Ken Griffin: The Maverick Investor Changing the Game
“If you make $100 million at another hedge fund, you are a god. If you make $100 here and someone down the street makes $400 million, you’d better be thinking about why you didn’t make $500 million."
Ken Griffin was desperate for a satellite dish, but unlike most 18-year-olds, he wasn’t looking to get an unlimited selection of TV channels. It was the fall of 1987, and the Harvard College sophomore urgently needed up-to-the-minute stock quotes.
Why? Along with studying economics, he happened to be running an investment fund out of his third-floor dorm room in the ivy-covered turn of-the-century Cabot House. Therein lay a problem. Harvard forbids students from operating their own businesses on campus, but he still got the authorization and this was the start of a great story.
Griffin was born on October 15, 1968 in the state of Florida, in Daytona Beach County. As a teenager, during his time at Boca Raton Community High School, he served as president of the math club. This particular trait would define the way he made his fortune.
His interest in the market dates to 1986, when a negative Forbes magazine story on Home Shopping Network, the mass seller of inexpensive baubles, piqued his interest and inspired him to buy some put options.
Miffed at the size of the broker’s fees, he ambled over to the Harvard Business School library and read up on finance theory. He soon built his own convertible bond pricing mode.
Returning home to Florida during the summer between his freshman and sophomore years, Griffin visited a broker friend working at the First National Bank of Palm Beach and began to discuss his new model. A retiree named Saul Golkin walked into the office and listened in as Griffin explained his theories about trading converts.
After 20 minutes, Golkin said, “I’ve got to run to lunch. I’m in for 50.” At first Griffin didn’t understand. Then the broker explained that Golkin had just agreed to invest $50,000 !
Emboldened, Griffin quickly raised a $265,000 limited partnership ( that’s worth about $682,000 today when adjusted for inflation )— whose investors included his grandmother — called Convertible Hedge Fund #1
With the $265,000 dollars he managed in his fund, he managed to benefit from the Black Monday of 1987, which allowed him to deliver profits to those who trusted in his talent and, in addition, to start managing a second fund.
In 1989 he graduated from college with a degree in economics and a reputation that attracted the attention of a famous manager of the time, Frank C. Meyer, founder of Glenwood Capital, who decided to test Griffin’s expertise by giving him a million dollars to manage.
In response, Ken Griffin far exceeded expectations by delivering a 70% return within a year. This feat earned him the interest of several firms to back him and provide capital for him to manage and grow.
Citadel LLC: building an empire
As a result of this great first year return, Griffin founded Citadel LLC on November 1, 1990, in the Illinois city of Chicago, with an initial capital of $4.2 million, and is today one of the largest hedge funds in the world.
At first, Citadel traded only U.S. convertibles, Japanese convertibles and warrants — lucrative trading arenas in the early 1990s.
“In the early 1990s, if you knew how to model a bond, you could make a lot of money,” says convertible bond chief David Bunning, a onetime Harvard wrestler who joined Citadel as its sixth employee in 1991. Griffin hired inexperienced college graduates and even interns as he gradually expanded.
“It was a global arbitrage shop run by a 22-year-old,” says Bunning.
Griffin’s youth showed. Former employees recall that he was forever challenging Citadel traders to defend every nuance of their positions and personally running them through pointed grillings at regular trading meetings
“From day one, the goal was always to build the best independent trading firm,” says Griffin. “If you make $100 million at another hedge fund, you are a god. If you make $100 million here and someone down the street makes $400 million, you’d better be thinking about why you didn’t make $500 million.”
Such competitiveness is not uncommon in the hedge fund world, but what sets Griffin apart, and just might secure his reputation, is an absolute mania for management. Though a first-class trader himself, he walked away from the convertibles desk years ago to dedicate himself totally to building the business and creating an institution with a solid infrastructure.
That’s something investors like Julian Robertson and George Soros tried to do too late Griffin has done this by hiring talented executives and instilling in his troops his obsession with systems and analysis.
Unusual for hedge funds, he has brought in professional managers from places like Andersen and Boston Consulting Group. He built an internal stock lending operation in the late 1990s to allow Citadel to fly below Wall Street’s radar.
By 1994, Citadel had expanded to 60 traders and analysts. However, the bond market witnessed a historic decline that year, causing several hedge fund closures across the board. In a panic, Citadel’s clients withdrew about a third of their capital, resulting in a 4.3% decline for the fund. That marked Citadel’s first down year.
Still, Griffin didn’t let one subpar year get the best of him. The firm breezed through the dot-com bubble and the subsequent market crash, rewarding clients with positive returns from 1995 through 2007. At the same time, the collapse of funds and companies throughout the industry allowed Citadel to take advantage of laid-off talent. By 2007, Citadel had $16 billion in AUM.
Last year, Citadel pulled in $28 billion of revenue, of which clients were charged around $12 billion in performance and management fees. Since inception, the hedge fund has generated $65.9 billion in net gains.
All four of Citadel’s main funds managed to outperform the S&P 500 by a wide margin, led by the flagship Wellington Fund:
Wellington Fund: 38.10%
Global Fixed Income Fund: 32.58%
Tactical Trading Fund: 26.49%
Equities Fund: 21.40%
S&P 500: -19.44%
$1 million invested into the Wellington Fund at its inception in 1990 would be worth $328 million today, handily beating out the S&P 500’s comparative value of $22 million.
“I would liken him much more to a broad institution than a boutique hedge fund,” says friend and rival Paul Tudor Jones of Tudor Investments. “He’s built an extraordinarily diverse organization, horizontally and vertically integrated. It’s something with franchise value, which makes him different from 95 percent of the companies classified as hedge funds.”
Underlying his success is an effort to translate the fierce discipline of quantitative trading to other investment arenas.
Quants, like ex–computer science professor David Shaw of D.E. Shaw & Co. and prize-winning mathematician Jim Simons at Renaissance Technologies Corp., have posted some of the best returns in the fund management business by building models and computer systems that tell them what securities to buy and when to buy them.
As Griffin has moved into areas like risk arbitrage and distressed-securities investing, he is supporting all these strategies with the advanced technology and analytical rigor typically found only in certain quant trading fields. His goal is essentially to build an investing assembly line that can methodically produce successful strategies across the markets.
However, despite his great ability with numbers, Griffin failed to foresee the hecatomb of the 2008 financial crisis. This mistake brought him to the brink of bankruptcy.
In the panic generated by the rapid loss of value of his funds over sixteen weeks, Griffin had to prohibit his investors from withdrawing their money for almost a year. This action gave him enough time to change his strategy and start generating profits again.
“It took me three years to recover everything I lost in just sixteen weeks in 2008,” Griffin said in an interview regarding his lack of vision to prevent the subprime disaster.
These days Griffin spends much of his time as CEO thinking about how to manage a financial services firm, an admittedly rare art form. Every Citadel unit operates according to detailed, regularly updated business plans, which are stacked all around Griffin’s office
What is his investment style?
“EVERY ORGANIZATION HAS TWO choices,” says Griffin. “Choice one is to grow. Choice two is to die. If you decide not to grow, it’s a clear-cut message to talented people that it’s time to leave.”
Unlike other famous investors, Griffin has remained very tight-lipped about his investment strategies and decisions. Despite this, it is no secret that Griffin has a penchant for quantitative investment techniques, stemming from his love and ease with mathematics.
He himself oversaw selecting the best profiles from different disciplines, not only economic and financial, but also physicists, actuaries, engineers, among others. He hires these profiles to generate mathematical models that help him define winning trading strategies to manage his funds.
“The systems that Citadel has are far superior to anything that I’ve seen in the hedge fund business,” says Carson Levit, who joined Citadel as a portfolio manager in its long-short equity business. He previously worked at Soros Fund Management and Pequot Capital Management.
Griffin is always on the lookout for talent. In the past he has hired a team of consultants from BCG to collect detailed information on his major hedge fund competitors in hopes of understanding their strategies and poaching their best people. And when the news broke that the successful hedge fund Vinik Asset Management would shut down, Griffin was in Boston 48 hours later interviewing Vinik traders.
A hallmark of Citadel’s success has been its ability to diversify into new investment areas at the right moment.
“What makes Citadel a worthwhile investment is its uncanny ability to go where other people are not—and make a lot of money there,” says Mark Yusko, former chief investment officer at the University of North Carolina’s endowment fund
Griffin says he had long thought about expanding into energy trading and waited until 2001, in the wake of Enron’s collapse, to make its aggressive push into the business.
Days after Enron failed, Griffin hopped on a plane with Miglis, the head of technology, and a few other executives and began recruiting energy traders in Atlanta; Kansas City, Missouri; Houston and Tulsa, the hometowns for energy companies including Aquila Inc., Mirant Corp. and Enron.
They interviewed hundreds of potential employees and hired only a dozen, including Ruth Sotak, who left Aquila to become head of Citadel’s energy operations team.
While Griffin was out recruiting, a team of Citadel employees—computer programmers, options traders, mathematicians working on pricing models and lawyers in charge of getting necessary regulatory approval to trade—were building up the staff and equipment necessary to compete in the business.
“We can organize resources when there’s been a dislocation of incumbents,” Griffin says.
Weather is key to figuring out energy supply, demand and transportation issues, “so we went out and set up a team of meteorologists,” says Scott Rose, the ex - managing director in charge of Citadel’s energy business. Citadel’s meteorologists sit in front of imaging and mapping computers in an alcove off the trading floor.
They analyze snowpack and rainfall density in the U.S. Northwest to see how a recent increase in precipitation in the region will provide a boost to hydropower producers and, in turn, cut demand for other types of electricity producers.
Citadel has also started dabbling in pollution rights and catastrophe, or “cat,” bonds.
Reinsurers, such as Swiss Reinsurance, issue these securities to hedge some of the risk of paying claims in catastrophic losses. The bonds pay high interest rates, though investors may lose their principal and interest payments if a storm generates losses at or above a set amount.
Citadel uses proprietary mathematical models and advanced computer systems to help make all of its investment decisions, from pricing convertible bonds to computing energy transactions to calculating the risk of its stock holdings. Other hedge funds restrict so-called quantitative trading to select areas—such as derivatives, where mathematical equations help value financial obligations
Ken Griffin today
Today, Griffin remains CEO of Citadel LLC, is an avid philanthropist, giving money to social causes, political causes, and continues to support his alma mater for education. He is also a great collector of art and homes, is the richest person in Chicago and a great example for anyone who wants to follow the path of finance.
As of September 2023, Griffin had an estimated net worth of $33.7 billion, making him the 38th-richest person in the world. He was ranked 21st on the 2022 Forbes 400 list of richest Americans.
He was included in Forbes's 2023 list of the United States' Most Generous Givers, according to which he has donated $1.56 billion to various charitable causes, primarily in education, economic mobility and medical research.
Time to finish with a final quote from the man himself :
“Successful people tend to be very overconfident about what they know, and it leads to tragic mistakes. That will not be the final chapter in my career.”
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