a friend of mine works here...they won't even tell me their shoe size....really!
Boy Wonder
Quietly, in Chicago, Ken Griffin has built one of the world's biggest and most successful hedge funds while amassing one of the financial world's great fortunes. Imagine what he'll do when he turns 33.
By Hal Lux
September 2001
Institutional Investor Magazine
Ken Griffin was desperate for a satellite dish, but unlike most 18-year-olds, he wasn't looking to get an unlimited selection of TV channels. It was the fall of 1987, and the Harvard College sophomore urgently needed up-to-the-minute stock quotes. Why? Along with studying economics, he happened to be running an investment fund out of his third-floor dorm room in the ivy-covered turn-of-the-century Cabot House.
Therein lay a problem. Harvard forbids students from operating their own businesses on campus. "There were issues," recalls Julian Chang, former senior tutor of Cabot.
But Griffin lobbied, and Cabot House decided that the fund, a Florida partnership, was an off-campus activity. So Griffin put up his dish. "It was on the third floor, hanging outside his window," says Chang.
Griffin got the feed just in time. That year saw the historic October crash, and he had $265,000 at risk.
Says Griffin: "I can't believe they let me put it up."
"Unbelievable" just about sums up Ken Griffin, whose life seems to come straight from the pages of fiction, not the annals of high finance. In the barely more than a decade since he left behind that dorm room with its two phone lines and futon bed, Griffin has fashioned an investment empire rivaled by very few in the world. Today his Chicago-based Citadel Investment Group manages $6 billion for such astute investors as Morgan Stanley, the University of North Carolina endowment and Glenwood Capital Management. Citadel easily ranks among the five biggest hedge funds in the world, and at the rate it is expanding - Griffin is raising money for a new trading unit that could reach $2 billion - it may soon be the biggest. Employing 15 strategies from convertible bond arbitrage to risk arbitrage, Citadel, which trades 24 hours across the globe, typically accounts for 1 percent of all trading every day on the New York, London and Tokyo stock exchanges.
A shrewd investor - the Cabot House sophomore was short heading into the '87 crash - Griffin's stellar returns place his firm among a tiny elite. His longest-running fund, Wellington Partners, boasts ten-year net annual returns of 30.01 percent, easily among the best records in the business. Citadel's four other U.S. and offshore funds have produced stunningly consistent annual net returns ranging from a low of 19.44 percent to a high of 28.8 percent. Over the past decade the firm has lost money in just one year, 1994, when Wellington fell 4.3 percent (see graph). The hardest task Griffin faces these days is how to turn away investors and figure out how to spend a personal fortune of many hundreds of millions of dollars - not easy when your favorite hobby is playing soccer in two sandlot leagues.
"His numbers speak for themselves," says Justin Adams, a Citadel investor who also co-founded the prominent West Palm Beach, Florida, hedge fund III Associates. "He has set the standard for hedge funds. Citadel's ability to move from one strategy to another is remarkable."
Notably, Griffin has turned in this record with no formal technical training, no advanced degree and next to no experience working anywhere but at his own firm. And he has done it in the most arcane areas of quantitative trading, a discipline overrun by Ph.D.s and the occasional Nobel laureate. Next month he turns 33.
Griffin's interest in the market dates to 1986, when a negative Forbes magazine story on Home Shopping Network, the mass seller of inexpensive baubles, piqued his interest and inspired him to buy some put options. Miffed at the size of the broker's fees, he ambled over to the Harvard Business School library and read up on finance theory. He soon built his own convertible bond pricing model (the firm currently uses version 600). Fifteen years later he stashes his soccer cleats in a $6.9 million Chicago apartment, sits on the board of Chicago's Museum of Contemporary Art and Public Library Foundation, and this year sponsored the $1 million challenge grant at the Robin Hood Foundation annual dinner charity auction. The previous donor: Kohlberg Kravis Roberts & Co. founder Henry Kravis.
Griffin is to hedge funds what pimply faced dot-com billionaires were briefly to the Internet: the boy god, nerd made good, self-taught polymath of finance. Comfortable in a wide range of disciplines from computer engineering to advanced statistics, he can write derivatives pricing models, debate options for reengineering computer networks or poke holes in complex mortgage-backed-securities positions with equal ease. Unlike those dot-comers, though, he appears unlikely to self-destruct anytime soon.
To be sure, hedge funds, like dot-coms, have come in for some rough times lately. Morgan Stanley market strategist Barton Biggs is warning of an impending hedge fund "bubble"; Forbes recently published a cover story debunking claims by the industry (with some 6,000 funds and perhaps $500 billion in capital) that it regularly outperforms the rest of the money management industry.
Several of the biggest and most prominent funds have come to sorry ends. Julian Robertson closed up shop, and George Soros farmed out most of his money last year; the partners at Bowman Capital and Galleon Group are in the midst of nasty breakups. These funds ran aground for a variety of reasons: poor judgment, infighting, bad timing, poor management and, to some extent, too much success - they simply got too big to handle all their investments well.
Fiercely competitive, Griffin is focused and ambitious. "I've never known him to be interested in anything else," says Harvard undergrad pal Alexander Slusky, who runs San Francisco-based venture capital firm Vector Capital.
"From day one, the goal was always to build the best independent trading firm," says Griffin. "If you make $100 million at another hedge fund, you are a god. If you make $100 million here and someone down the street makes $400 million, you'd better be thinking about why you didn't make $500 million."
Such competitiveness is not uncommon in the hedge fund world, but what sets Griffin apart, and just might secure his reputation, is an absolute mania for management. Though a first-class trader himself, he walked away from the convertibles desk years ago to dedicate himself totally to building the business and creating an institution with a solid infrastructure. That's something Robertson and Soros tried to do too late (Institutional Investor, September 1999).
Griffin has done this by hiring talented executives and instilling in his troops his obsession with systems and analysis. His people talk constantly of "process." He himself consumes so many books and articles on corporate strategy and leadership to hone his own management skills that he sometimes sounds like a corporate self-improvement junkie (a recent Harvard Business Review favorite: "Level 5 Leadership: The Triumph of Humility and Fierce Resolve").
But it isn't all just palaver. Unusual for hedge funds, he has brought in professional managers from places like Andersen and Boston Consulting Group (in fact, eight former consultants are on his payroll). He built an internal stock lending operation in the late 1990s to allow Citadel to fly below Wall Street's radar screen on sensitive short sales; it's the kind of operation run only by major investment banks. Stung by a bad experience with liquidity in the brutal bond markets of 1994, Griffin moved to secure more permanent capital from his investors that couldn't be yanked in a crisis. Last year Citadel became the first hedge fund organization to receive public ratings from Standard & Poor's and Fitch; the investment-grade rating it received lowered the firm's funding costs.
"We've talked to a lot of hedge fund organizations, and very few would qualify for an investment-grade rating," says S&P financial institutions analyst Jonathan Ukeiley. "Citadel's institutionalization is very deep for a fund."
"I would liken him much more to a broad institution than a boutique hedge fund," says friend and rival Paul Tudor Jones of Tudor Investments. "He's built an extraordinarily diverse organization, horizontally and vertically integrated. It's something with franchise value, which makes him different from 95 percent of the companies classified as hedge funds."
Underlying his success is an effort to translate the fierce discipline of quantitative trading to other investment arenas. Quants, like ex-computer science professor David Shaw of D.E. Shaw & Co. and prize-winning mathematician Jim Simons at Renaissance Technologies Corp., have posted some of the best returns in the fund management business by building models and computer systems that tell them what securities to buy and when to buy them. As Griffin has moved into areas like risk arbitrage and distressed-securities investing, he is supporting all these strategies with the advanced technology and analytical rigor typically found only in certain quant trading fields. His goal is essentially to build an investing assembly line that can methodically produce successful strategies across the markets.
That, of course, is easier said than done. And even some of Griffin's biggest fans worry that he may overreach. Citadel is getting ready to launch a new U.S. long-short equity unit that will basically involve a classic stock picking business - quite a departure from its current approach. Investors say the firm may raise as much as $2 billion; in July Citadel hired Carson Levit from Pequot Capital Management to manage a broad market portfolio and Peter Labon from Bowman Capital to run the telecommunications, media and technology sectors.
Beating the market in U.S. stocks is always difficult, and it's not clear how Citadel's technology and information-gathering techniques in areas like risk arbitrage will necessarily give it any edge. "It's hard to bet against Ken," says one hedge fund investor. "But the connection between long-short and what he's been doing is not obvious."
Also troubling is the rate of Citadel's growth in recent years. Citadel grew from $18 million to $2 billion in assets under management in its first eight years, but it has swelled by a further $4 billion in just the past three years, thanks to great returns and huge investor demand for hedge fund product. One hedge fund after another has hit the investing shoals when it got too big to handle its own success.
Moreover, Griffin uses lots of leverage to generate his returns, cranking up his positions by three to six times. He's produced consistent gains, but leverage has led to big problems for other hedge funds during financial market crises.
Still, his first big investor suspects he will find a way, somehow, to make it work. "If you had told me that I would stake my reputation on a 22-year-old, I would have said never," says Frank Meyer, the hedge fund veteran who backed him a decade ago. "But then I met Ken Griffin."
Ken Griffin grew up thinking about making money in a town that had plenty of it, Boca Raton, Florida.
The oldest son of a serial entrepreneur, who made his biggest splash in the building supplies industry, Griffin dreamed of making a killing in business from an early age. What business was unclear, though. Computers looked like a sure bet early on; IBM Corp. was the biggest employer in town, and while he attended Boca Raton Community High School, Griffin, who had a facility for numbers and technology, taught himself to be a proficient programmer. By 11th grade he was operating a small computer consulting business.
When he entered Harvard in 1986, leveraged buyouts were all the rage, and Griffin imagined for himself a career as a hotshot banker helping to reshape corporate America. Then he read the Forbes article that argued that the stock of Home Shopping Network was overvalued. Griffin agreed, and opened his first brokerage account, bought one or two put options contracts, and turned a quick $5,000 profit when the stock fell.
Griffin got a surprise when he sold the options and got paid less than their apparent value. His broker explained the economics of Wall Street's bid-ask spread; it irritated the Harvard freshman to know that someone else was making a riskless profit off his trade. "He paid me a discount to the intrinsic value of the option," says Griffin. "I had been arbed. And I took it upon myself to find out why."
Camping out at the Harvard Business School library, Griffin spent hundreds of hours imbibing finance theory from the capital asset pricing model to the Black-Scholes options pricing model. By chance, he made another discovery while thumbing through Standard & Poor's stock guide, which contained an appendix with quotes for the little-known convertible bond market. Comparing stock and convert prices, Griffin saw a discrepancy. "The price relationships just didn't look right," he says.
Looking for an explanation, he called the local office of First Boston Corp., figuring that with such a name it had to be the best bank in Boston. Hooking up with an institutional salesman, the 18-year-old visited the regional office to grill him. Recalls Griffin, "They said, 'It's not a strategy we recommend for the firm's clients, but we do it for our own account.'" Griffin was even more intrigued.
Back at Harvard he began building a rudimentary model to price the bonds. Returning home to Florida during the summer between his freshman and sophomore years, Griffin visited a broker friend working at the First National Bank of Palm Beach and began to discuss his new model. A retiree named Saul Golkin walked into the office and listened in as Griffin explained his theories about trading converts. After 20 minutes, Golkin said, "I've got to run to lunch. I'm in for 50." At first Griffin didn't understand. Then the broker explained that Golkin had just agreed to invest $50,000. Emboldened, Griffin quickly raised a $265,000 limited partnership - whose investors included his grandmother - called Convertible Hedge Fund #1.
Returning to Harvard, Griffin rushed to get his satellite dish and began trading. Then, on October 19, the stock market crashed. Many hedge fund managers, such as Michael Steinhardt, suffered widely publicized losses. Griffin, however, just happened to be leaning very short in his portfolio. Making money during a crash made it easy to quickly raise $750,000 for another fund, this one called Convertible Hedge Fund #2. "Historical happenstance has a way of making people look like geniuses," he says modestly.
Early on he showed his practical side. Not content to simply fiddle with his computer models, Griffin went out and introduced himself to the Wall Street stock loan departments that convertibles traders depend on to borrow stock for shorting. Brokers who had no reason to be nice to a small partnership gave Griffin a break as he played up his unusual role as student trader. "He was very resourceful," says early backer Meyer. "He wasn't ivory tower. He took the fact that he was small and made it an advantage."
Griffin found time for classes at Harvard, but not much else. "He was a pretty serious guy," says venture capitalist Slusky. "He went to classes and ran his business." Even Griffin's schoolwork had a practical bent; his thesis, advised by economist Richard Caves, analyzed the effects of mergers on bondholders. He distinguished himself for his rigor. "The thesis," says Caves, who is renowned for his research on industrial organization, "could have been published in an academic journal."
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