The news that Citadel Investment Group lost about 13% last month has to sting especially sharply for the founder of the Chicago hedge fund giant. Not only is Ken Griffin’s company now down to 47%, according to investors cited by the Wall Street Journal. It’s suffered the most from losses in convertible bonds–the very business Griffin built his reputation on.
Griffin first started trading convertible bonds as an Harvard student. He had been reading up on financial markets when he first discovered the bonds and decided that the pricing didn’t make sense. There was an arbitrage opportunity because the value of the bonds and the prices at which they converted to stocks were out of whack. He went so far as to write his own software to figure out how to price the bonds better.
In his first year trading convertible bonds after graduation, Griffin saw a 70% return. Griffin opened his fund in 1990, with $4.2 million of investor money. He called the firm Citadel to convey the idea that it would be a stronghold in volatile markets. For the first three years the fund and its investors prospered. In 1991, the funds returns were 43 per cent. In 1992, 40.7 per cent. In 1993, 23.5%. But in 1994, he suffered his first losses as the convertible bond market tanked.
“We’re not going to let this happen again,” Griffin reportedly told an investor.
But it looks like that is exactly what happened, according to the Journal:
“Citadel’s mounting losses have come from declining values of convertible bonds, bank loans and other investments as global markets strain. Much of the losses stemmed from credit holdings during the last week of the month, investors say.
Continued pressure on those assets, particularly as other hedge funds fail and are forced to dump positions to raise cash, is compounding Mr. Griffin’s efforts to engineer a rebound during what is by far his firm’s worst year ever.”
We wouldn’t count Citadel out yet, however. Griffin is no doubt back at the white boards right now, making sure the tens of billions of dollars he still manages will not continue to suffer this badly. And Griffin is actually one of the smart guys. But, as we’ve said before, intelligence is often over-rated by intelligent people. And sometimes the markets decide to remind us of that.