How does it feel to be the only Hall of Famer who has basically had just one job his entire career?
I am probably unique on your list in not having worked on Wall Street, which is a bit different than this having been my only job. When I was in college I co-managed the portfolios of two small partnerships engaged in convertible bond arbitrage. After graduation from Harvard I was hired by Frank Meyer [founder of fund-of-funds firm Glenwood Partners] here in Chicago to manage a separate account. In my early days I continued to focus on convertible bond arbitrage, relative value and other trading strategies.
How would you quantify Meyer’s impact on your career?
I owe a big part of my success to Frank’s willingness to take a risk in hiring me out of college, entrusting me with his investors’ capital and then being my partner back in 1990 when we launched Citadel. Frank was a wonderful mentor, adviser and partner who encouraged me to build a platform. In other words, rather than focus on just one strategy, he encouraged me to assemble a team of professionals who could successfully deploy capital through a number of investment strategies. Balancing both the short-term need to drive profits and the long-term focus on building a platform has been instrumental in our success over the years.
Citadel has also been very opportunistic.
It’s very much part of our DNA. This is an organization that thrives on the challenge of entering new markets and putting together teams and competitive advantages that put us in a leadership position over time.
Such as the decision to get into energy trading?
When Enron went into disarray a few years ago, it was a great entry point for us to get into the energy trading business. And we’ve put together a team over the past couple of years that I think is one of the best in the world, a team that [in October 2006] was able to, in partnership with JPMorgan, acquire Amaranth’s enormous portfolio in just a couple dozen hours and stop, dead in its tracks, one of the most significant financial crises that had ever hit the energy markets.
And also make some money for your investors.
We priced the trade correctly, and fortunately we were very aggressive in the disposition of the portfolio. We were able to exit a fair number of positions that would have had losses down the road. I’m very pleased with how my team handled the situation. To go from being a nonpresence in a market, which is where we were when Enron collapsed, to just a few years later being the firm the world turns to to solve one of the biggest crises in the energy markets speaks volumes.
Was Sowood a similar story? [Last summer, Citadel stepped in to purchase Sowood’s entire portfolio, which had plummeted in value in the wake of the credit crisis.]
The swift resolution of Sowood’s liquidity crisis was important to the functioning of the world’s credit markets. It was obviously also of incredible importance to that firm’s investors. We were in contact with Sowood around noon on a Sunday. We quickly put together a 35-to-40-person team to go through the portfolio and had six or seven people on the ground in Boston by Sunday night. We bought the portfolio before the opening of business on Monday morning. It was a sight to behold. The teamwork here on our side — and to the credit of the principals of Sowood, the focus on their side to pull this together — was quite impressive.
How do investments like Sowood and Amaranth fit into what Citadel does?
A lot of these headline stories reflect what we do every day. Almost 20 years after being founded, Citadel really is at the center of the world’s capital markets. On a busy day we’ll trade well over half a billion shares of stock. Some 20 to 25 percent of all the options contracts in America will come through our four walls. And what that scale speaks to is — whether it’s 100 shares of Google or a $35 billion eclectic portfolio of assets — we can price it immediately.
If you look at the reputation of Citadel, let’s talk, just for a moment, about the so-called negatives. People say, “It’s a tough place to work. It’s demanding. It’s unrelenting.” I look at these traits as strengths. Market leaders are unrelenting. They are always trying to move the standard higher. I’m very proud that we have a sterling reputation when it comes to doing what we say we’re going to do. And that’s why, when Amaranth needs a partner or Sowood needs a solution or E*Trade needs a capital infusion or the investment banks have a large risk-transference trade to do, they come to Citadel.
Are you still involved in day-to-day trading?
Well, my trading activity, or lack thereof, seems to be a constant source of curiosity for the press. I’m involved. Before we spoke today, I went through our risk reports from last week, thinking about the various positions we have on the page, talking with one of my portfolio managers about one of the large positions. I’m not out there buying and selling assets on a day-to-day basis. The guys who work for me are much better at doing that. But I’m certainly involved in asking, Where is the portfolio today? Where do we want to take the portfolio? What are the key risks we are taking? Are we being well compensated for those risks?
How involved were you with Amaranth and Sowood?
With Amaranth, I think I slept less than an hour or two in the first 60 hours. But none of my colleagues slept. That was just what it took to get the job done.
How important is technology to Citadel?
Extremely. Our chief information officer, Tom Miglis, has a team of about 500 people who support our technology needs day in and day out. And I do believe that our technology gives us a substantial competitive advantage in the marketplace. How many firms can handle a million transactions a day? We do it every day.
You’ve been outspoken about the financial industry’s role in the credit crisis.
I think Wall Street dropped the ball. The losses that we’ve seen over the past nine months have been intolerable, in my opinion. It signifies a lack of discipline on the capital commitment and risk management side of these institutions.
What do you see as your biggest contribution to the hedge fund industry?
The story of Citadel has been a huge inspiration for hundreds and hundreds of managers. Look at my background. Never went to business school. Never worked on Wall Street. And my partners and I have created one of the most powerful and successful financial services firms in the U.S. — in the world. We have redefined what a hedge fund is and can be. And for many would-be entrepreneurs who face that decision — Do I go for it or not? — I hope they look at our success story and say, You know what? It’s worth taking a shot.
What does the future hold for Citadel?
I’m 39 years old. The first 20 years have been great. During the next 20 years, I need to make sure that I position this firm to be a going concern well past my last day here. And we’ll take steps as a team to create an enterprise that unquestionably has capitalizable value in the capital markets. I owe it to my partners. I owe it to my employees. I owe it to everyone who trusts me to make sure that when I am no longer part of this institution, this institution will be here.
Would it help ensure that future for Citadel to go public?
Being public is certainly an opportunity for us to increase the strength of this organization. It is not an imperative. It’s not something that we need to do tomorrow. It’s something we have thought about and reflected on over the years. And we’d be foolish not to understand both the pros and cons of being a public company. I think that Citadel is well positioned to be one.
Given the poor stock performance of hedge fund firms that have gone public, maybe you’ve been wise to wait.
Yes, this is one situation where we didn’t have to be first.
— Interview by Michael Peltz
