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How it all began
Kenneth Griffin's career in investing began soon after he joined Harvard University in 1986. The very next year he established a convertible-bond arbitrage fund. Since Harvard did not allow its students to indulge in business while on campus, Griffin admits that he took the help of some warders to place his orders by positioning a special satellite link in his dormitory. In 1987 the stock market crashed, but Griffin hit it big with his arbitrage fund. Soon he raised a sum of $265,000, from various people, including his grandmother. When he left Harvard, he attracted the notice of Frank Meyer of Glenwood Capital, for the high returns he had generated. Mayer offered him $ one million in investment funds. Griffin managed to generate a huge 70% return on that fund and as news of this achievement spread through the investor community, Griffin started to attract more and more capital.
Says Ken Griffin, "There were no real time stock prices when I was in college. I used a service called ComStock that sent you a satellite dish to install. At the time Harvard didn't allow students to start businesses in their dorm room so I had to have the dorm superintendent sneak around and help me. The world was so different in the late 80's. The personal computer was just finally becoming a thing. We saw the early adapters of technology having a significant advantage in the 1980's." (Valuewalk, Mark Melin, April 28, 2015)
From arbitrage operator to hedge fund king
From humble beginnings as an arbitrage fund operator, Griffin has grown by leaps and bounds to become one of the wealthiest men in the USA. Citadel Investment Group, Griffin's company, is one of the largest companies to follow the quantitative method of investing. Along the way he has become a broker too, being one of the largest in the U.S. The company currently employs 1,250 workers around the globe.
Griffin started Citadel in 1990 with an initial fund of $4.2 million. The company made a name for itself very fast and Griffin widened his investing horizon in 2001 to include a greater range of stocks. By 2012, the company was managing $14 billion worth of assets. Citadel's Wellington and Kensington funds have witnessed an eyebrow raising 25% growth in 2012 and 19.25% growth in 2013. Griffin's personal net worth has swelled to $5.5 billion as of September 2014.Citadel now is so big that its trades account for 1% of all trading activity in the London, New York and Tokyo markets. The Kensington Global Strategies fund took the first place at the Alternate Investments Awards for getting the highest risk adjusted returns. Today Citadel boasts a portfolio value in excess of $ 25 billion.
Investment Philosophy
Griffin's philosophy is eminently practical. It is inevitable that one will make losses in the financial markets, he says. One must also understand that one cannot make money on all trades. Indeed, in the 2008 crisis, Griffin suffered considerable losses. According to Griffin, how you react to such losses is important in defining who you are and your professional trajectory.
Another of his themes is the value he places on integrity. "It's simple. From our earliest days in life, we know that when we walk away playing fairly and win, we feel the best we can possibly feel. When you cheat in some way and win, that's an empty feeling. Most people want to win on their own merits. They don't want to cheat themselves by cheating. In 25 years we've had very few problems. It has happened. We deal with it quickly and powerfully. People see that we don't tolerate it." (Valuewalk, 11th May 2016)
Investment Strategy
He has been secretive about his investment methods and strategies. What is apparent is that the Citadel Investment Group studiously follows the quantitative method when investing. Using technology to the hilt, the company currently has fifteen separate strategies for investments. According to Citadel's website, "Our strategies are grounded in thoughtful research and developed by experienced, diverse teams. We understand how to bring multiple perspectives to the toughest challenges, engage in vigorous debate and arrive at the best solution."
This has led to soaring growth for the company. Citadel's hit ratio with winning stocks is a humongous 52%. He attributes the success of his strategy to the fact that different fund managers have varied views on investing. One becomes successful when the market agrees with the asymmetric knowledge that one gathers. The important thing is how investors would react when the information that is privy to oneself becomes public.
"We're in a lot of different businesses, and in everyone one of our businesses there is a science and an art," he says. "The science usually encapsulates the hard work and process that goes into driving an investment decision. We'll do thousands of management meetings a year," Griffin admits, noting the lack of glamour. "At the end of the day the art comes down to not how you can do all that work, but how well you can differentiate your idea from what other people perceive the reality to be. (Valuewalk, Mark Melin, April 28, 2015)
He revels in the role of a person who evaluates the investment models developed by his hi-tech team of researchers rather than 'analyze' the markets. Based on the inputs from his team, some stocks are offloaded almost immediately while others are held for months. This ability to lead from the front is the real reason for his phenomenal success.
Adaptability and transparency
Stock trading as a profession is subject to rapid changes. The trading environment today with all the new technologies, computers and quantitative analyses, is a completely different world from that which obtained in the eighties, a scarce three decades ago. As a hedge fund manager and investor, his forte has been his ability to adapt to changed circumstances. For example, after having being battered by the financial meltdown in 2008, Citadel managed to pick up the pieces pretty quickly. "A defining moment for our organization. We lost half of our capital in sixteen weeks. We had never had a double digit drawdown in 20 years. It was like an out of body experience for us as the entire banking system collapsed. We made a fundamental mistake. It all stops on my desk. I'm the CEO. I didn't think through the risks enough. We retained employees via deferred comp - which was levered. We all lost our golden handcuffs, and you learn - are you going to keep your team or not? There's an element of shame but it helped make us stronger," says Griffin. (Valuewalk, 11th May 2016)
Own Products
Another reason behind Citadel's success is that the company has an array of products which it purveys to its customers. According to Griffin, "we are one of the users of our own product. We trade 100 million shares of stock per day. We need liquid capital markets that allow us to monetize our research. We are the largest destination for retail order flow in America. When they know they're being treated fairly, they trade more. We want greater market structure and transparency - because healthy capital markets serve both our interests and America's." (Valuewalk, 11th May 2016)
Final words
Why he insists on being numero uno. "Economic rents accrue disproportionately to market leaders. Who is the fifth largest manufacturer of PC's? Who cares? The world is becoming winner take all. We strive to be a market leader in every segment we're in. We need the best investment talent. You need information faster than your competition, you need to understand it faster than your competition, and you need to trade faster than everyone - trading is how we monetize our research. It needs to all come together." (Valuewalk, 11th May 2016)
"We are relentlessly focused on enhancing our research process and believe we are skilled at converting insights into investment opportunities," Griffin says.
Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.
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Kenneth Griffin, born in 1968, was a teenage investment prodigy. He began his investment career while still in college at Harvard. From managing one million dollars in 1987, Ken Griffin today runs one of the world's largest and most successful hedge funds - Citadel LLC, with assets in excess of US$ 25 billion. Ken Griffin is reckoned as one of the best performing hedge fund managers in the world in the last decade. A sharp focus on quantitative analysis and nimble trading strategies have enabled Citadel to turn in impressive investment performance that is the envy of the fund management world in a market where alpha is increasingly difficult to generate. He epitomizes the "winner takes it all" approach - he plays only to be number 1, and has a firm conviction that he has a team with research skills to continuously convert insights into investment opportunities, which will keep him ahead of the pack.