Citadel Prospectus Paints A Rosy Picture

Nov 29 2006 | 12:15pm ET

Citadel Investment Group’s proposal to raise some $2 billion through a bond sale isn’t just breaking new grounds for hedge fund financing, it’s also providing a rare look inside one the industry’s biggest and most powerful players.
 
After a bruising few weeks, in which the $13 billion firm was rumored to be on the brink of collapse following massive energy losses, and the departure of global stock trading chief Anand Parekh, the 363-page prospectus, a copy of which was obtained by Bloomberg News, paints a far rosier picture.
 
The firm’s two largest hedge funds are enjoying big years thanks to energy trading, not in spite of it. The $9.5 billion Citadel Kensington Global Strategies Fund was up 17% through the end of September, with net income of nearly $800 million, a fivefold increase from last year. It returned a solid 7% in the third quarter alone, as other energy-heavy funds, including Amaranth Advisors and MotherRock, either collapse or shut their doors.
 
Its second-largest fund, the $3.3 billion Wellington LLC fund, posted almost $400 million in net income during the first eight months of 2006, better than seven times its performance in the same period last year.
 
Both funds benefited from energy trading, especially Citadel’s takeover of Amaranth’s disastrous energy trades. Indeed, 10 days after the transfer, Citadel paid $725 million for half of JPMorgan Chase’s share of the Amaranth wreckage. For its trouble, both of Citadel’s top funds returned 3% on their energy investments in September, in part thanks to “the returns received in this transaction,” the prospectus, dated Nov. 27, said.
 
In addition to performance, the prospectus details the growth and behind-the-scenes changes at the secretive firm. According to the document, “Citadel hired a significant number of new investment professionals since mid-2005 to strengthen both the global credit and global energy business.” In total, the firm has hired 320 employees over the past two years, and now employs 1,070 people, including 656 investment professionals.
 
All those new mouths to feed contributed to a dramatic increase in operating costs at the Kensington and Wellington funds. Costs increased by one-fifth to $805.1 million, or 8.75% of assets. Citadel plans to launch Citadel Solutions to handle its administrative functions, a move the firm hopes with slash ballooning fund expenses.


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