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Citadel Losing 53% in a Year
The year was 2008. As you might have heard, the financial markets were in turmoil. The Dow Jones Index was down 34% to close the year.
Citadel Securities led by Kenneth Cordele Griffin (Ken Griffin) was down 53% for the year. Griffin shared his lessons and thoughts on what he got wrong at the end of the year in a Fortune Magazine Interview.
Griffin had started off trading stocks in his Harvard dorm room and went on to create a multibillion dollar hedge fund giant. He said that they had prepared extensively for a 1987 or 1998 style crash but were still caught off guard in 2008.
In March of 2008 after Bear Sterns collapsed, Ken Griffin bought a bunch of investments in the financial sector and thought they caught the bottom. But turns out the worst wasn’t over yet and the handle they thought they caught was actually a sharp blade.
Their positions were actually fine until mid September.
On the 15th of September, Lehman Brothers filed for bankruptcy and Ken Griffin who had bought truckloads of financial assets which they thought was undervalued was in for a shock.
The bankruptcy of Lehman Brothers caused a global credit freeze. In basic terms, Lehman had to sell of its positions which caused greater sell off and devaluations of all assets.
2 days later, there was news that the SEC was considering banning short selling of mostly financial stocks which would be great for banks like Morgan Stanley, Citigroup and others as they didn’t have to worry about paying up to hedge funds that shorted the move but that would completely blow up Citadel who had been short financial stocks and long bonds through their convertible-bond arbitrage.
In early October Ken Griffin wrote in a letter to investors,
September has been the single worst month, by far, in the firm's history. Our performance reflected extraordinary market conditions that I did not fully anticipate, combined with regulatory changes driven more by populism than policy.
Politicians at DC weren’t the only people who were enacting policies that would unintentionally destroy Citadel.
Wall Street wasn’t having it with Citadel either. Also it didn’t help that Citadel and Ken didn’t have the best relationship with Wall Street. He had created a number of enemies and had set out to be generally independent of Wall Street.
There were also a couple of rumours spreading on the rumour mill that Citadel had a leverage ratio of 13 to 1 when in reality it was much closer to 4 to 1.
But fund managers and other counterparties weren’t having it, they were margin calling Citadel positions as they were worried that they would sustain losses if Citadel didn’t manage to return their loans in time before they collapse.
Due to all of this panic and fear about Citadel, Ken decided to conduct an emergency conference call to set things straight about the firm and ensure investor confidence in their fund.
When asked whether he would have done anything differently in the past months, he responds not much, other than perhaps reducing some of the firm's more complex investments.
Then, after thinking a moment, Griffin says with a sly smile: "With hindsight, of course, I would have been all in cash!" And thus he demonstrates another skill that he mastered during the credit crisis - gallows humor.
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