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Citadel is battered by trading restrictions
By Henny Sender in New York
Published: October 4 2008 03:00 | Last updated: October 4 2008 03:00
Citadel Investment's flagship fund has lost 18 per cent of its value for the year to the end of September, underscoring the problems facing hedge funds as they deal with new restrictions on short-selling and borrowing.
Funds that were once regarded as impregnable are suffering, in part because of restrictions on short-selling and the reduced ability to amplify trading bets through the use of borrowed money.
Citadel's fund lost 15 per cent of its value in September, making it by far the worst month for the fund manager since 1994 when its flagship fund was down 4 per cent in one month.
People familiar with the fund, which has now dropped $2bn to have a total of $18bn under management, attribute much of the firm's poor performance to the changing rules governing trading in US markets.
Citadel, one of the more highly diversified hedge funds, until recently had been a beneficiary of the troubles of its competitors, buying the portfolios of its distressed peers and serving as one of the largest market makers in the options market.
"In many ways, Citadel's structure today is probably more akin to an investment bank such as Goldman Sachs than the average hedge fund on the street," analysts from Standard & Poor's noted in a recent report.
Thanks to two-year lock-ups for its investors, Citadel is less vulnerable to a withdrawal of funds by investors than most of its competitors. Unusually, Citadel's subsidiaries also are rated. In 2006, it established a programme giving it the ability to raise up to $2bn from the debt market, freeing it from exclusive dependence on investor inflows.
Still, its troubles and those of other multi-billion funds are adding to pressures on the financial system in general and on the stock market in particular. Given their wide footprint, any general hedge fund problems have potential systemic implications.
In the wake of the ban on short-selling, trading volume has dropped and the difference between bids and offers has widened dramatically, an indication of how much liquidity has disappeared. Volatility has soared.
The inability to sell short a wide universe of shares has limited the ability of managers to hedge risk. That has hurt funds like Dinakar Singh's TPG-Axon and Joshua Friedman's Los Angeles-based Canyon Capital, which both joined TPG in its ill-fated investment in Washington Mutual.
The limits on short-selling also have affected investors who buy convertible bonds because many hedge those holdings by shorting the shares of the issuers.
By Henny Sender in New York
Published: October 4 2008 03:00 | Last updated: October 4 2008 03:00
Citadel Investment's flagship fund has lost 18 per cent of its value for the year to the end of September, underscoring the problems facing hedge funds as they deal with new restrictions on short-selling and borrowing.
Funds that were once regarded as impregnable are suffering, in part because of restrictions on short-selling and the reduced ability to amplify trading bets through the use of borrowed money.
Citadel's fund lost 15 per cent of its value in September, making it by far the worst month for the fund manager since 1994 when its flagship fund was down 4 per cent in one month.
People familiar with the fund, which has now dropped $2bn to have a total of $18bn under management, attribute much of the firm's poor performance to the changing rules governing trading in US markets.
Citadel, one of the more highly diversified hedge funds, until recently had been a beneficiary of the troubles of its competitors, buying the portfolios of its distressed peers and serving as one of the largest market makers in the options market.
"In many ways, Citadel's structure today is probably more akin to an investment bank such as Goldman Sachs than the average hedge fund on the street," analysts from Standard & Poor's noted in a recent report.
Thanks to two-year lock-ups for its investors, Citadel is less vulnerable to a withdrawal of funds by investors than most of its competitors. Unusually, Citadel's subsidiaries also are rated. In 2006, it established a programme giving it the ability to raise up to $2bn from the debt market, freeing it from exclusive dependence on investor inflows.
Still, its troubles and those of other multi-billion funds are adding to pressures on the financial system in general and on the stock market in particular. Given their wide footprint, any general hedge fund problems have potential systemic implications.
In the wake of the ban on short-selling, trading volume has dropped and the difference between bids and offers has widened dramatically, an indication of how much liquidity has disappeared. Volatility has soared.
The inability to sell short a wide universe of shares has limited the ability of managers to hedge risk. That has hurt funds like Dinakar Singh's TPG-Axon and Joshua Friedman's Los Angeles-based Canyon Capital, which both joined TPG in its ill-fated investment in Washington Mutual.
The limits on short-selling also have affected investors who buy convertible bonds because many hedge those holdings by shorting the shares of the issuers.
:sorpresa::yeah:
