A consultant who reviews many hedge fund-of-funds managers on behalf of his firm's institutional clients said it's clear Citadel provides different levels of information to investors.
"I am convinced that all of the hedge fund companies — not just Citadel — maintain a list of their most coveted clients that is ranked … in descending order of importance. No one, not even the clients at the top of the list, ever finds out what clients are on it. Citadel and other hedge funds respond much differently to information requests from the top-of-list clients than they do to those at the bottom," said the consultant, who asked not to be identified.
Because Citadel's performance is so good, the consultant said, many fund-of-funds managers stick with the firm despite discomfort with the lack of transparency.
"But it's a much better story when we meet with a hedge fund-of-funds manager who says they are satisfied with the level of transparency Citadel provides them and is able to share some of that with us," said the consultant.
One institutional hedge fund-of-funds manager that invests with Citadel said his firm is satisfied with the information given about investment strategies.
"We're institutional and we know that we get more information than a more retail hedge fund-of-funds manager that represents 82 family offices is going to receive. The amount of information you get (from Citadel) depends on who you are, who your investors are and what kind of relationship you have with them," said the source, who asked to remain anonymous.
But a hedge fund-of-funds executive, who asked for anonymity, said: "Citadel is a top-notch group … (but) we have never invested with them because of the onerous terms and lack of transparency, even regarding the risk level of their hedge funds. They have been completely uncooperative with information about their investment processes."
Other large hedge funds-of-funds managers that once invested with Citadel pulled assets in the last several years because executives were uncomfortable about the level of transparency they were offered.
Another fund-of-funds manager who asked not to be identified said his firm was forced to drop Citadel when it couldn't get information on some of Citadel's intercompany relationships. "It was virtually impossible to figure out the leverage, what was financing what. When you're paying expenses of between 8% to 10% and a 20% performance fee, you should be able to ask for transparency and get it."
Citadel's assets under management have increased to just shy of $12 billion as of Feb. 28, up from $1 billion in 1998, said founder Kenneth C. Griffin, Citadel's president and chief executive officer.
The firm offers multistrategy hedge funds using six principal underlying strategies: global rates; global equities; global energy; global credit; global markets and quantitative; and global value. According to company data, it accounts for between 1% and 2% of the total daily dollar volume traded on both the Nasdaq and New York Stock Exchange.
Citadel, founded in 1991 in Chicago, employs more than 970 people in Chicago, London, Tokyo, San Francisco and New York; about 40% of them work in information technology. Research and trading team members include mathematics professors, astrophysicists, specialists in string theory and a team of meteorologists.
Sources who know Citadel well said it has between 40 and 50 attorneys on its compliance staff and its general counsel, Adam Cooper, is president of the Managed Funds Association, a hedge fund industry organization. Citadel also has an in-house risk management team, led by Nessan Fitzmaurice, chief risk officer and head of the portfolio construction group.
The flagship Wellington Fund, a convertible arbitrage strategy, returned an annualized 26% for the six years ended Dec. 31, compared to the 4.25% to 6.25% Rocaton Investment Advisors LLC, Norwalk, Conn., uses to judge hedge fund performance. Rocaton gets the figure by adding 3% to 5% to the return of the Standard & Poor's 500 index.
Sources said the firm's strategies have closed and reopened to new investment over the past couple of years. Mr. Griffin wouldn't confirm this.
Mr. Griffin said Citadel has been providing its clients and credit counterparties with "transparency commensurate with the underlying nature of the strategies while protecting the competitiveness of those strategies."
Gerald A. Beeson is chief financial officer with responsibility for asset and liability management and financial reporting. He said: "We work extremely hard to provide our investors with the information necessary to help them in their on-going due diligence of our business. This includes rating of our flagship funds by outside agencies, complete position audits and over 200 detailed meetings with investors each year."
Mr. Griffin said his firm has spent "hundreds of millions" on its reporting and risk management systems. The information it provides to clients about investments, portfolio allocations and risk is on par with information provided by other hedge funds and money managers, he said. "Would you expect Goldman Sachs or Lehman to tell you how their proprietary portfolios are constructed?"
He conceded it's hard to condemn smart, sophisticated institutional investors for wanting as much information as they can get. "It's in their genetics. I admire them for it, but we have to balance that with what's in the best interest of the company and the investments," Mr. Griffin said.
Industry sources said Citadel is developing a new risk reporting system in response to investor requests for more information, but details were sketchy. Messrs. Beeson and Griffin would not confirm whether a new system was in the works, but acknowledged that Citadel's reporting processes are constantly evolving. Robust risk management systems have been fundamental to Citadel's architecture from its inception, said Mr. Griffin.
People who know Mr. Griffin said he is intent on expanding Citadel's assets under management significantly. Most agreed that Citadel probably is quite capable of managing a reported target of $100 billion, given its infrastructure and investment skill.
One source who asked for anonymity said: "Ken wants Citadel to become the Fidelity of the hedge fund world. But you can't get to $100 billion from $10 billion without attracting serious new capital, and that kind of cash flow is only going to come from institutional investors. Without transparency, you can't attract that kind of institutional money."
Mr. Griffin would not confirm the $100 billion figure, but said management has every intention of growing larger in line with the firm's capabilities and market conditions, especially with regard to liquidity.
"We have been growing strongly over the last seven years and have been one of the (hedge fund) industry's leaders," Mr. Griffin said.