How Citadel Made BILLIONS

Today we're talking about Ken Griffin of Citadel. They manage $67 billion today across their multiple hedge fund strategies. They netted $16 billion last year. I don't know if you guys realize how much that actually is. For reference, Walmart netted $11 billion last year in net income. And so Citadel blew way past them, right? They're a very well-performing hedge fund, one of the behemoths, one of the giants. And today we're going to be talking about how Citadel started, some of the products they run, some of their strategies, and ultimately how they got to where they are today. All right, so let's get into it. So Ken started in college like so many of his other successful peers. They started early in the industry, as early as possible, and he started trading in college. He was really interested in math and sciences and engineering. He started trading, playing around in the markets and experimenting with different things until he fell upon a strategy that he ultimately loved. He made a few thousand bucks and thought he was the richest person in the world and decided to double down on it. The reason he did so well was following this convertible bond trading strategy. So the convertible bond strategy is essentially where it has features of both stocks and bonds, where you get fixed income. It's more like a bond at the beginning, but then you have the right to convert it to stock and common equity later down the road. So essentially what he would do is he would go long on these convertible bonds, betting that the stock would go up, and he would simultaneously short the stock itself. So by puts, And then anytime there's movement or volatility, he would make money. Now simultaneously, he noticed that the market was valuing these convertible bonds wrong, that there was a lot of mispricing, and that just through plain arbitrage, he could actually capture additional alpha. So Ken, being the brainiac he was, he actually built an algorithm, coded it out, you know, while he was still a sophomore in college to identify all of these mispricings. Price bonds. And then he wasn't satisfied with how quickly the information was updating, so he went to his college landlord and actually installed an antenna and satellite on top of his dorm room building so he could get more up-to-date information on the pricing of these convertible bonds. He started trading there and was doing really, really well until he met one of his key mentors and players in his life, Frank Myers. So Frank Myers was the co-founder of Glenwood Partners. And was really impressed when he met Ken. Ken, you know, told him about his strategies and what he was doing. And ultimately, Ken didn't want to work for somebody else. He wanted to run his own shop. Frank convinced him, hey, come work for my firm. I'll give you $1 million to manage as a portfolio. And if you do well, I'll help you go out and start your own firm. So Ken took him up on the deal. It was a pretty simple exchange. And he came in and in the first year, he produced a 70% return. Frank fulfilled on his side of the bargain, and they went to launch Citadel together. So Citadel, from its inception, really was quite a wild success. You know, their original trading strategy of convertible bonds exploded, and so did subsequent strategies alongside it. They were doing really well, but you know, every good story has its falls. In the early 2000s, in the dot-com era, Citadel kind of faced some pretty critical challenges where they were overleveraged in a lot of facts, and you know, due to poor market conditions, their firm was on the brink of bankruptcy. And they learned a lot of good lessons. During this period. Ken actually talks about how he learned both how he navigated the early dot-com bubble as well as the financial crisis. They studied Long-Term Capital Management. They're a large firm that was doing really well, and in 1998 they ultimately fell apart. But what's interesting and what he notes about Long-Term Capital Management is they were able to lose 90% of their AUM until they had to close its doors, which is Pretty astounding. Most firms, when they drop 50, more than 50%, 70%, are forced due to liquidity reasons to close up shop and unwind the fund. But Long-Term Capital Management set up their firm in a way where they could literally have a 90% drawdown and still be operating effectively. It was a critical lesson that Ken took to heart, and he applied to the balance sheet of Citadel. Externally, Citadel looks like this brilliant firm. Right, that they were just navigating the market like a puzzle. Internally, you know, in hindsight, Citadel and Ken, they've expressed that, hey, look, we had actually made some pretty serious errors. He shares in one interview in 2008 where he had left his office on a Friday afternoon, and if Morgan Stanley didn't open their doors on Monday, then they would be out of business by Wednesday. To be in this business, you really have to have just a strong gut and a strong willpower and be able to take large risks and stomach them and fight through them. It was a good thing they took that lesson to heart because the robust internal balance sheet that they had is what Ken said got them through those tough times. So they've had some downs, but they've obviously emerged triumphant, managing $67 billion and multiple funds and multiple strategies netting $16 billion last year. And one of their core things that I think have attributed to their success is their ability to introduce new products to the market at appropriate times. So I wanna quickly summarize the 6 product strategies that they're in right now. Now, they've got an equity strategies bucket, a fixed income and credit strategies, quantitative strategies, market and global strategies, event-driven and special situation strategies, and then lastly, kind of a multi-strategies and fund of funds bucket. Ken has built this robust empire of 2,600 employees and portfolio managers that each specialize in their individual vertical. And he prides himself in the fact that, you know, he's not worried about crowding himself out. He's got all these other hedge funds outside to worry about, and he's not really worried about internal competition. Ken actually gave advice where he was encouraging people to start by building a firm instead of one strategy. And I'll have to kind of agree to disagree with Ken in a few ways. Obviously, I think that you should start with a firm in mind. Obviously, everyone should be managing a— when I say firm, I'm talking about multiple products, multiple strategies, multiple ways that you're attacking the market and generating alpha. And I think that everyone should be planning that. But ultimately, I think Ken's— he overlooks the fact that he really just started with one. He started with convertible bond trading strategies, and because he was successful, he was able to start a firm and then introduce multiple products to the market quickly. So if you're a new manager, I think it's vital that you just— you really just have to start with one strategy, validate proof of concept, demonstrate to the market that you can make money. And I don't care if it's even months after you start that first product, then you can go ahead and introduce some products to the market. But you have to validate proof of concept and show investors that you can make money. And that's exactly what Ken did. Okay guys, let's recap today. We've learned some great things from Ken Griffin and Citadel. Guys, he started with $265K, not a lot of money, but he managed it well. And obviously he's now built an empire of $67 billion under management. Citadel has not— it's not been an easy road, right? There's been its troubles. But if If you build a good firm with good product sets and you have a diverse balance sheet, you can navigate anything. All right. Thanks for listening today, guys. If there's a topic that you would like me to cover, just leave it in the comments. I'm happy to dive deep into it and uncover this world of funds. Look, we are trying to democratize the world of funds and make it accessible to all. We want to make sure that if you are starting a new fund or running a fund, that you have all the information and resources necessary to do so. Thank you so much. I hope you have a wonderful week.