Citadel High-Frequency Fund Gained $1 Billion Last Year

Oct 2 2009 | 2:34am ET

It’s no wonder Citadel Investment Group is so protective of its high-frequency trading group: The division is a cash-cow.

Citadel, which is suing the former head of the unit and another ex-employee for what the hedge fund giant has called “industrial espionage,” earned about $1 billion in returns from the group, called Tactical Trading, last year, The Wall Street Journal reports. Just five year ago, the team made only about $3 million.

The performance figures for the highly-secretive group in a highly-secretive hedge fund firm emerged during legal proceedings resulting from Citadel’s lawsuit. The Chicago-based firm accuses Misha Malyshev, the former head of the unit, and Jace Kohlmeier, another former employee, of violating their non-compete agreements by setting up their own trading firm, Teza Technologies. Malyshev and Kohlmeier argue that, as the firm has not actually begun trading, there is no competition. Another Teza employee has been arrested and charged with stealing proprietary computer code from his former employer, Goldman Sachs.

High-frequency trading is little understood, and those hedge funds and other firms that practice it keep their systems close to the vest. But over the last two days, Malyshev and Citadel’s James Yeh have offered a peak into Citadel’s unit on the stand.

Malyshev testified in the Chicago hearing that the group’s first consistently positive day was July 25, 2004. Since then, it’s been nothing but positive, earning about $75 million in returns the following year, nearly $500 million in 2006 and $892 million in 2007, when tactical trading was spun out from Citadel’s flagship hedge funds. That turned out to be a bad move for the Kensington and Wellington funds, which plummeted along with much of the rest of the hedge fund industry last year. But the Tactical Trading fund, which manages about $1.9 billion, soared, and has continued to do so this year, rising about 20%.


How Profitable Are High-Frequency Trading Strategies?

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