| Kenneth Griffin, Citadel (Bloomberg) |
Regulators served as a popular punching bag for various panel discussions at the opening day of the SkyBridge Alternatives (SALT) Conference, the annual hedge fund industry confab at the Bellagio in Las Vegas. But one of the industry’s most prominent figures strongly refuted the idea that regulations passed in the wake of the great financial crisis have done more harm than good.
“The United States has overall the best regulatory framework in the world, hands down,” declared Kenneth Griffin, founder of Chicago-based Citadel, which manages some $25 billion in multistrategy hedge funds and also operates a large market-making business. When asked if the banking system is stronger today than it was in 2008, Griffin responded: “If we think about what happened in ’08, it was the collapse of our banking system that drove the chaos that was unleashed. No doubt our banks are stronger than ever. Riskiness of portfolios has come down…we’re safer.”
Griffin’s remarks capped a day of discussions in which industry practitioners including Omega Advisors founder Leon Cooperman bemoaned a reduction of liquidity in the markets, which some blamed on the Dodd-Frank Consumer Banking and Protection Act and its Volcker Rule provision, which effectively wiped out proprietary trading by investment banks. That law was passed in 2010.
The increased regulation certainly hasn’t hurt Griffin’s business: He topped Alpha’s annual Rich List ranking of the highest-earning hedge fund managers in a tie with Renaissance Technologies chairman and founder James Simons, with each taking home $1.7 billion in 2015. It was Griffin’s second straight year at the top of the list and followed a year in which Citadel’s flagship Kensington and Wellington multistrategy funds returned 14.3 percent in what was a tough environment for hedge funds. And Citadel manages more money than ever: Today it’s the 19th-largest hedge fund firm in the world.
But 2016 — at least so far — has been less kind to Griffin. Kensington and Wellington each lost 6.9 percent in the first quarter, mostly from equities. On Monday — the day before the Rich List figures were published — protesters demonstrated outside Citadel’s Chicago headquarters, demanding that the wealthy pay more taxes. Then, on Tuesday, Reuters reported that the Department of Justice has subpoenaed Citadel’s market-making arm, as well as KCG Holdings, to determine whether the firms are deliberately giving customers worse prices on trades to net bigger profits on the transactions, according to the report. A Citadel spokeswoman wouldn’t confirm or deny the probe but told Reuters, “As one of the largest market-makers and providers of liquidity in the U.S., we regularly receive inquiries from and work closely with a number of regulators and others regarding our business and market practices.”
At SALT, Griffin appeared unfazed as he addressed a series of easy questions from Anthony Scaramucci, the founder of New York–based SkyBridge Capital, which hosts the SALT conference each year. Scaramucci didn’t specifically bring up the latest Citadel headlines but asked its founder at length about the firm’s culture. Griffin seized the opportunity to emphasize his firm’s commitment to staying within the legal lines.
“Most people really want to win on merits. They are driven by the joy of doing it the best anyone could possibly do it,” he said. “We’ve had very little problems with people displaying a lack of integrity. It’s happened. There’s rotten apples in society; we deal with it quickly and powerfully. The vast majority of people I’ve worked with conduct themselves with integrity every day in what they do at Citadel.”
During the brief conversation, Griffin also addressed Citadel’s history, particularly its darkest moment, in 2008. That’s when the firm’s flagship funds lost 55 percent.
“For our team this was an unbelievable journey toward the abyss,” said Griffin. “We lost half our capital in 16 weeks. We’d never had a double-digit drawdown in 20 years. It was like an out-of-body experience” in terms of the losses the firm accrued, he said, adding, “Our deferred compensation scheme was levered. So we’d lost all our golden handcuffs on the entire team. You’ve just suffered a catastrophic loss, you’ve lost your golden handcuffs, you’re ashamed of what’s happened. There is no doubt there is an element of shame.”
Citadel instituted a series of changes, including a pivot toward more liquid strategies, and went on to post double-digit gains in its flagship funds every year since. Of course, it remains to be seen whether the firm can pull off the same feat in 2016. Judging by the prognostications of many of Griffin’s fellow SALT attendees, that will be difficult for anyone to achieve this year.
