An integral part of Citadel’s drive to create an expansive commodities business was the team of scientists and analysts hired by the firm to track the weather, reports an article in Financial Times. That team, unique for a hedge fund, has helped Citadel, helmed by Ken Griffin, make a record $16 billion last year from their bets on raw materials, giving them the crown of the most successful hedge fund ever, according to LCH Investments data that is cited in the article.
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Citadel was in the right position at the right time to reap the rewards of a boom in the gas market in the wake of post-pandemic reopening and Russia’s war in Ukraine. The firm focuses much attention on supply and demand, particularly in the gas and power sectors, making large wagers and holding them for significant periods of time. Yet Citadel and Griffin keep their cards close to their vest; though they hold meetings one-on-one with investors, many Wall Streeters intimate that information on Citadel’s trades is harder to come by than many other hedge funds. What is known is that most of their competitors did not build up as large a stake in commodities as Citadel in recent years, as the sector didn’t offer the same kind of attractive opportunities as equities and bonds before the pandemic, the article contends.
Citadel went into commodities more than two decades ago with a team of former Enron traders. Giving the firm significant exposure over the years, that team has generated billions—$7 billion to $8 billion from commodities alone in 2022. The weather trackers at the firm have driven up those profits, using weather forecasts to predict demand for gas and power. Those gains played a large part in Citadel’s commanding 38.2% outperformance last year, bringing its annualized return to 19.7% since the firm’s inception in 1990. While that kind of record might not be sustainable, a spokesperson for Citadel told FT, “unlike our competitors, Citadel’s commodities team invests globally across a diversified set of products…leveraging more than 20 years of long-term, steady investment in exceptional people, analytics and infrastructure.” But those competitors are taking notice; last year, Balyasny added a tropical weather specialist and an expert in climate change to their staff. And many analysts believe that Citadel’s success isn’t due only to its diversification in a variety of assets but also to its sizable bets that traders are encouraged to run, with constant pressure to be risk-on, say sources close to the firm. Those large bets could leave the firm open to loss in the case of an extreme market event, the article contends, especially given the lack of transparency.
But others say that other factors have contributed to the firm’s success, such as the $2 billion that poured in from investors at the onset of the pandemic in March 2020, Griffin’s assertion that the firm return to in-person work earlier than most others, and the firm’s size which gives a bigger book to its traders from the day they start. Those traders are now poised to have a significant payday given its extremely high fees that generate huge bonuses for those who performed well. And while those fees are “astronomical,” Citadel needs them in order to “compete for talent,” one investor in the firm told FT.