Citadel Funds Down 47%; Firm Sued Over Sentinel Transfers

Dec 8 2008 | 1:29am ET

Hedge fund giant Citadel Investment Group has had better weeks. And years, for that matter.

Citadel’s two largest funds have lost almost half their value this year. The Kensington and Wellington funds, which manage a total of $10 billion, lost 13% in November, bringing their year-to-date losses to some 47%.

The firm has received redemption requests for about $1 billion from the funds. Chicago-based Citadel, which at the start of the year managed some $20 billion, will be left with just $12 billion by the end of the year, according to estimates.

Citadel has also cut about 40 jobs in response to its shrinking business and dismal returns. The job cuts are linked to the firm’s decision to shutter CIG Reinsurance, it’s Bermudan reinsurer, Crain’s Chicago Business reports. A dozen of the lost jobs are at the firm’s headquarters in Chicago. The Wall Street Journal reports that the firm has laid off 20 employees in recent weeks, including some in London, as it cuts back its trading, back-office and human-resources operations.

But the bad news for Citadel isn’t limited to poor performance, fleeing investors and layoffs. Last week, the court-appointed trustee for collapsed cash management firm Sentinel Management Group filed suit against Citadel and Goldman Sachs, accusing the pair of helping Sentinel cover up its allegedly fraudulent activities.

Frederick Grede, the trustee, said Citadel accepted fraudulent transfers from Sentinel, which it then immediately transferred to Goldman, helping hide the a multi-billion scheme in which Sentinel commingled customer assets with its own, using the pooled assets to leverage risky trades. The transfers were part of a “desperate attempt” by Sentinel’s leadership “to cover up their underlying fraud.”

Grede’s lawsuit seeks the recovery of the allegedly fraudulent transfers.

While its flagship offerings are suffering in a big way, three other Citadel funds are doing almost as well as Kensington and Wellington are doing poorly. The market-making funds, which manage a total of about $3 billion, are up about 40% on the year. And despite the poor performance of the bigger funds, Citadel has announced plans to raise some $500 million for one of the market-making funds that will, among other things, buy much of the Kensington and Wellington portfolios.

The Tactical Trading Fund, which manages about $2 billion and has returned more than 40% this year, will buy about half of the stocks owned by the larger funds, Bloomberg News reports. The sale, at market prices, will take place by the end of the year.

“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,” the firm said in a letter to clients.

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