Lincoln Welcome to Funds That Won, where we dive into some of the world's most renowned investment funds. We'll interview investment managers across the alternative landscape and learn how they built their million and even billion dollar asset management empires. We'll explore teams, structures, strategies, and best practices in launching and running alternative investment funds. All right, welcome back to another episode of Funds That Won. Today, we're talking about Ken Griffin of Citadel. They managed $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 and how they ultimately won the hedge fund game. 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. and really took a liking to the financial markets. 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 on the stock and then any time the stock there's movement or volatility, he would make money. And 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. He coded it out while he was still a sophomore in college to identify all of these mispriced 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. And ultimately, he was doing really well. He went out and he started with a measly $265,000. Like, you don't have to have a ton of money to start. 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. But Frank convinced him, hey, come work for my firm. I'll give you a million dollars 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 is a pretty simple, uh, you know, exchange and he came in and in the first year he produced a 70% return on his money. So obviously, uh, you know, 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. Their original trading strategy of convertible bonds exploded, and so did subsequent strategies alongside it. They were doing really well, but 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 over-leveraged in a lot of facts, and due to poor market conditions, their firm was on the brink of bankruptcy. they learned a lot of good lessons during this period. Ken actually talks about how he learned both how he navigated, you know, the early dot com bubble as well as the financial crisis. They studied long term capital management. If you don't know about them, they're a quick story. 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 percent of their AUM until they had to close its doors, which is pretty astounding. Most firms, when they drop 50, more than 50 percent, 70 percent 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. And it obviously led to their demise. It was a critical lesson that Ken took to heart and he applied to the balance sheet of Citadel. So throughout the early dot-com era and subsequently the financial crisis, you know, externally, Citadel looks like this brilliant firm, right, that they were just navigating the market like a puzzle and just solving each equation one after another. But 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. And, you know, cause at the time it was, it was very likely that Morgan Stanley was going to be forced to close the store. Lehman brothers had just closed their doors. There was all this calamity in the markets, but you know, they were sure about their position and you know, 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. Hey, guys, thanks for listening. As you know, we don't run ads on this channel. So if you could really help me out, if this podcast has added any value to you or your business, please subscribe, rate and review. I would appreciate that greatly. Thank you. And obviously, you know, the whole market didn't you know, wasn't aware of everything that's going on. Hedge funds are typically pretty private and in their positions. But outside looking in, they were just like this. powerhouse, this behemoth that had managed, that had thrived, you know, in a time of despair and navigated the market successfully. So, you know, Citadel, you know, they it was a good thing they took that lesson to part 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 throughout, you know, the past couple of decades as a large institutional grade hedge fund. managing $67 billion and multiple funds and multiple strategies netting $16 billion last year. They're doing really well. 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 want to quickly summarize six product strategies that they're in right 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 he's more worried. He's got all these other hedge funds outside to worry about, and he's not really worried about internal competition. You know, Ken was asked in an interview if he's worried about himself, like crowding himself out with all of his strategies that he's encompassing. He says, no, not really. You know, I've got thousands of other competitors externally. I think our strategies are different enough where we're now just. doing a benefit to our investors. So Ken actually, it's funny, I was listening to an interview and 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. 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, you know, he overlooks the fact that he truly 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 subsequent 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. So allocators are funny. Every year they sit down and they predetermine their target asset allocation. Everyone thinks that they, you know, they have a position on if they think real estate is going to do well or not, or private credit is going to do well or not. And they determine in terms of basis points and percents, what percent of their dollars are going to go towards different strategies. And these allocators, they don't want to work with hundreds or thousands of managers. It's hard to manage, right? They would prefer to work with 10 to 30 core firms in their portfolio and 10 to 30 core contacts. And as such, it's a benefit as an asset manager to have multiple products that fill their different needs. Even when you're starting out, right, different investors have different appetites. Some high net worth like allocating to income products. Some like allocating to growth. Others like care. They care really strongly about lockup periods. So ultimately, again, just to reemphasize this point is it's good to have multiple products in your firm. But when you're just starting out, just start with one and do really well at it. And then you can move on and launch subsequent products. All right, so let's put this in a real life example. Looking at phone carrier, would it make sense for me to have Verizon and my wife to have AT&T and my daughter to have T-Mobile? No, probably not. Right. Because then I have to go pay all these different bills. I have to work with all these different providers. And I'm probably not even getting the best price. The reason they would want to work with one provider, for example, is, you know, just honestly ease of use. It's easy to contact one person. It's a relationship business. Not having to call up multiple providers. I'm talking to one provider and I get better terms on on those services that they offer. Okay, guys, let's recap today. We've learned some great things from Ken Griffin and Citadel. Guys, he started with $265K, right? Not a lot of money, 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 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. All information shared are the sole thoughts and opinions of the author. Do not take any information as legal or financial advice. You should seek a certified accountant and a professional legal team for taking any further action. We are not selling or soliciting a security in any way, shape or form. This content is for educational purposes only and is not to be construed as financial or legal advice. Clients of FundLaunch or Black Card Capital Partners may maintain positions and securities discussed on this podcast.