up to become a full-scale banking institution.

Citadel Investment Group, a Chicago-based hedge fund, is on many asset managers' radars right now to one day become a full-service boutique investment bank. Recently, the fund seems to be doing little to hide that ambition.

Citadel's interest in online broker E*Trade Financial is a good starting point. With nearly $2 billion invested in its long-time holding E*Trade this year, Citadel has become far more than a speculator in the stock: it's pretty much an operating manager. Signs of that status were confirmed by its recent refusal to enter into a 120 million share sale in late August in the interests of the company, despite financial benefits for the fund.

More recently, E*Trade's chief executive Donald Layton said he will step down from the job at the end of the year. That announcement followed Citadel manager Ken Griffin's ascension to the broker's board earlier in the year. It's a well-known fact that Layton and Griffin frequently argued over the E*Trade's strategic direction.

In other news, Citadel's administrative division, Citadel Solutions, recently gained a contract to provide accounting, IT and back-office services to a $50 billion piece of what remains of the former Lehman Brothers carcass. Citadel re-branded its Solutions subsidiary Omnium on the eve of the deal. Citadel is also one of the first hedge funds to resume hiring after last year's market train-wreck.

The two deals are a pretty clear sign that Griffin has more in mind for his financial warchest than pure asset management. In fact, via both the E*Trade and the Omnium subsidiaries, it's evident that the financial warlord (most of his companies have names borrowed from military contexts) is building a sizeable back-office, capable of handling a range of financial services functions.

Griffin is the kind of Type A, leap-feet-first-into-the-next-big-thing-when-the-going-gets-tough, hyper-aggressive money manager that you more often see on the big screen than casually strolling around Chicago. According to hedge fund lore, he paid his way through college with his trading profits.

In that light, it wouldn't be surprising to see Citadel become a sort of Goldman Sachs-style bank: with a strong trading arm, a razor-sharp team, and an increasing tightening in hedge fund regulation, the move definitely makes sense from a growth perspective.

  • Daniel Harrison

    Daniel M. Harrison is a business journalist who has written for publications such as The Wall Street Journal, Dow Jones Newswires, and Forbes.com.

    In 2007, Harrison initiated Asian market coverage for TheStreet.com, reporting from New York and Hong Kong. He also served for a while as Opening Bell Editor at the financial blog Dealbreaker.com. Harrison is the publisher, editor and writer of The Global Perspective, and you can follow him on Twitter at Twitter.com/bizjourno.