Citadel Investment Group LLC CEO Kenneth Griffin is trying to convince hedge-fund investors he's still got the magic touch.
Mr. Griffin has been traveling the world in search of capital for two new Citadel funds, reminding potential clients of his roots as an asset management whiz kid who had people lining up for his services in 2007. His performance soured in the financial crisis of 2008, when he had to publicly reassure investors that Citadel's finances were solid.
The renewed focus on Citadel's hedge-fund business, the biggest in Chicago, comes as Mr. Griffin's plan to build an investment bank has become snagged by the departure of three executives over the past year, even as it has started landing deals.
In addition to his stellar pre-crash record, Mr. Griffin can tout 62% returns last year at his flagship Kensington and Wellington funds, beating the 25% average for similar funds. Still, the new funds — called single-strategy funds because they focus on one asset class instead of a broad investing strategy — face a wary marketplace.
Large hedge funds lost 20% on average in 2008, according to Chicago-based Hedge Fund Research Inc. Citadel's funds took a 55% beating. In the past two years, investors have been taking more money out of hedge funds than they have been putting in. This year, the entire industry has raised just $13 billion more than investors have taken out.
Mr. Griffin's roadshow will test his drawing power with cautious investors. The new funds are an opportunity to show he can adapt his investing style to generate outsized returns in changing financial markets.
"I wouldn't expect these funds would be critically important from a business perspective, but like with anything else, a failure would be harmful, perhaps more reputationally than financially," says Michael Rosen, chief investment officer at Santa Monica, Calif.-based Angeles Investment Advisors LLC.
Mr. Griffin declined to be interviewed.
His fundraising efforts come as federal oversight of the industry is increasing. Pending legislation in Congress would require increased public reporting by hedge funds, which long have valued their secret strategies.
Chicago-based Citadel's overall assets under management have inched up to $12 billion over the past year, well below the pre-crash peak of $20 billion. On Nov. 30, Mr. Griffin lifted a nearly year-long suspension on redemption requests, which probably led to some outflows.
Mr. Griffin is trying to lure clients to the new funds with more specific strategies and lower management fees.
Hedge-fund investors — typically pension funds or other institutional investors, funds of funds or wealthy individuals — have been clamoring for narrower investment options and increased control over strategies in the wake of industry losses in 2008, consultants say. Multistrategy funds, such as Citadel's Kensington and Wellington funds, left some investors feeling blindsided by risks they hadn't anticipated when the financial crisis hit.
Investors "are less willing to give a totally blank mandate to managers," says Daniel Celeghin, a partner at Casey Quirk & Associates in Darien, Conn., who is a consultant to hedge funds.
Citadel's flagship funds, which are essentially the same fund — one created for U.S. investors and the other for foreigners — are down about 2% this year, according to an investor who spoke on condition of anonymity, citing Citadel's confidentiality rules. Hedge funds globally, on average, are down about half a percent, according to Hedge Fund Research.
When Citadel introduced the two funds, it reportedly aimed to raise as much as $2 billion for one of them, the Citadel Global Macro Fund Ltd. The two single-strategy funds have reported raising a total of about $164 million but may have raised more since their last regulatory filings. While a spokeswoman declines to comment on the fundraising, she says the funds and a mortgage-related managed account, also launched over the past year, have $1.3 billion under management.
In a letter to investors in October, Citadel said the new single-strategy funds would give investors "pure play" investment opportunities "with access to certain of our strongest investment programs."
In addition to starting the Global Macro single-strategy fund, a type that typically bets on currencies and government bonds, the company rolled out the Citadel Global Equities Fund, which takes long and short stock positions. The firm told investors that it started a Citadel Convertible Opportunities Fund, but that appears to have been abandoned. Convertible arbitrage, where Mr. Griffin got his start, had a blowout year last year, but Mr. Celeghin says the strategy has probably played itself out for now.
©2010 by Crain Communications Inc.
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