A Hedge Fund's Savvy Ascent

Citadel has thrived buying the wrecked portfolios of its troubled peers. Now it may go public

For hedge fund magnate Kenneth C. Griffin, 2007 was the best year ever. His Citadel Investment Group emerged as one of Wall Street's top opportunists, picking up the pieces of fallen peers on the cheap. With such deft moves, Citadel rang in 30%-plus gains last year, vs. 12% for the average fund.

How could Griffin top that in 2008? An initial public offering of Chicago-based Citadel might do the trick. That would not only cement his reputation as a power player on the Street but also pad his bank account. The 38-year-old Harvard grad, who welcomed his first child in early December, is already estimated to be worth more than $2 billion.

The media-shy Griffin, who founded Citadel with $1 million in 1990, has developed a reputation over the years as a tech-savvy, rapid-fire trader, using computer models to buy and sell stocks, bonds, and options. Today the $20 billion Citadel accounts for 3% of stock trading volume in the world. And with a broad range of strategies and businesses in its portfolio, it looks increasingly like a large-scale financial company rather than just a hedge fund.

It's an evolution that has prompted IPO rumors. Speculation started in 2006, when Citadel sold $500 million worth of bonds, the first debt offering by a major hedge fund. CFO Gerald Beeson recently told BusinessWeek: "An IPO is something we'd consider. It would be a byproduct of our wanting to expand our firm to create an even more diverse and permanent institution."

The timing seems odd, though. Amid the credit crunch, shares of private equity giant Blackstone Group (BX) and hedge fund manager Fortress Investment Group (FIG) are down 29% and 13% respectively since their IPOs in 2007. Nonetheless, people familiar with Citadel say Griffin is likely to take the plunge this year and go public.

Griffin's moves often look contrarian. In 2006, he salvaged the assets of Amaranth Advisors after that large fund made a disastrous bet on natural gas prices. Last year he scooped up parts of Sentinel Management Group, the cash-management firm accused of mismanaging clients' money.

He was also fast on the scene when hedge fund Sowood Capital Management blew up during the credit crisis last summer. At the time, most observers figured Citadel had bought roughly $1 billion worth of corporate bonds and bank debt. But a copy of Sowood's final financial statement, reviewed by BusinessWeek, shows that Citadel actually picked up $4.7 billion worth of securities at a 20% discount to their face value. The portfolio mainly includes solid corporate debt issued by the likes of radio operator Clear Channel Communications (CCU), Continental Airlines (CAL), General Motors (GM), and hospital manager HCA—the prices of which are down only modestly despite the trouble in the broader credit market.


As part of the Sowood transaction, Citadel also assumed $200 million of debt from E*Trade Financial (ETFC). Three months later, Griffin pumped an additional $2.5 billion into the online broker, which disclosed in November that it had $3 billion in subprime-linked securities. Citadel now owns all of E*Trade's troubled mortgage-related debt, occupies a seat on its board, and effectively has a 20% equity stake—signs Griffin sees value in the business. It's too soon to say if Griffin's gambit will pay off: E*Trade shares have fallen 35% since the deal was announced on Nov. 29. But Griffin has said that E*Trade has a "strong brand" and a "solid model."

Meanwhile, he's plotting his next deal. Griffin is emerging as a central player in a plan to launch a futures exchange to rival the dominant Chicago Mercantile Exchange (CME). Citadel is one of a dozen financial firms, including Barclays (BCS), Citigroup (C), Deutsche Bank (DB), and Merrill Lynch (MER), behind the new venture, which was revealed in late December. Few details are known, but the all-electronic exchange could offer cut-rate prices. That would not only put a dent in the Merc's business but also expand Citadel's empire.

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