Toomre Capital Markets LLC

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

Citadel Investment Group

Misha Malysev and Teza Technologies Sued By Citadel Investment Group

On July 9th 2009, another legal shoe dropped in the case of Sergey Aleynikov and his would be new employer Teza Technologies. Ken Griffin's Citadel Investment Group is now suing its former head of high-frequency trading Misha Malysev and two other former employees, Jace Kohlmeier and Matthew Hinerfeld, alleging that their formation of a new trading firm violated a non-compete agreement they had with Citadel.

As The Wall Street Journal reports, "The identity of Malyshev's new firm, Teza Technologies LLC, became very public this week, when it said it hired and subsequently suspended former Goldman Sachs computer programmer Sergey Aleynikov. Aleynikov has been charged by the U.S. with stealing computer code from Goldman's high-frequency trading business. Aleynikov and his lawyer have asserted that any violation was unintentional, and that he didn't distribute any codes obtained from Goldman."

The Citadel complaint was filed in the Chancery Division of Cook County, Illinois Circuit Court. The complaint asks the court for an expedited hearing in the case, saying that Teza could cause "irreparable" harm to Citadel. It also mentions the Aleynikov affair, stating, "Teza's decision to hire Aleynikov, an accused software thief, creates a substantial risk that they have stolen, or may be planning to steal, Citadel's proprietary code."

As part of the complaint, Citadel attached copies of the non-compete agreements and resignation acceptance letters of the former employees. Malyshev's agreement states that for nine months following his February 2009 departure, he cannot start working for a "competitive enterprise" or use "quantitative analytics which are based on information that is proprietary to Citadel and which I either utilized or developed when I was employed by Citadel." The WSJ notes that Citadel's non-compete agreements are widely considered to be among the more stringent in the hedge-fund business.

Is Sergey Aleynikov Really A Russian Spy Who Stole Trade Secrets That Could Cost Goldman Sachs Millions?

A top story of the day on many of the news outlets is about Sergey Aleynikov, the thirty-nine year-old former vice president who allegedly stole trade secrets from Goldman Sachs and stored them on a foreign server. The breathless headlines are staggering. Code theft could cost Goldman millions, US says, To Catch a Rogue Quant, Russian Said to Be Ex-Goldman Worker Charged in Theft and The Dumbest Man at Goldman Sachs.

As President Obama visits Russia, the homeland security, terrorism and anti-immigrant blogs are abuzz about the alleged Russian spy. You have to look hard to find the headline, Goldman sees no impact from computer programmer-source. It isn’t as exciting.

Before Aleynikov is hung for international espionage, I thought it would be good to dig a little bit deeper into what happened. According to the an affidavit by Michael G. McSwain entered into the Southern District of New York, FBI agent McSwain charges Mr. Aleynikov with “unlawfully, willfully, and knowingly, without authorization, copied, duplicated, sketched, drew, photographed, downloaded, uploaded, altered, destroyed, photocopied, replicated, transmitted, delivered, sent, mailed, communicated and conveyed, a trade secret that is related to and included in a product that is produced for and place in interstate and foreign commerce with the intent to convert that trade secret to the economic benefit of someone other than the owner thereof, and intending and knowling that the offense would injure the owner of that trade secret, to wit, Aleynikov, while in New York, New York, and elsewhere, copied, without authorization, proprietary computer code belonging to a financial institution in the United States and then uploaded the code to a computer server in Germany.”

Citadel Investment Group's Main Hedge Funds for 2008: Negative 53%!!

According to Dow Jones, the preliminary 2008 results for Citadel Investment Group’s main hedge funds are out and the numbers are not pretty. The $10 billion Kensington and Wellington hedge funds lost approximately 53% for 2008 and were down about 9% during the first 24 days of December. Chicago-based Citadel last month barred investors from withdrawing money from these two hedge funds until at least March 2009. With such “wonderful” performance, one has to wonder how much of the funds’ investors have queued up to leave once it is again possible to do so.

Toomre Capital Markets LLC (“TCM”) previously has written about Citadel in the post Citadel Investment Group To Try To Raise $500 Million. With this type of performance, though, TCM is now wondering whether Citadel Investment Group will survive the on-going credit crunch. In order to get back to their “high water” mark (at which point they can again start to earn performance fees), Citadel will need more than a 100% gain from their 2008 year-end balances. Citadel earned more than thirty percent in 2007. It will need approximately three years of such “lights out” performance before it will pass the former “high water” mark. Can they really successfully run the hedge fund company just on management fees? Time will tell. Reader comments and thoughts are welcome.

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?

Hedge Funds SAC Capital and Citadel Return North of 30% for 2006

Bloomberg is reporting on January 16th 2007 in this article that two of the largest hedge funds, Steve Cohen's SAC Capital Advisors LLC and Kenneth Griffin's Citadel Investment Group LLC, substantially beat the 2006 performance of their hedge fund peers with returns in excess of 30%. SAC is reported to have returned 34% and Citadel north of 30%. Congratulations to both of these mega hedge funds on their superior returns.

This article also includes information that the average hedge fund was said to have increased by 13% during 2006 after average gains of 9.3 percent in 2005. By comparison, the S&P 500 Index was up 15.8 percent in 2006.

Amaranth Transfers Energy Portfolio to Citadel Investment???

According to this Reuters news story, Amaranth Advisors LLC has transferred the balance of its energy portfolio to one of its peers, the approximately $12 billion hedge fund complex known as Citadel Investments. The real interesting question is at what net price (loss) this liquidation was completed at. One suspects that Citadel took on the positions at some discount to spot prices, given that many market participants were/will be trading against what is known about the Amaranth portfolio exposures. Without knowing the specifics of the positions that were transferred, it would appear that a discount of between 2.5% and 20% would be appropriate for taking on such a public and notorious position. This will not help the investors who put their money with Amaranth Advisors, but it will satisfy at least one of rule of risk management: when confronted with a run-away position, liquidate and prepare to play the trading game another day after lessons have been learned. A key question will be whether Amaranth will be around to play in the future. The jury is still out on how such a sophisticated fund could lose close to half of its value in just two short weeks. Would you give your money to Amaranth for 2% and 20% fees going forward?

Citadel Investment Group Off to Flying 2006 Start

Toomre Capital Markets previously noted Citadel Investment Group’s impressive December 2005 returns in this post. According to a March 10, 2006 article in the Chicago Tribune entitled Citadel CEO raves about hedge fund firm's '06 performance written by Becky Yerak, the approximately $12 billion dollar fund group’s performance has been even better in early 2006. According to the article,

Coming off a weak 2005, the head of one of the nation's biggest hedge funds said he "couldn't be happier" with how 2006 is shaping up. In 2005 Citadel Investment Group's biggest fund, Kensington, returned about 7 percent, the smallest gain for the $9 billion fund since it opened in 1995. And last fall, the Chicago-based firm's energy desk lost $150 million on natural gas and electricity trades before rebounding later in the year. But in an interview Monday night, Chief Executive Kenneth Griffin painted a picture of a company not only in no real trouble but off to a "phenomenal" start to 2006.

"We had record revenues in December. We almost doubled that number in January," he said. And Citadel "had a phenomenal February" in revenues, or investment gains before expenses and fees. "So we're extremely pleased with our performance over the last quarter," Griffin said. "We couldn't be happier." He wouldn't elaborate on the performance year to date but said it exceeds the 7 percent disclosed for 2005.

More Information on Citadel Investments' Impressive December

The term “Citadel Investments” has been one of the most popular search terms at the Toomre Capital Markets website over the past several weeks. From the web pages served, one can surmise that there is considerable interest in Citadel’s activities in Bermuda reinsurance, the energy trading sector and its Information Technology staff reductions. However, the greatest interest appears to be in the area of return performance for this approximately $12 billion hedge fund group. The TCM posting entitled WSJ: Citadel Investments Pulls Up Its Withdrawl Bridge has been extremely popular and references The Wall Street Journal article that indicates Citadel was only up about 1.5% through the first eleven months of 2005.

Marketwatch reported subsequently that despite a strong December, the Citadel Investment Group's two main hedge funds returned about 6.5% and 7.5%, respectively, in 2005. This is below some hedge fund industry benchmarks, such as an index run by Hedge Fund Research, which climbed 9.2% in 2005, and the Greenwich-Van Global Hedge Fund Index, which advanced an estimated 8.3%. The Chicago Tribune also reports further information in a January 14, 2005 article entitled Citadel's fund returns 7%.

WSJ: Citadel Investments Pulls Up Its Withdrawl Bridge

Citadel Investment Group continues to be in the news for alleged sup-par performance through the first eleven months of 2005. On Friday, January 13, 2006, The Wall Street Journal published an article written by Henry Sender entitled “Citadel Pulls Up Its Withdrawal Bridge, As Hedge Funds Aim to Block the Exits..”

Times Online: Deutsche Bank CDO desk has 'shortfall of at least £30 million'

The TCM blog entry “Stainton leaves Deutsche as CDO co-head to lead Citadel energy business??” has been unusually popular the past few days. Perhaps the news story out of London in Times Online entitled “Deutsche suspends trader over £30 million 'cover-up'” by Patrick Hosking might be an explanation.

The beginning of the article reads “A LONDON-based derivatives trader at Deutsche Bank has been suspended after allegedly covering up a shortfall of at least £30 million, The Times has learnt. The trader, Anshul Rustagi, has been ordered to stay away from the bank, pending a disciplinary hearing next week. He is alleged to have overstated profits on his own trading book, according to a Deutsche investigation, which was launched as soon as discrepancies became apparent. The full size of the alleged abuse is not known because of the esoteric nature of the derivatives that Mr Rustagi traded. Known as collateralised debt obligations (CDOs), they can be very hard to value. CDOs, once famously labelled “toxic waste” by Sir Howard Davies, the former chairman of the Financial Services Authority, have become very big business for investment banks.”

Stainton leaves Deutsche as CDO co-head to lead Citadel energy business??

According to the publication, a top credit correlation trader, Mark Stainton, has quit Deutsche Bank purportedly to head the energy trading group at Citadel Investment Group. According to that publication, “Deutsche Bank has confirmed that Mark Stainton, global co-head of the bank's combined cash and synthetic CDO business, has resigned. Deutsche confirms that Stainton, who is one of the best known figures in the credit correlation market, is joining investment management firm Citadel. Based in London, Stainton was the key figure behind Deutsche's global correlation and exotics credit trading activities.

Citadel Investment Group lays off 200 IT staffers

According to an article in Chicago Business entitled “Citadel Unloads Technology Jobs,” Citadel Investment Group let go about 200 technology staffers in November 2005, reducing the large hedge fund’s staff by about 18% to 900 staffers. While the hedge fund is ostensibly outsourcing computer programming work related to its complex trading strategies, this explanation is somewhat puzzling since most hedge funds – Citadel Investment Group included – are loathe to release any information into the public domain, let alone their prized intellectual property. With the losses that Citadel are rumored to have suffered in both its energy trading book and through its investment in the reinsurer Cig Re, perhaps over-all reduced returns drove this bid to increase efficiency. Please feel free to add your thoughts and comments.

Up to Nine new Bermuda (re)insurers

The article entitled “Six New Players in the Market” from the Royal Gazette in Bermuda on Monday, November 7, 2005 is a particularly good summary of on-going developments in the global insurance and reinsurance market, particularly after the property losses associated with 2005 Hurricanes Katrina, Rita and Wilma. What is particularly interesting is reference to the combined capitalization of Bermuda’s newest companies may be close to $8 billion. The complete article written by Lilla Zuill is a worthy read.

Information that Toomre Capital Markets (“TCM”) found particularly noteworthy included:

  • Bermuda's financial services regulator has licensed six major insurance start-ups to sell policies and more are on the way.
  • Those granted Class 4 licenses – reserved for highly capitalized companies – in October were Amlin Bermuda Ltd., Arrow Capital Reinsurance Company Limited, Harbor Point Re Limited, Hiscox Insurance Company (Bermuda) Limited, Lancashire Insurance Company Limited and Validus Reinsurance, Ltd., according to a Bermuda Monetary Authority bulletin issued on Friday, November 4, 2005.
  • At least two more, both understood to be property-catastrophe reinsurers, are in line to enter the Bermuda market – one from investors led by reinsurance veteran Don Kramer, and the second being formed by hedge fund guru Ken Griffin's Citadel Investment Group LLLC. Citadel's new reinsurer, New Castle Reinsurance Company Ltd., is its second Bermuda reinsurance venture focused on property risks. Citadel formed CIG Re Ltd. in September 2004, hiring away Chris McKeown from ACE Tempest Re.
  • XL, one of Bermuda's larger global insurance companies, has said little about the new company. It did reveal that the lead investor was an alternative asset management firm that XL has worked with through the years. And the company is expected to draw between $500 million and $1 billion in initial capitalization.