Swiftest Scavenger On The Block

Hedge fund magnate Kenneth C. Griffin of Citadel Investment Group moves fast when he smells blood in the water. Hours after Sowood Capital Management's Jeff Larson called on July 27 to say he planned to shutter his once-$3 billion fund after it suffered big losses in bonds, Griffin dispatched a team of traders and analysts to Sowood's Boston headquarters to sift through the remains of the portfolio. Griffin and Larson reached a tentative deal less than 24 hours later, say sources familiar with the situation, for Citadel to buy $1 billion of Sowood's corporate bonds and bank debt at a deep discount.

There's plenty of carnage on Wall Street these days, and Chicago's Citadel has been one of the biggest scavengers. Three weeks after swooping down on Sowood, Griffin made a similar move on Sentinel Management Group, buying up some of its debt right before the Securities & Exchange Commission filed fraud charges against the troubled cash management firm on Aug. 21. And days after hedge fund Amaranth Advisors imploded, losing $6 billion on a natural gas bet a year ago, Citadel scooped up its energy and commodity trading business for at least $725 million.

Such rapid response to crisis has been critical to the performance of Citadel, which employs a multitude of strategies that span all manner of investments from traditional stocks and bonds to more esoteric plays like commodities, derivatives, and energy trading. Amaranth's leftovers have reaped tens of millions in profits, contributing to Citadel's 30% gain in 2006. Sources say it's up 16% this year through August, a brutal month for hedge funds.

Citadel is in an enviable position from which to profit from others' pain. At $14 billion, it is one of the biggest and most experienced players in the game, with more than 1,000 employees scattered across the globe. It's also one of the most profitable, producing market-beating total returns of 420% to 540% at two of its biggest funds between 1998 and 2006.

All this means Citadel has unparalleled access to capital to pay for its investments, funding that's far more stable than what most hedge funds get. Long before the current credit crunch began, it sold $500 million of bonds in October, and it could issue up to $2 billion more. Compared with peers, Citadel has also moved more aggressively beyond traditional bank lines of credit to pump up its leverage. The firm set up a $400 million financing deal nearly a year ago with Britain's HSBC Holdings PLC in what's known as a total-return swap--a complicated transaction that allows a fund to capture the gains of a security without having to buy it outright and with only limited collateral.

Such tools allow it to be more nimble than peers. Indeed, Griffin's crew can move so quickly that other hedge funds or vulture investors simply don't have a chance to assess the wreckage and determine whether they even want to make a bid. "They have the size and the resources," says a trader at another fund. "They can move fast, and others can't."

Of course, that sort of advantage can ruffle some feathers. Talks started between Citadel and Sentinel on Aug. 14, and Citadel had reached an agreement the next day to pay $318 million for some of Sentinel's bonds and loans, 17% off the face value. But when they announced the deal publicly on Aug. 17, some Sentinel customers protested the sale, arguing that Citadel had gotten the securities on the cheap. The dissenters quieted down only after it became clear that market officials and regulators pushed Sentinel to sell some of its assets in a bid to raise cash fast, say people familiar with the deal.

Still, Citadel doesn't like to be called a vulture. The usually press-shy company has been relatively outspoken, defending its recent dumpster diving. "It's not about distressed opportunities," says Adam Cooper, a Citadel senior managing director. "It's about seeing the opportunities that exist in the market every day, having a view, and being able to execute quickly."

By Matthew Goldstein

    Before it's here, it's on the Bloomberg Terminal.