The billionaire from the hostel: how the founder of Citadel hedge fund earned $7 billion

A quarter-century ago, a Harvard student Kenneth Griffin began to sell bonds in the dorm room. Today he is a billionaire with a fortune of $7 billion, and the successful head of Citadel hedge fund with a portfolio of $25 billion.
Origin source
In 1988, 19-year-old sophomore at Harvard sneaked past the secretary in the Boston office of the bank Merrill Lynch, found the manager in charge of the convertible bonds, and struck up a conversation about the technical aspects of trading in securities. A few weeks later, for which two companion had two or three times to meet student Kenneth Griffin asked Terence O'Connor, an expert on convertible bonds, open in his name corporate trading account in the amount of $ 100 thousand. While the average size of the bill was $ 100 . million "My boss thought I uporolsya" - says O'Connor. Nevertheless, the manager persuaded his boss to meet the young man. Over the years, no one could call this absurd decision.

In 2003, Griffin, with a fortune of $ 650 million, for the first time ranked among the richest Americans by Forbes magazine, ranking the second place among the youngest millionaires, at the time he was 34 years old. In 2006, his fortune reached $ 1.7 billion, and in 2007 exceeded $ 3 billion today Kenneth Griffin -. CEO of Citadel LLC, one of the most respected and fastest growing investment funds, ond which manages about $ 25 billion, his personal fortune is estimated at $ 7 billion.

An investor from the hostel

Kenneth Griffin was born in Daytona Beach October 15, 1968 in Florida, but grew up in another Florida city, resort Boca Raton. His father worked as a project manager, overseeing space program General Electric, and the boy loved since childhood electronics - he often asked his mother to take him to the Computerland store, where his favorite pastime was to make the brain the next seller. Besides, he liked chess and even became president of the school chess club. In high school, the teenager has already earned, eliminating the "bugs" in IBM computers.

"Ken was hardly a typical teenager - says in a conversation with his children's Fortune buddy Dan Wexler. - He was friends with guys older and always knew what he wanted, and constantly generate ideas. " One of them he embodied by opening company Diskovery Educational Systems, which specialized in the sale of educational software to schools. Later, Griffin went out of business, but the company still works.

In 1986, Griffin arrives at the eonomichesky faculty of Harvard University. Already in the first year he made his first investment, for which he was inspired by an article in Forbes magazine. Having read that the shares of the company Home Shopping Network overrated, he opened a short position by placing their savings in the fact that the paper will fall in price, and has not lost. He made a profit, but it is almost entirely eaten commissions and transaction costs.

This outcome has disappointed the novice investor, and he began to read the literature on financial markets. The ratio of the value of bonds and the prices at which they are converted into shares, Griffin seemed illogical, and he wrote a program to rationalize the relationship between these two indicators.

Holidays after the first course, Griffin spent on collection of funds from relatives and friends for their first hedge fund. The initial capital of the fund was $ 265 thousand. On his return to the university he had established in his dorm room Cabot House satellite dish to receive market data in real-time. A month later, 19 October 1987, "Black Monday", the stock markets collapsedand: a record fall in Dow Jones industrial index was recorded in its history. Griffin being in shorts working again.

"Most of us are hard-versed in these things, and Ken sold directly from his room, - says fellow at Harvard Griffin Slusk Alexander, managing partner of the San Francisco Foundation Vector Capital Corp. - He often ran away from classes in brokerage houses to get information about their positions, because he could not afford to order the delivery of financial data directly to the hostel. "

By 1989, under the control of Griffin was already $ 1 million. In the same year, an event that largely determined the further development of the Griffin business. One of his friends introduced him to traders authoritative investor Frank Meyer, head of investment group based in Chicago Glenwood Capital. Meyer believed in the long-term investor and gave him $ 1 million. Griffin has surpassed all expectations, providing a 70 percent return on investment.

"Ken has proved that he has a lot of abilities: he is versed in IT, trade, even in compliance - says Meyer in colloquialOVOR with Bloomberg. - The combination of so much talent rarely found in one person. " It is easy to converge with top managers of corporations, and he was able to persuade them to lend him shares of their companies to hedge their own bets on bonds.

As a result, Meyer gave Griffin office in Chicago, and in November 1990 a young entrepreneur opens Wellington Financial Group (the predecessor Citadel) fund with a capital of $ 4.6 million. "Then the Citadel Fund and now called-it was difficult, it was reduced to only one Ken Griffin ", - said Meyer. Griffin was then 23 years old, he was too young to earn the trust of major investors. Support Meyer was just what we needed. He instructed novice businessman, helped resolve organizational issues and taught his charge to think big. "Frank always makes me think of the business as a platform - says Griffin. - When your first investor believes that you will be able to systematically build a business, it is a powerful source of inspiration. "

Three years Fund succeeded. From 1990 to 1993, its return on investment was 43, 40.7 and 23.5%respectively. But in 1994 the crisis started in the market of convertible bonds, and the fund lost 4.3%. Investors began to withdraw their constitution, and the fund's assets have fallen three times.

Not having time to grow before the end, a young investor has learned an important lesson: liquidity in the business plays a key role, and during the crisis, access to it is often closed. "We've all got a warning - Meyer noted. - Then Ken promised me that it will never happen again. "

Sitadel LLC in figures

$ 265 thousand. Initial capital was Ken Griffin in 1987, when he has had only fax, phone and personal computer

About 1,200 headcount Citadel LLC

13 offices in the world has Citadel LLC: Chicago (headquarters), as well as in New York, London, San Francisco, Hong Kong, Boston, Dallas, Denver, Greenwich, Houston, Toronto, Shenzhen, Shanghai

$ 25 billion the amount of funds managed by Citadel LLC

$ 7 million is that the forecast profit for the Citadel in 2015

$ 10-100 million is the minimum amount of investments in funds managed by Citadel LLC

Financeth Citadel

In 1994 Wellington Fund changed its name to the Citadel, which was intended to reassure investors in the fund's stability among financial storms. In 1998, when the portfolio of the fund's assets rose to $ 2 billion, Citadel has revised its business strategy: he now demanded of investors to keep money in the fund for at least three years. The last of the structures Citadel approved the new Rule 31 of July 1998, against the backdrop of the Asian financial crisis.

Citadel became cautious approach to transactions, buying up assets of distressed assets. As a result, the Fund has demonstrated one of the best profitability ratios in the investment business - 30.5%.

Gradually Citadel began to adopt different strategies: trading Japanese and European convertible bonds, statistical arbitrage, betting on the historical correspondence between the value of the securities, mergers arbitrage, betting on the shares of companies in mergers, arbitration on fixed-income instruments, purchase and sale of the relevant bonds. Buying distressed assets of failed hedge funds - Amaranth, Sowood Capital Management and Enron Corp. - Brought Citadel Milldollars the Jordan.

Griffin kept his promise to Meyer: Citadel withstood the financial crisis of 2008, which was worth $ 8 billion fund to prevent the ruin of the company, Citadel has banned foreign investors to pull their money out of the fund for ten months.. Over time, the Citadel has returned to the market. According to Griffin, to win back losses, the company took three years and 17 days. "He knows how to deal with the crisis", - says Brian White, co-director of BlackRock Alternative Advisors.

sweatshop factory

Entering the Citadel office, is difficult to separate traders from technical experts - light top, dark bottom, but a shirt with an open collar. The staff moved quickly around the office, cutting off the conversation short. There is an atmosphere of Silicon Valley and Wall Street. Work is not easy there. «Citadel can be quite a sweatshop factory, - says one of the former employees of the company. - We have put a lot of energy, and to sacrifice for the sake of his work. " The Fund pays a lot of money, but even they can not keep employees if they decide to leave.

"Griffin can plait the most effective traders at $ 2.5 million per year - says a former employee. - But as soon as the term of their contract expires, many leave the company. " Unlike other funds do not allow traders to buy shares in the company, and they have no understanding of how much they are actually. Once the five years left Citadel 15 senior managers, including those, says a former employee who has "been building the structure of the Fund, together with Griffin, though he probably never it does not recognize."

The local press due to staff turnover calls Citadel Chicago "factory personnel." "Ken - extremely gifted trader crazy technical warehouse, but it clearly lacks the emotional maturity", - the head of Citadel characterize his former subordinates.

Competitors speak of Griffin still less biased. Head of Third Point Partners Dan Loeb once called it "sand mouse". One of the letters Loeb Griffin in 2005 flowed to the press: in it he compares the established Citadel in the atmosphere c gulag. "You are surrounded by flatterers, but you are very well aware that you despise them and have for tBe disgusted "- Fortune magazine quoted a letter Loeb.

According to former employees of the Citadel, Griffin absolutely not stand for the public. He pathological introvert, they argue that even with his assistant Jody Dayhmiller, who sits with him in the same office, Griffin communicates by e-mail.

But on the 25th anniversary of the company, said this year, the founder found the right words to pay tribute to the employees by associating with them long-term success of the company. "The source of our sustainable competitive advantages - technical skills and a team of outstanding individuals. Their creativity, ingenuity, ambition and perseverance enough to conquer the whole world ", - said in a letter sent to all employees at the beginning of November.

Business Citadel

Like most hedge funds, Citadel bets both on the growth and the fall in the markets - the so-fund insures itself against the risk of sharp changes in certain market conditions. Thus, unlike many of its competitors, limiting its range of rates, Citadel will invest in a variety of different pnkov.

The fund has a division specializing in the commodity markets. For three years the company has spent on the establishment of a unit specializing in algorithmic trading, which uses complex mathematical formulas to determine the attractive investment. Now this structure manages assets of $ 3 billion and could soon be transformed into a separate fund.

Citadel also strengthened its brokerage unit, which is involved in trading securities on behalf of third parties, occupying a niche that left some banks.

A Citadel system is currently undergoing nearly a third of Americans applications on stock trading. This business accounts for about 10% of the fund revenue. Citadel also began to try to engage in the same business in China.

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