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Citadel first Hedge Fund to sell Bonds ($2 billion)
- Thread starter JayS
- Start date
Quote from Mvic:
If they are susceptible to being squeezed hard enough on any position that they will need to use this so called hedge then it would seem to suggest that they might be employing strategies that are too aggressive and/or are over leveraged.
Think of it: 2 bil in the bank is earning them 5.00% or so in yield.
All they need to do is sell this entire amount of funds raised as yen against the dollar or even the aussie with 2:1 leverage, then use the proceeds to buy 15% canadian royalty energy trusts. you have a nice 25% yield spread right there.
hahah.
This is just the beginning. Whats amazing is since junk debt doesn't carry too much of a risk premium nowadays (heck, i think this is investment grade), we're entering into a new era of junk funded hedge funds ...
three words: house of cards.
very entertaining.
and don't give me a BS argument of how a proper capital base is extra insurance against unnecessary margin calls of big players who try to strong arm the market. In the end, it just means in the end of the day, instead of losing 4 billion on a bad gamble, they'll lose 6 billion - since of course they'll try to strongarm the market with the extra 2 billion in capital.
What a joke.
before you know it, these hedge funds will find a way to get their risk premiums down even further on these bonds below treasuries, just another form of 20/2 compensation. (i'm getting carried away)
I predict a new era of dumb money long mutual funds outperforming these hedge funds more and more - this hedge fund fad will pass. People will lose interest, once they see this oversaturated era of hypercompetition amongst these guys results in returns not much different than direct treasury investment.
Citadel Says Hedge-Fund Profit Rose Fivefold in 2006
By Katherine Burton and Miles Weiss
Nov. 29 (Bloomberg) -- Citadel Investment Group LLC, the hedge-fund manager founded by Kenneth Griffin, said earnings at its two largest funds increased more than fivefold on gains from debt and energy investments.
Net income at Citadel Kensington Global Strategies Fund Ltd. rose to $795.6 million in the first eight months of 2006 from $148.4 million in the year-earlier period, the Chicago-based firm told investors this week in a prospectus for its first bond sale. The fund, which has $9.5 billion in assets, had an investment return of 7 percent in the third quarter, compared with 3.1 percent a year earlier, when its corporate-debt and energy bets lost money.
``Citadel hired a significant number of new investment professionals since mid-2005 to strengthen both the global credit and global energy business,'' the Nov. 27 document said. Earnings at its Wellington LLC fund, which has $3.3 billion in assets, rose to $389.1 million from $54.3 million.
The 363-page prospectus, a copy of which was obtained by Bloomberg News, details the finances of the closely held firm, which oversees almost $13 billion for wealthy investors and institutions. Hedge funds, private pools of capital that allow managers to participate substantially in their investment gains, oversee $1.3 trillion, more than double what the industry's assets were five years ago.
Institutions such as pension funds and endowments have contributed about $361 billion to hedge funds, according to an Oct. 10 report by Bank of New York Co. and consulting firm Casey, Quirk & Associates LLC in Darien, Connecticut. That amount may triple by 2010.
Kensington's Returns
Citadel is a top performer among multistrategy funds, which try to exploit relative price discrepancies between securities including stocks, bonds, commodities and derivatives. Kensington's returns beat the group's average in eight of the past nine years, according to the prospectus and data compiled by Chicago-based Hedge Fund Research Inc.
The fund returned 17 percent this year through Sept. 30, compared with an average 8.8 percent for similar funds. UBS Dynamic Alpha Strategies Fund 2, run by Brian Singer and Neil Williams, earned 5.6 percent in the period, while the Quantum Endowment Fund NV, managed by George Soros's son Robert Soros, returned 2.5 percent, according to data compiled by Bloomberg.
Still, Kensington's lead has narrowed in recent years as the number of hedge funds has more than doubled since 2001 to 8,500, making it harder for managers to produce outsized gains. Last year, Kensington returned 7.2 percent, compared with 6 percent by the average fund and 4.9 percent, including dividends, by the Standard & Poor's 500 Index, a benchmark for U.S. stocks.
Using Leverage
Hedge funds are designed for investors with at least $1 million, and endeavor to make money whether financial markets fall or rise. They can use leverage to help boost gains and they can sell short, or borrow securities and immediately sell them with the hope of buying them back at a lower price.
Citadel's funds borrowed 7.8 times their assets as of Aug. 31. Their investments include corporate debt, energy, stocks, currencies and government bonds, and reinsurance.
Citadel plans to sell bonds as a means to cut its reliance on financing from Wall Street investment banks. In a first for a hedge fund, the firm may sell $500 million of the notes next week, said a person familiar with the offering. Citadel could raise as much as $2 billion over time, according to the preliminary prospectus. The sale is being managed by Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc.
Bryan Locke, a spokesman for Chicago-based Citadel, declined to comment.
Fund Expenses
Citadel in January is scheduled to start Citadel Solutions LLC, which will handle administrative chores such as settling trades and valuing holdings for its own funds and other hedge funds. Citadel said it expects the move to cut fund expenses.
Operating costs at Citadel's two main funds rose 20 percent this year to $805.1 million, the prospectus said, as the company hired 320 employees since the beginning of 2004. Performance- based compensation is a ``significant part'' of those costs. The company currently has 1,070 employees, including 656 investment staffers.
Unlike most hedge funds, investors in Citadel funds pay all expenses. Their costs rose to 8.75 percent of assets in 2005 from 4.66 percent in 2003, the prospectus said. Kensington had net withdrawals of $657.6 million through Aug. 31. For all of 2005, the fund had net inflows of $61.7 million.
Amaranth Profit
Citadel's profits this year were boosted by its takeover in September of the energy portfolio of Amaranth Advisors LLC, which had been crippled by $4.6 billion in trading losses. The funds' energy returns were about 3 percent in the month, compared with total gains of 4.5 percent for Kensington and 4.9 percent for Wellington, the firm said in the document.
Amaranth, based in Greenwich, Connecticut, transferred the holdings to Citadel and JPMorgan Chase & Co. on Sept. 19, and Citadel bought JPMorgan's share of the natural-gas, power and oil trades on Sept. 29 for $725 million, according to the prospectus.
Citadel Employees
Citadel and New York-based JPMorgan received an unspecified ``concession payment'' from Amaranth for taking on the risks of the trades, the prospectus said. By buying out JPMorgan's half, Citadel received the remaining concession payments from Amaranth.
Griffin's managers absorbed the Amaranth holdings, reduced the risks of the trades and set aside reserves to reflect current market value, the prospectus said, without providing details. By Oct. 15, Citadel's energy portfolio had about one-third the risk of the original Amaranth trades.
Griffin, 38, started Citadel in November 1990 with $4.6 million, three years after he began trading convertible bonds out of his dorm room at Harvard University. Kensington opened with $5.5 million in 1995.
Institutional investors and so-called funds of funds make up about 62 percent of the firm's investment capital as of Sept. 30, according to the prospectus. Citadel principals and employees contributed about 15 percent, the most of any group of investors.
To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net ; Miles Weiss in Washington at mweiss@bloomberg.net .
Last Updated: November 29, 2006 12:45 EST
By Katherine Burton and Miles Weiss
Nov. 29 (Bloomberg) -- Citadel Investment Group LLC, the hedge-fund manager founded by Kenneth Griffin, said earnings at its two largest funds increased more than fivefold on gains from debt and energy investments.
Net income at Citadel Kensington Global Strategies Fund Ltd. rose to $795.6 million in the first eight months of 2006 from $148.4 million in the year-earlier period, the Chicago-based firm told investors this week in a prospectus for its first bond sale. The fund, which has $9.5 billion in assets, had an investment return of 7 percent in the third quarter, compared with 3.1 percent a year earlier, when its corporate-debt and energy bets lost money.
``Citadel hired a significant number of new investment professionals since mid-2005 to strengthen both the global credit and global energy business,'' the Nov. 27 document said. Earnings at its Wellington LLC fund, which has $3.3 billion in assets, rose to $389.1 million from $54.3 million.
The 363-page prospectus, a copy of which was obtained by Bloomberg News, details the finances of the closely held firm, which oversees almost $13 billion for wealthy investors and institutions. Hedge funds, private pools of capital that allow managers to participate substantially in their investment gains, oversee $1.3 trillion, more than double what the industry's assets were five years ago.
Institutions such as pension funds and endowments have contributed about $361 billion to hedge funds, according to an Oct. 10 report by Bank of New York Co. and consulting firm Casey, Quirk & Associates LLC in Darien, Connecticut. That amount may triple by 2010.
Kensington's Returns
Citadel is a top performer among multistrategy funds, which try to exploit relative price discrepancies between securities including stocks, bonds, commodities and derivatives. Kensington's returns beat the group's average in eight of the past nine years, according to the prospectus and data compiled by Chicago-based Hedge Fund Research Inc.
The fund returned 17 percent this year through Sept. 30, compared with an average 8.8 percent for similar funds. UBS Dynamic Alpha Strategies Fund 2, run by Brian Singer and Neil Williams, earned 5.6 percent in the period, while the Quantum Endowment Fund NV, managed by George Soros's son Robert Soros, returned 2.5 percent, according to data compiled by Bloomberg.
Still, Kensington's lead has narrowed in recent years as the number of hedge funds has more than doubled since 2001 to 8,500, making it harder for managers to produce outsized gains. Last year, Kensington returned 7.2 percent, compared with 6 percent by the average fund and 4.9 percent, including dividends, by the Standard & Poor's 500 Index, a benchmark for U.S. stocks.
Using Leverage
Hedge funds are designed for investors with at least $1 million, and endeavor to make money whether financial markets fall or rise. They can use leverage to help boost gains and they can sell short, or borrow securities and immediately sell them with the hope of buying them back at a lower price.
Citadel's funds borrowed 7.8 times their assets as of Aug. 31. Their investments include corporate debt, energy, stocks, currencies and government bonds, and reinsurance.
Citadel plans to sell bonds as a means to cut its reliance on financing from Wall Street investment banks. In a first for a hedge fund, the firm may sell $500 million of the notes next week, said a person familiar with the offering. Citadel could raise as much as $2 billion over time, according to the preliminary prospectus. The sale is being managed by Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc.
Bryan Locke, a spokesman for Chicago-based Citadel, declined to comment.
Fund Expenses
Citadel in January is scheduled to start Citadel Solutions LLC, which will handle administrative chores such as settling trades and valuing holdings for its own funds and other hedge funds. Citadel said it expects the move to cut fund expenses.
Operating costs at Citadel's two main funds rose 20 percent this year to $805.1 million, the prospectus said, as the company hired 320 employees since the beginning of 2004. Performance- based compensation is a ``significant part'' of those costs. The company currently has 1,070 employees, including 656 investment staffers.
Unlike most hedge funds, investors in Citadel funds pay all expenses. Their costs rose to 8.75 percent of assets in 2005 from 4.66 percent in 2003, the prospectus said. Kensington had net withdrawals of $657.6 million through Aug. 31. For all of 2005, the fund had net inflows of $61.7 million.
Amaranth Profit
Citadel's profits this year were boosted by its takeover in September of the energy portfolio of Amaranth Advisors LLC, which had been crippled by $4.6 billion in trading losses. The funds' energy returns were about 3 percent in the month, compared with total gains of 4.5 percent for Kensington and 4.9 percent for Wellington, the firm said in the document.
Amaranth, based in Greenwich, Connecticut, transferred the holdings to Citadel and JPMorgan Chase & Co. on Sept. 19, and Citadel bought JPMorgan's share of the natural-gas, power and oil trades on Sept. 29 for $725 million, according to the prospectus.
Citadel Employees
Citadel and New York-based JPMorgan received an unspecified ``concession payment'' from Amaranth for taking on the risks of the trades, the prospectus said. By buying out JPMorgan's half, Citadel received the remaining concession payments from Amaranth.
Griffin's managers absorbed the Amaranth holdings, reduced the risks of the trades and set aside reserves to reflect current market value, the prospectus said, without providing details. By Oct. 15, Citadel's energy portfolio had about one-third the risk of the original Amaranth trades.
Griffin, 38, started Citadel in November 1990 with $4.6 million, three years after he began trading convertible bonds out of his dorm room at Harvard University. Kensington opened with $5.5 million in 1995.
Institutional investors and so-called funds of funds make up about 62 percent of the firm's investment capital as of Sept. 30, according to the prospectus. Citadel principals and employees contributed about 15 percent, the most of any group of investors.
To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net ; Miles Weiss in Washington at mweiss@bloomberg.net .
Last Updated: November 29, 2006 12:45 EST
17% for 8x leverage doesn't sound right.
i'll just assume that most of this 'leverage' is employed in low volatility instruments like 30 day fed fund futures. (ie 1 million dollars notional will move less than 50 shares of apple).
i'll just assume that most of this 'leverage' is employed in low volatility instruments like 30 day fed fund futures. (ie 1 million dollars notional will move less than 50 shares of apple).
This is nothing new. I have a friend who used to work at Citadel. If you go back and read old articles about the company you'll see that Griffin determined long ago that he would directly tap the debt markets rather than relying on intermediaries. This was due to a credit squeeze in the early nineties involving some convert arb positions (if memory serves correctly) -- he vowed never to be at the mercy of an investment back for credit backing again.
Quote from Mvic:
FT had a piece about Citadel over the weekend, looks like Citadel employs 12-1 leverage in size (leveraged $12-13B to $166B). Yes I realize that it probably was some kind of carry trade but its not like they are risk exempt.
If that's what they do at such size, it's a disaster waiting to happen.