Citadel founder Ken Griffin is already one of the world's most powerful investors. But he wants to be much more than a billionaire wunderkind with a head for figures. Fortune's Marcia Vickers takes an unauthorized look inside his world.
(Fortune Magazine) -- On North Michigan Avenue in Chicago, on the Magnificent Mile, sits one of the city's tallest and swankiest residential buildings. The most notable feature of the structure, a seven-year-old art deco-ish number called the Park Tower, is a two-story penthouse with a set of enormous, darkly tinted windows that give the place a Howard Hughes-like mystique. Occasionally passersby shopping at the Armani or Tiffany stores nearby catch a glimpse of the windows and tilt their heads skyward with an "I-wonder-who-lives-there?" stare.
The answer - Kenneth C. Griffin - probably wouldn't make much of an impression, which suits a secretive hedge fund manager like him just fine. In fact, he fits the hedge fund stereotype quite nicely. He's young (38), fantastically rich (worth $2 billion or so), and he collects museum-quality art (he recently spent $80 million to take a Jasper Johns off David Geffen's hands).
He's got the trophy home, obviously, and is married to a very attractive woman, the former Anne Dias. The company he founded and runs, Citadel Investment Group, has around $13 billion in assets and is one of the largest and most powerful funds in the world.
What sets him apart from his fellow nouveau zillionaires is the scale of his ambition. Griffin, say people who know him, doesn't want a reputation merely as a hedge fund legend like Tiger Management's Julian Robertson or SAC Capital's Steve Cohen. What he really seems to want is to build an edifice for the ages: a diversified, large-scale financial institution on the order of Goldman Sachs (Charts) or Morgan Stanley (Charts).
To get there Griffin has launched a flurry of business deals: buying up a mortgage operation here, some distressed assets from another hedge fund there. Last fall Citadel announced plans to sell up to $2 billion in bonds - a first for a hedge fund. All the while, there's steady speculation that Citadel will go public. (Griffin declined to be interviewed for this piece in time to meet our deadline.)
The ambition doesn't stop there. Griffin seems to be going for full-blown, captain-of-industry immortality, the kind achieved by titans who didn't just dot, but shaped, the landscape of business over the past century. As a former Citadel manager put it recently, "Suddenly it seems like Ken wants to be a J.P. Morgan or John D. Rockefeller."
That's hard to do if you're an adherent of the reclusive, cloak-and-dagger Way of the Hedgie. So Griffin and his society-savvy wife have been throwing themselves an extended coming-out party. He's on the Chicago 2016 Olympics organizing committee and various high-profile boards. In October he and Anne made headlines around the world when they donated $19 million to the Art Institute of Chicago - one of the largest private donations ever made to the museum. He even appeared in a Chicago Mercantile Exchange ad in TheWall Street Journal.
Griffin looks a little tense in that Chicago Merc ad. That isn't surprising given his line of work, and it's even less surprising to those who know him, because he really does appear to be conflicted about publicity. "He's an introvert's introvert," says an acquaintance. "And here he is in a national newspaper ad wearing a red power tie!"
Of course, Griffin will have to learn to be comfortable with his public if he wants to fulfill his grand plans. The empire builders Griffin aspires to emulate didn't just have amazing analytical powers; they were also preternaturally shrewd psychologists. They may have been rapacious robber barons, but they knew how to manage - or at least accepted the primacy of the human factor in business. Griffin, says a former trader, "believes management, like everything, is all about process, methodology."
There are plenty of people like that among the 8,000 hedge funds now in existence. And those funds come in a wide variety of flavors, even in the top tier. You've got Tire Kickers - funds that closely examine the companies they invest in. The archetypal Tire Kicker fund is the defunct Tiger Management, founded by Robertson.
There are the Gunslingers, like SAC Capital, which trade frenetically, seeking any edge they can get. There are the Global Sophisticates, like George Soros's Quantum Fund in its heyday and now Stanley Druckenmiller's Duquesne Capital (Charts), which make big bets on interest rates and currencies. And you've got your Quants, which rely heavily on computer technology to invest; they are often run by mathematicians and physicists and whatnot.
Citadel is basically a quant fund. Its trading programs furiously buy and sell on behalf of the firm's two main funds, Kensington Global and Wellington. (Citadel accounts for more than 3 percent of average daily trading volume on the New York, Tokyo and London exchanges, 15 percent of the options market, and as much as 10 percent of the Treasury bond market.) "We're a tech firm first and foremost that happens to trade," Citadel's longtime CIO, Tom Miglis, likes to say.
Technology reaches into every line of Citadel's business, even as Griffin adds new ones. Citadel is the only hedge fund with a market-making options business and is one of the first to have its own stock loan and borrowing capabilities. It also has an elaborate back office, the boring innards of financial firms where transactions are processed, orders fulfilled and so forth.
The 363-page private bond prospectus that was somehow leaked to the press revealed that Citadel plans to sell its back-office expertise to other funds, yet another step away from plain-vanilla hedgieville. It even has a duplicate computer system in an undisclosed location outside Chicago - standard for big banks, but highly unusual for a hedge fund.
"There's a risk-management paranoia there," says a former top executive. "It's like the North American Ballistic Military Command." The point of all this technology is to make the firm more agile. It allows Griffin "to assess and grasp situations and get his team deployed at lightning speed in almost any situation," says a former trader. "No other hedge fund has this."
"Ken is a brilliant innovator," says Alec Litowitz, a longtime star Citadel trader who left to start his own fund, Magnetar Capital. "He has transformed what it means to be a hedge fund."
Those who invest with Citadel don't do it because of Griffin's tech cred. They do it for the returns: Kensington, Citadel's largest fund, delivered average annual gains of around 22 percent over the past nine years. That's after fees, and as you might guess from Citadel's stellar performance, those fees run pretty high. Most hedge funds follow the "2 and 20" rule - a 2 percent annual management fee and a 20 percent annual performance fee (i.e., they keep a fifth of the profits). Citadel's investors are willing to pay the customary 20 percent cut of the profits, but cough up an unusually high management fee - it was 8.75 percent in 2005.
An excellent example of Citadel investors getting what they pay for happened last fall. On the morning of Sept. 18, Griffin feverishly exchanged phone calls with Amaranth Advisors, the $9.5 billion hedge fund. Amaranth had made one of the most disastrous trading bets ever, wagering that natural gas prices would rise. Instead, prices had plummeted, and Amaranth had lost $4.6 billion, almost half its assets, in one week. (Amaranth would eventually lose a total of $6.4 billion.)
Griffin remained characteristically calm as he helped negotiate the purchase of the pulverized portfolio, say people close to the situation. Working with his energy team - some handpicked from the remains of Enron - he calculated the risks, analyzing the positions and the market. At times he was talking intensely with Charlie Winkler, Amaranth's chief operating officer, who had joined Amaranth from Citadel five years earlier. Winkler knew it was the kind of deathwatch deal Griffin relished. Then, "while the corpse was still warm," as one observer put it, Griffin bought half of Amaranth, while J.P. Morgan Chase took the rest.
Some on Wall Street thought it was a foolish bet, joking that Griffin had "Amaranthed" himself. Natural gas prices, after all, could have continued to plummet. But they didn't, and Griffin, as usual, ended up in the money. Amaranth paid Citadel an unspecified cash fee - probably about $1.5 billion, a source says - for taking on the troubled portfolio.
In September, Citadel posted a 3 percent gain on its energy investments, according to a fund document; that helped spur the fund to one of its most spectacular years ever. In 2006, while the average hedge fund gained 13 percent, Citadel was up 30 percent, according to investors.
For the past year or so, Citadel has been investing in China and making big bets on credit derivatives. "Ken is great at recognizing patterns without relying on lots of analysis," says Mark Yusko of Morgan Creek Asset Management, a Citadel investor. "He can synthesize loads of information faster than anyone."
You hear that kind of comment a lot about Griffin. He doesn't look at all like some mathaholic - he's about six feet tall and has short salt-and-pepper hair, perfectly pleasant-looking. But he seems most comfortable in black-box mode: distilling complex securities models or whatever market voodoo is on his mind. With an unnerving, unblinking blue-eyed stare, he grills underlings - many of them math and physics Ph.D.s from MIT or Harvard, his alma mater - about things ranging from the risk premium to neural stochastic dynamics (don't ask).
"Ken only wants to have what he calls 'high bandwidth' conversations," says a former trader. "He might zone out if you try to talk with him about your family, for example. He's not the kind of guy you can have a beer with."
Griffin grew up in Boca Raton. His father was once a project manager in General Electric's space program. His mother often drove the teenaged Ken to a local Computerland store, where he spent hours picking the brains of the salespeople. In high school he worked as a part-time debugger for IBM. "Ken wasn't your typical 17-year-old who'd hang out at the movies," says Dan Wechsler, a friend from the Computerland days. "His friends tended to be older. He knew where he wanted to go. He was always coming up with ideas."
In 1986, Griffin came up with a novel concept: selling educational software to schools. He and two of his Computerland pals founded a tiny software sales company, Diskovery Educational Systems. Though he sold out years ago, it's still around, run by Wechsler in West Palm Beach.
At Harvard, the story goes, Griffin rigged a satellite dish outside his dorm room so he could receive real-time stock quotes. With money from his family, he assembled a convertible-arbitrage portfolio, and when the market crashed in 1987, he was on the short side.
After graduating from Harvard in three years with an economics degree, Griffin was introduced to an influential hedgie named Frank C. Meyer, the founder of Chicago's Glenwood Capital Investments. Meyer was taken with Griffin's enthusiasm and impressive, if short, track record. He invited Griffin to work for him, giving him $1 million to run on his own. A year later Griffin set up his own shop, coming up with the name Citadel because of its connotation of strength in times of volatility.
Seventeen years later, Citadel has more than 1,000 employees in six locations worldwide. The home office takes up seven floors of Citadel Center, a 37-story office tower right in Chicago's Loop.
On a day in early March at Citadel, it's difficult to tell traders and techies apart; they all seem to be dressed in black casual pants, button-down shirts open at the collar, with white T-shirts peeking out. People are walking quickly through corridors and the lobby, having clipped conversations. The atmosphere is a mix of Silicon Valley's high tech meets Wall Street's high octane, with emphasis on the latter.
It's not an easy place to work. "Citadel can be a real sweatshop," says a former employee. "You have to be incredibly energetic, willing to give your life up to work there." The money is good - it's a hedge fund - but that doesn't seem to do much for employee retention. "Griffin pays talented traders a fortune," says a former manager.
"An example is, he'll pay $5 million a year for two years to a star trader. But once their contract expires, they often head out the door. They get no ownership stake. They don't get a sense they're really valued." In the past five years Citadel has lost at least 15 senior managers - some who "created the fabric of the firm along with Griffin, though Griffin probably wouldn't admit it," says a former trader - including David Bunning, who led the global team; Peter Labon, a top equities manager; Alec Litowitz, the merger arbitrage head; and most recently Anand Parekh, who ran global equities.
The local press has lampooned Citadel as "Chicago's revolving door." (People close to the firm say turnover is on a par with a typical investment bank's.) "Ken is an extraordinarily talented trader and technical guy," says a former top trader, "but along with his youthfulness comes an emotional immaturity."
A more colorful assessment of Griffin's abilities comes from one of his peers: Dan Loeb, the voluble chief of Third Point Partners who's famous for slamming competitors in open letters that end up all over the Internet, apparently refers to Griffin as a "gerbil."
In 2005, after Griffin snagged an analyst from another shop, Loeb sent an e-mail to Griffin: "I find the disconnect between your self-proclaimed 'good to great, Jim Collins-esque' organization and the reality of the gulag you created quite laughable. You are surrounded by sycophants, but even you must know that the people who work for you despise and resent you. I assume you know this because I have read the employment agreements that you make people sign." Citadel declined comment, as did Loeb.
While all that workplace angst at Citadel is going on, Griffin is often holed up in his office reading management books. "He's borderline obsessed with it, perhaps because it's his biggest weakness," says someone who recently worked with him. "He thinks that by reading books and hiring management consultants, he's managing."
As Loeb so graciously noted, Griffin admires management guru Jim Collins. He also once told Bloomberg Markets magazine, sounding a lot like another hero of his, former General Electric CEO Jack Welch, that "each of the business leaders here knows they have to drive their business to be No. 1 or No. 2.''
Griffin borrows Welch's tactics, like firing the bottom 10 percent of his workforce each year. He also tries to follow that management-consulting chestnut Hire your successor, which he seems to interpret as Hire large numbers of interchangeable brainiacs. "He's got this pipeline of people with similar skill sets in case someone walks out the door," says a former trader. "It's like shark teeth - there's always one behind another. The message is that everyone is replaceable at any time."
Sometimes, however, Griffin's castoffs bite back. Last June, Griffin was sued by an old friend and self-described mentor, Rush Simonson. Simonson had been a tech-savvy Computerland salesman back when Griffin frequented the store. In a complaint filed last June in Cook County Circuit Court, Simonson, now 48, claimed he had developed the computer program at the center of the convertible-arbitrage business the two ran while Griffin was at Harvard. Simonson also alleged Citadel's beginnings were based on his program and demanded a cut of the action. (Simonson alleged as well in the suit that he never had a clue Griffin ran a hedge fund until 2003, when he saw an article about Griffin in a copy of Fortune at his dentist's office.)
In January, Simonson abruptly dropped the lawsuit. Griffin, in a statement, acknowledged the two had been partners: "I have fond memories of my days in college when I would run back to my dorm room to execute trades on behalf of the partnerships we had formed." Griffin and Citadel claimed that the partnerships had been legally terminated and that there was no settlement in the case. Simonson declined comment.
Do investors care about Griffin's interpersonal skills? Not as long as he makes them money. But that's the problem: What if employee retention deteriorates so much it hurts Citadel's returns? "I like to see some broad experience set when I invest in managers," says Philip Halpern, the University of Chicago's former endowment manager. "My concern is that Citadel doesn't have that. The turnover has been too high over the years."
If Griffin does go for an IPO, those issues will be even more urgent - he'll have a whole new constituency agitating for succession plans, bench strength and better leadership all round. And here's another problem: What's stopping all those disgruntled but well-trained former Citadelians from launching copycat funds once their non-compete clauses wear off? Nothing, really. "The ideal is to take what you learn at Citadel and combine it with great management, which truly values talent," says one former trader.
Perhaps it's the human resources issues that have persuaded Griffin to emerge from his bunker and burnish his image. This is where his wife helps. "I think if it were just up to Ken, he'd be less public," says a close acquaintance of Griffin's. "You might say Anne has helped to broaden him as a person."
If Griffin really is transforming into a softer, cuddlier persona, future stories about him may say this new chapter began in July 20 03, on the day he and Anne Dias exchanged wedding vows. Several of the 200 or so in attendance swear Griffin shed tears of happiness. "It was uncharacteristic coming from Ken," says one, "so it was noted."
As was the wedding itself - a two-day affair held in Versailles. (No, not Versailles, Ill. Versailles, France.) The reception was held at Hameau de la Reine, or the "Hamlet of the Queen" - Marie Antoinette's well-preserved 18th-century faux village, complete with thatched-roof cottages and farm animals, where the young Queen played peasant. A two-story tentlike structure had been constructed for the occasion. After a formal dinner, dancing, fireworks, an aerial act involving people attached to large helium balloons and a performance by Cirque du Soleil, the dining room wall disappeared and - voilà! - guests found themselves in a Casablanca-style lounge with ceiling fans and potted palms. Next came disco diva Donna Summer. "Most people were out until four in the morning," says a guest.
Since the wedding, the Griffins have blown into the Chi-Town civic scene like a gale off Lake Michigan. Anne - who's 36, was born in France, and runs her own small hedge fund (Aragon Global, $55 million in assets) - sits on the board of Chicago's Children's Memorial Hospital. The couple underwrites Chicago Symphony Orchestra concerts and are players in the Robin Hood Foundation, the charity founded by Paul Tudor Jones.
But it's the art that has attracted the most attention. Three blocks east of Citadel Center is the Art Institute of Chicago, a gem of a museum known for its collection of 19th- and 20th-century paintings. Donor names emblazoned throughout the galleries include Cyrus McCormick, who founded a company that became the backbone of International Harvester, and Potter Palmer, an inventor of the money-back guarantee.
Toward the rear of the museum there's a small room dedicated to the 264,000-square-foot Modern Wing - THE BUILDING OF THE CENTURY, a sign says - designed by Renzo Piano and set to open in 2009. A centerpiece of the project will be a grand two-story entrance called the Kenneth and Anne Griffin Court.
Of course, getting your name on a museum simply means you're rich. Achieving Rockefellerdom - Griffin must know he's still a ways from that. He has to keep Citadel growing, possibly take the company public, keep his investing edge, and get the hang of that HR stuff. It's the human element again, the part of business he's never been comfortable with. But it's essential. Without it, to paraphrase Griffin's idol Jim Collins, a business just isn't built to last.
Doris Burke contributed to this article.http://money.cnn.com/magazines/fortune/fortune_archive/2007/04/16/8404298/index.htm
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