July 13, 2021

How Did Ken Griffin Get to Be Such a Big Deal?

His hedge fund firm, Citadel, has thrived for the past 30 years, thanks to his data-driven zeal—and an early start. Way early.

Reported by Larry Light

Ken Griffin

Maybe it’s the dorm room factor. Moxie and smarts (not to mention luck) are key components to investing success. But as Malcolm Gladwell argues in his book Outliers: The Story of Success, an early start on one’s chosen path is crucial to great triumph. As a Harvard undergrad in 1987, Ken Griffin began his finance career by trading convertible bonds from his dorm, and he even installed a rooftop satellite dish to snag quotes.

Since then, Griffin has become one of the world’s top hedge fund managers, doing well in an asset class that has struggled since the 2008 financial crisis. Sporting a knack for bold investing, a wide-ranging intellect, and an intense personal style, he is routinely ranked among the top in his field. He and his Chicago-based firm, Citadel, finished No. 3 in LCH Investments’ all-time hedge fund rankings (Bridgewater was No. 1), which covers their performance from inception through 2019, and No. 5 in turbulent 2020 (Tiger Global was the top one).

Last year, Citadel’s flagship fund, Wellington, clocked a 24.4% return, which overshadowed the S&P 500’s 16.3% showing. Since the fund’s start in 1990, it has generated an annual gain of 19%, versus 8.75% for the stock index. Hedge funds in general have fallen short of the equities benchmark during a bull market. The HFRI Fund Weighted Composite rose 11.6% last year, an improvement from before, yet still short of the index’s return.

That early-start narrative is seen a lot in the business and financial world’s success stories. Think of Michael Dell selling homemade computers from his University of Texas dorm room or Mark Zuckerberg launching what would become Facebook while at Harvard. In college, Griffin raised $265,000 from his grandmother, a successful businesswoman herself, and several others, including his dentist. He did well shorting stocks in the 1987 crash. After graduating, Griffin worked for a year in a Chicago hedge fund firm called Glenwood Capital Investments before founding Citadel. He was 22.

As Lloyd Blankfein, former Goldman Sachs CEO, once put it: “Ken started his business in a dorm room in college. So, not after he graduated—in college, in his dorm room, he started doing this. Who was thinking about that stuff then? He was.”

Griffin’s new firm got off to a strong start with canny trades and distressed plays, scooping up assets and people from the wreckage of such ill-fated rivals as LTCM, Amaranth, and Enron. Today, it is one of the few hedge fund firms that has been in business for three decades, and it has doubled its headcount over the past 10 years, with 16 offices across the globe, two of those opening this year in Paris and Singapore. Citadel now has $38 billion in assets, and Griffin is extremely rich, with an estimated net worth of $16.1 billion, according to Forbes, which makes him the 119th wealthiest American.

No doubt Griffin is one colorful character, a business heavyweight who enjoys spending the immense wealth he has accumulated. He had a 2003 wedding at Versailles, where singer Donna Summer and Cirque du Soleil were among the performers. He energetically buys art, with a collection valued at $800 million (featuring paintings by Jackson Pollock and Willem de Kooning, for instance), and a lot of the most famous work is on view in public art museums. He also collects trophy real estate worldwide (in Chicago, New York, London, Aspen, etc.), worth $1 billion, published reports say.

In addition, he has a robust philanthropic impulse, donating $1 billion to causes such as urban education and internet accessibility for low-income kids, as well as to hospitals, museums, and other public-spirited organizations. Griffin made a $150 million gift to Harvard in 2014 that helps hundreds of students financially each year. He gave away $55 million to combat the pandemic, including by sending medical oxygen to India and bolstering research for vaccines. He last year paid to send supplies and relief to Wuhan, China, when the outbreak first struck, and helped evacuate Americans.

Along the way, Griffin, 52, who wasn’t available for comment, has encountered his share of woe in the hedge fund trenches. Last winter, the firm got caught up in the controversy over GameStop. The videogame retailer was (and still is) a favorite of amateur investors, who gathered on Reddit’s WallStreetBets forum and bid up its price as a counterattack against hedge funds that were shorting it. Citadel (which wasn’t one of the shorts in this drama) injected $2 billion in cash to support one of the the hedge funds caught in this short squeeze, Melvin Capital.

At the height of the frenzy, online broker Robinhood, a favorite venue for the fledgling investors, curtailed trading in GameStop. These so-called Redditors blamed Citadel Securities, a large market maker that Griffin founded. The critics didn’t want to accept Citadel’s insistence that the market maker was a freestanding entity and that the hedge fund operation had zero to do with GameStop’s trading curtailment. Griffin testified to those points at a congressional hearing, stating that his firms had no role in Robinhood’s decision to limit trading.

Nevertheless, Rep. Rashida Tlaib denounced him at the meeting, saying, “You are irresponsible and it [the market] is set up in a way that helps only the wealthy.”

More significantly, Citadel, like other hedge operators, went through a hellish interlude in 2008, when it lost $8 billion. To stave off collapse during a spell when 7% of hedge funds went under, it refused to let investors pull out money for 10 months, which earned the firm a barrage of criticism.

Griffin turned things around post-crisis, attracting fresh capital and adopting an aggressive strategy when so many other hedgies stayed cautious. Citadel is known for its strong emphasis on data analysis, robust investments in technology, and a multi-strategy approach, ranging from commodities to credit to quant trading. All that has helped propel its Wellington fund and more than a dozen brethren to exceptional returns.

The commodities unit, if it were an independent company, would be one of the world’s biggest commodities funds. Citadel’s quant-trading unit, in operation since 1994, employs complicated math formulas to select investment targets. The market-making business (it’s separate from the hedge fund firm) has thrived, handling a third of individual stock orders, published reports indicate. Here, Griffin is cleverly filling a gap in an area where large banks have pulled back. And as the pandemic spread, he quickly set up a temporary trading floor in the Four Seasons Palm Beach to ensure Citadel Securities could provide liquidity to the market

Some notable hallmarks of Griffin’s style:

Bold Investing. Citadel’s remarkable returns rest in large part on savvy stock picking. The basis for the good showing of late was picking up bargains in the early-2020 market plunge surrounding the pandemic’s onset. For instance, he bought shares in T-Mobile, which got keel-hauled back then, but has since doubled in value on account of its merger with Sprint. Citadel’s most recent position in the wireless carrier is worth $688 million, regulatory filings show. Griffin also has built solid positions in the top tech firms, whose prices have soared, such as Apple, with a $9.3 billion Citadel position. Also boosting his performance were gains in fixed-income, credit, and commodities.

“It was a macro trader’s dream,” Griffin remarked about the market’s early-2020 freak-out, at an event for the Robin Hood Foundation, no relation to the trading platform (it’s a nonprofit anti-poverty charity he donates to). Citadel bought “when people are panicking,” he said.

Throughout, Griffin balanced his forays with some safeguards. For instance, last summer, he put “collars” around two high-flying holdings, Tesla and Amazon— in case of volatility, which was abundant then, Bloomberg reported. Consisting of a put and a call with close to equal amounts, this options maneuver protects on the downside if a stock plummets, although it does limit the upside.

Lately, Citadel’s biotech team has been focused on research surrounding the coronavirus. In a January webcast sponsored by the American Finance Association (AFA), Griffin described the firm’s ongoing scrutiny of the economic impact of the virus’ variants, as well as its study of companies’ efforts to maintain a safe working environment for employees returning from lockdown.

During the AFA webcast, Cliff Asness, chief of AQR Capital, jokingly said he wished Griffin would “give me a 10-minute notice of any trades he is going to make.” Citadel’s funds, generally closed to new investors, get 70% of their capital from institutions. Tellingly, during the 2020 market free-fall, it offered investors up to $1 billion in redemptions, although only $50 million of that ended up withdrawn—a far brighter picture than it encountered in 2008.

Broad Intellect. The biotech team is one example of how Griffin’s far-reaching mentality has sought to propel Citadel. He has invested heavily in machine learning and data collection, to give the funds an edge. He makes these efforts, he has said, to stay abreast of a fast-changing world. “In this era, a new idea can catch on quickly,” he told the AFA audience. “Amazon went from nothing to becoming the No. 2 retailer” in a relatively short span.

By the same token, Griffin is acutely aware that data has its limits, namely in delving into the complexities of human psychology. “How can you account for the audacity of Elon Musk?” he asked. “How can you quantify that?”

Listening to him reveals his wide range of interests, both in finance/economics and other realms, such as art. He can talk knowledgeably about protein folding (a way of understanding the building blocks of cells, which could advance drug discovery) and self-driving cars. Of art, he said in a TV interview that it is an area “where we can find common ground.” He said he tried his hand at painting, and the result was “ugly.” While that showed Griffin he lacked artistic skill, it led him to appreciate those who had it. His interest in art burgeoned 20 years ago, he said, when a Degas sculpture captured his eye, but he was out-bid. Since, he has won many an auction.

Personal Intensity. Griffin is a tough boss with little tolerance for underperformance and insists that his firm be a meritocracy. Those who don’t do well end up canned. “There’s not a lot of empathy,” a former employee once said in an interview. “That can be an asset when things are going crazy, as I don’t think he feels stress the same way as everyone else. There’s just this desire to be the best at everything, and everyone is either helping him accomplish that, or not.”

He is one opinionated guy. An ardent proponent of free-market values, he has contributed generously to Republican politicians and often sounds off on his beliefs. As a hedge fund operator, he thinks active investing is superior to passive, and is a defender of short selling (which is a key hedge fund tactic) as a means of discovering market prices.

To his old friend, James Gordon, the founder of Edgewater Funds, the man’s success is easy to explain. Griffin, he said in a tribute when the hedge fund honcho got an award, “is one of the smartest and most passionate people I have ever encountered.” And it all started in that dorm room.