Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Citadel Investment Group To Try To Raise $500 Million

The weekend edition of the Wall Street Journal on Saturday, December 6th contains a small article about how Citadel Investment Group Seeks to Raise $500 Million. The funds supposedly are going to be added to the $2 billion Citadel Tactical Trading fund, which is up more than 40% this year. This is a smaller fund to the much larger Kensington and Wellington funds and now includes Citadel's profitable market-making business.

The larger Kensington and Wellington funds have performed miserably this year. Supposedly they are down approximately 47% through the end of November 2008 and lost approximately 13% during the month of November alone. CEO Ken Griffin's plan apparently is to use the funds raised for the Citadel Tactical Trading fund to purchase approximately half of the combined equity portfolio from both of the larger multi-strategy funds.

According to the letter sent out from Citadel Investment Group about this limited offer, “Citadel Kensington and Citadel Wellington will experience reduction in the risk associated with their portfolios and enhanced liquidity from the transfer of a substantial portion of the Global Equities portfolio." Apparently, Citadel’s stock-picking team, with about 80 employees, has made money this year and will manage the equity positions of the Tactical Trading fund, the letter said.

Toomre Capital Markets LLC ("TCM") wonders though whether in this case Citadel Investment Group and Ken Griffin are talking out of both sides of their mouth. The two multi-strategy funds will be losing a substantial portion of the Global Equities portfolio, one that was supposedly profitable for 2008. Does that not mean that existing investors in the two funds will have more concentration in other strategies that contributed such miserable return numbers?

One also has to wonder whether any new investors in this "limited offer" might just be fodder for those investors, particularly institutions, who want their money back after such poor performance. Does anyone have any sense of how high the redemptions might go in Kensington and Wellington? Say the number is 30 percent. What more of their illiquid assets would need to be sold to meet the redemption requests? And perhaps equally as interesting, "With might be left in the portfolios, can this hedge fund manager make any substantial money until more normal conditions return to the debt capital markets?"

TCM suspects that market participants have not yet heard the last of damaging blows from illiquid investments, poor performance and high redemption requests. Perhaps Citadel Investment Group will survive this round. However, do not people want to do business with people they like and respect? The combination of being an arrogant prick and poor performance will be the death blow to many previously high flying hedge funds.