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ETF News

UPDATE 2-Citadel plans to pay redemptions over time

 * To redeem shares periodically if funds meet thresholds     
 * CEO sees "only modest improvement" in markets since year-end
 * Funds significantly reduced holdings in illiquid assets
 (Adds details from letter, other background)
 NEW YORK, Feb 13 (Reuters) - Citadel Investment Group LLC
plans to meet redemption requests for its Wellington and
Kensington hedge funds over time, distributing cash quarterly if
the funds meet certain thresholds, the firm told investors in a
letter distributed on Friday.
 The plan would partially lift "gates" imposed in December,
blocking clients from cashing out their shares amid some of the
most turbulent financial markets in decades. Citadel Chief
Executive Kenneth Griffin told investors the environment has
improved, but not enough to justify totally lifting the gates.
 "Given that the world's financial system has seen only
modest improvement since year-end, we believe that it is
necessary to continue to suspend redemptions," Griffin wrote in
the one-page letter, which was obtained by Reuters.
 "As our balance sheet continues to strengthen and the
liquidity of our investment portfolio continues to improve, we
intend to initiate a 'distribution program' and make periodic
distributions to investors who desire liquidity," the self-made
billionaire said.
 The Chicago-based firm, which manages roughly $16 billion in
assets, confirmed the letter but declined further comment. Until
last year, Citadel had recorded annual gains every year since
Griffin founded the firm in 1990 with $4.2 million.
 Under the plan, Citadel will determine at the end of each
quarter what distributions can be made based on the funds'
aggregate capital levels. The threshold levels will decline over
time. The letter did not specify the withdrawal schedules of the
thresholds.
 Whatever funds are available for distribution each quarter
will be allocated on a pro-rata basis among the investors. "We
believe that this approach is in the best interests of all our
investors as we navigate this extraordinary period," he said.
 Hedge fund managers perform a balancing act when it comes to
redemptions: clients want access to their funds, especially last
fall when almost every market was tumbling, yet managers do not
want to be forced to sell good investments or illiquid positions
at fire-sale prices.
 Exceptional volatility and a worsening credit crunch
triggered humbling losses last year at many of the best-known
funds. The losses and tumbling markets also sparked a surge of
redemption requests from clients: about 40 percent of fund
assets industry-wise.
 Citadel joined on Dec. 13 a number of hedge fund firms that
suspended payments on redemption requests. Citadel's funds fell
by half last year, with the biggest losses seen after Lehman
Brothers collapsed in September.
 Fund managers "raise gates," as the practice is called,
seeking flexibility to avoid sales that would be forced to meet
withdrawal requests.
 Yet many investors scrambling to meet margin calls or offset
other portfolio losses decried being cut off from their funds.
 Griffin told his investors that Citadel has been active in
recent weeks shedding hard-to-sell assets and strengthening its
balance sheet.
 "We have significantly reduced our holdings of illiquid
assets, and will continue to do so from a position of strength,
in a manner that protects the interests of our investors and the
funds," Griffin wrote.
 A person familiar with the firm's performance said Citadel's
funds were up 5 percent through January, with positive results
across several asset classes.
 (Reporting by Joseph A. Giannone; editing by Jeffrey Benkoe and
Matthew Lewis)


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