Citadel Hedge Fund: Gearing Up to Become the Next Goldman Sachs?

Among asset management circles on Wall Street, there’s a persistent rumor that just won’t go away: the world’s most aggressive hedge fund is gearing up to become a full-scale banking institution.

Citadel Investment Group, a Chicago-based hedge fund, is on many asset managers’ radars right now to one day become a full-service boutique investment bank. Recently, the fund seems to be doing little to hide that ambition.

Citadel’s interest in online broker E*Trade Financial (ETFC) is a good starting point. With nearly $2 billion invested in its long-time holding E*Trade this year, Citadel has become far more than a speculator in the stock: it’s pretty much an operating manager. Signs of that status were confirmed by its recent refusal to enter into a 120 million share sale in late August in the interests of the company, despite financial benefits for the fund.

More recently, E*Trade’s chief executive Donald Layton said he will step down from the job at the end of the year. That announcement followed Citadel manager Ken Griffin’s ascension to the broker’s board earlier in the year. It’s a well-known fact that Layton and Griffin frequently argued over the E*Trade’s strategic direction.

In other news, Citadel’s administrative division, Citadel Solutions, recently gained a contract to provide accounting, IT and back-office services to a $50 billion piece of what remains of the former Lehman Brothers carcass. Citadel re-branded its Solutions subsidiary Omnium on the eve of the deal. Citadel is also one of the first hedge funds to resume hiring after last year’s market train-wreck.

The two deals are a pretty clear sign that Griffin has more in mind for his financial war chest than pure asset management. In fact, via both the E*Trade and the Omnium subsidiaries, it’s evident that the financial warlord (most of his companies have names borrowed from military contexts) is building a sizeable back-office, capable of handling a range of financial services functions.

Griffin is the kind of Type A, leap-feet-first-into-the-next-big-thing-when-the-going-gets-tough, hyper-aggressive money manager that you more often see on the big screen than casually strolling around Chicago. According to hedge fund lore, he paid his way through college with his trading profits.

In that light, it wouldn’t be surprising to see Citadel become a sort of Goldman Sachs-style (GS) bank: with a strong trading arm, a razor-sharp team, and an increasing tightening in hedge fund regulation, the move definitely makes sense from a growth perspective.

Comments

[Mad Hedge Fund Trader]

ond. The hedge fund industry is emergingfrom the ashes of 2008, and will inevitably grab a larger share of theinvesting public’s assets. Low interest rates and hero status made itway too easy for inexperienced, untested, and sometimes unscrupulousmanagers to raise new funds that charged management fees as high as 3%with a 50% performance bonus. Behind every “liar loan” was a bondmanager happy to soak it up through securitized Fannie Mae (FNM),Freddie Mac (FRE), or bank debt, shorting Treasuries against them, andthen leveraging the 40 basis point spread by 50 times to generate ahighly marketable 20% gross return. Never minds the risks. It was easymoney, as long as there were lots of liars, which mortgage brokersherded in by droves, and as long as spreads narrowed, which they didfor most of the 21st century. By the beginning of 2008, assets undermanagement soared to $2 trillion. The melt down that followed wiped outlarge numbers of funds, and raised gates for the survivors, makinginvestors wonder if they would ever get their money back. Total assetsplunged to $1 trillion in the blink of an eye through a combination ofredemptions and market losses. The new era that is emerging will bepopulated with humbled and chastened managers offering more disclosure,lower fees, no gates, and thanks to Madoff, oodles of third partyoversight. Their portfolios will have less leverage, be invested inmore liquid securities, and bring in lower returns. But the newgeneration will also offer investors battle tested strategies thatsurvived the 100 year flood. Bridgewater, with $37 billion in assets,is now the largest hedge fund, followed by JP Morgan with $36 billion,Paulson & Co. at $27 billion, DE Shaw showing $26 billion, andSoros still at a hefty $24 billion. Long track records and a Guccicachet will assure that these will prosper. Fees settling down to the1%/20% range. For the rest of us this means more capital bunching up inthe most successful trades, as we have already seen this year infinancials, China, oil, and copper. It is also going to be much harderto get new funds off the ground.

2009 Sep 12 04:45 PM

[Northstar10000]

And the point is...

2009 Sep 12 05:24 PM

[BullnBear]

I believe that many would like to get into this market but few are in the position currently to take advantage of this, Citadel seems like they are probably one of the few.

I’m sure that JP Morgan is also looking at what Goldman is currently doing and looking at areas that they may be able to take some of that profit margin as well.

2009 Sep 12 07:34 PM

[User 488509]

"Citadel’s interest in online broker E*Trade Financial (ETFC) is a good starting point. With nearly $2 billion invested in its long-time holding E*Trade this year, Citadel has become far more than a speculator in the stock: it’s pretty much an operating manager. Signs of that status were confirmed by its recent refusal to enter into a 120 million share sale in late August in the interests of the company, despite financial benefits for the fund."

Recent SEC filings have essentially exploded this hypothesis, KG is running away from ETFC , not embracing it.
Care to rethink your premise?

2009 Sep 29 11:06 AM