October 24, 2008 / 7:09 PM / 9 years ago

UPDATE 2-Citadel seeks to end talk of liquidations

5 Min Read

(Adds Citadel's comments on its future)

By Svea Herbst-Bayliss and Karen Brettell

BOSTON/NEW YORK Oct 24 (Reuters) - Citadel Investment Group, one of the world's biggest hedge funds, said on Friday it has $8 billion in available credit and sought to quell rumors it was liquidating some portfolios after its two main funds had lost 35 percent since January.

Reacting to persistent market talk it had asked the U.S. government for a cash injection and that financial regulators were coming to inspect its accounts, Chicago-based Citadel held an unusual and hastily arranged conference call.

Its founder Kenneth Griffin, one of the $1.7 trillion industry's most prominent players and someone who rarely speaks in public, and Gerald Beeson, its chief operating officer, blamed the dislocations in the bond and credit default swap markets for the bulk of the loss in Citadel's main funds. Panic also played a major role, they said.

The men told throngs of people who had jammed the phone lines at the start of the call that Citadel, which manages roughly $18 billion, has 30 percent of its assets in cash and U.S. Treasuries locked away in a box at the Bank of New York and was in no danger of collapsing.

While the firm's main Kensington and Wellington funds have lost 35 percent this year, Beeson explained the bulk of losses occurred in the weeks after Lehman Brothers Holdings collapsed and filed for bankruptcy in mid-September. The men said Citadel's other businesses were strong.

Recently the fund firm, which has long been known as an aggressive trader, has branched out into other businesses like executing a large bulk of American option and stock trades.

It has hired a string of bankers from JP Morgan Chase & Co in a move that so angered the New York-based bank that it sued the head hunter who helped broker the hires.

But because Citadel has traditionally delivered out-sized returns, such as 20 percent annually from 1998 to 2007, word of the its swelling losses -- the funds suffered their worst month ever in September -- came as a huge shock even as thousands of other hedge funds are also nursing double digit losses.

The average hedge fund has now lost roughly 19 percent, according to data from Hedge Fund Research and industry analysts expect thousands of funds, including some multibillion dollar players, to collapse in coming months.

Credit default swaps on Citadel's debt have been quoted at distressed levels for the past week, indicating concerns over the fund's viability, though trading in the swaps has been very illiquid.

Griffin, 40, who started his investing career in his Harvard dorm room, firmly brushed off talk that the firm might fail. "We have made it through 18 years and we are confident we will make it through the next 6-to-8 weeks as we approach year end," Griffin said.

He also stressed that the "tremendous dislocations in the market" have also created "tremendous opportunities".

So far investors seem to be taking the firm at its word as the men said investors' requests to get their money out have been modest, totaling only a few percent of capital. Clients have until Nov. 15 to notify Citadel if they want to exit by year's end.

Beeson and Griffin repeatedly described recent events as unprecedented and Beeson called Lehman's bankruptcy "the greatest dislocation we've seen in money market history."

To calm frayed nerves, Citadel had issued a statement early on Friday saying that it is "business as usual around the globe."

But as the day wore on and the rumors kept coming, the company arranged the call with Griffin, who rarely gives interviews, but who has been asked to testify before Congress next month along with other industry icons and fund managers George Soros and John Paulson.

Earlier this week, Griffin told a group in Chicago that he sees a changed world for hedge funds as policymakers around the world have chosen the winners and losers. "The winners are the banking system," he said, adding that he also sees the need for a new fiscal stimulus package. (Editing by Andre Grenon, Tim Dobbyn, Leslie Gevirtz)

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