Asset Management: Citadel’s bold bet

One scoop to start: GAM is scrambling to find a buyer ahead of results it has delayed by two months, five years after a scandal over private debt holdings that led to fines, the resignation of the investment firm’s chief executive and a collapse in its share price.

How Ken Griffin harnessed the weather

Multi-manager hedge funds have been one of the standout winners of recent years, but one firm’s performance has stood out more than most.

Ken Griffin’s Citadel posted a return of 38.2 per cent last year, a large gain made even more remarkable by the amount of assets — currently $54bn — that the firm manages.

The $16bn in profits it generated in 2022 ranked as the biggest annual dollar gain by a hedge fund in history, according to LCH Investments, and propelled Citadel to the top of the list of the most successful money managers of all time.

In this deep dive, my colleague Laurence Fletcher explores how Citadel has built its remarkable moneymaking machine.

Notably, the firm has developed a major commodities business and grown into a natural gas powerhouse. Griffin and his senior team are attracted by the size of the asset class, its low correlation with other markets and its complexity. In gas, supply can be mapped and analysed by his large teams of researchers while the many gas hubs across the US and beyond offer numerous prices that can be traded.

The team of European head of gas trading Chris Foster, who has a reputation for punchy bets, has helped generate billions of dollars for the fund, according to people familiar with the firm, who say Citadel made $7bn-$8bn from commodities last year.

A little-noticed but key component of that growth has been the recruitment of a team of weather forecasters whose predictions are more accurate than many meteorological offices. Its traders are fed information by a weather team that uses supercomputers to run forecasts and includes specialists in areas such as thunderstorm and tropical cyclone prediction.

Argentina diary: the hunt for inflation-proof dollars

All dollars are equal, but some dollars are more equal than others. At least that was certainly my experience in Argentina, where a single $100 note buys you more pesos than two $50 notes or — worse than that — 20 crumpled $5 notes.

Argentine friends had been unequivocal as I headed their way: live by the day and live by the dollar. Leave your credit card in your wallet, don’t go near an ATM, and come armed with US dollars in cash that you can change into pesos on the ground. Not just any dollars, crisp $100 dollar bills. They weren’t exaggerating.

For Argentines, the double-digit inflation afflicting Britain would look like a rounding error. Inflation, which reached 3,000 per cent in 1989, last year hit a three-decade high of 95 per cent. It is so ingrained in daily life that Argentines talk about inflation in the same way the English talk about the weather. Hoarding dollars — the proverbial hiding cash under the mattress — is a national pastime.

Of course, from a traveller’s perspective, rapid inflation in the local currency works in your favour because it means that your dollars will go further and further as the trip progresses. But to take advantage of that, it means exchanging $100 notes as you need them. And this, I found out, is not entirely straightforward.

The black currency market — traded out of illegal exchanges or cuevas and rather confusingly called the dólar blue — is part of a large underground economy. Right now the blue rate is so strong that if you avoid using the official rate you can double your money.

As if the dual currency exchange is not enough to contend with, Argentina has around 15 different exchange rates, including a “soy dollar” for soy exports, a “Qatar dollar” for Argentine tourists travelling to the World Cup last year, and even the “Coldplay dollar”, a special exchange rate for paying foreign entertainers that made a name for itself when the band had a string of sellout concerts last year. A satirical blog post in October comparing each zodiac sign with the different dollar variants went viral.

Read the full story here of my month-long adventures in Argentina, in which I experienced the novelty of black-market currency trading and trying to stay one step ahead of rampant inflation. As I began the long flight home, I was left contemplating the words of Simon Kuznets, who won the Nobel Prize for economics in 1971 for his work on growth.

He famously said that there are four types of countries in the world — developed, undeveloped, Japan and Argentina.

Chart of the week

Fears for the future of the London stock market are mounting after SoftBank and CRH, the world’s largest building materials group, shunned the City in favour of New York.

The string of departures and prospective moves from London underline the UK’s difficulty in attracting and retaining companies, despite the British government’s attempts to reinvigorate the City and lure businesses away from rival exchanges. Executives see the US as an environment that embraces higher growth, while they bemoan the lack of interest from UK-based investors in their home market, particularly pension funds that have increasingly shunned British stocks over the past two decades.

“There are no domestic equity investors here — everything else is a symptom,” says Michael Tory, founder of advisory firm Ondra Partners. “It’s not about the listing rules, the governance or the free float requirements. Global investors look to domestic investors for the signal to validate the investment, and that local signal has simply flickered out.”

Holdings of UK-listed companies by British pension and insurance funds have plunged from about half of their portfolios to 4 per cent over the past two decades, according to data from Ondra. Meanwhile UK pension fund holdings of fixed income surged from 17 per cent in 2000 to 72 per cent in 2022.

Did pension funds kill the UK equity market? And how can they be harnessed to revitalise it? Email me: harriet.agnew@ft.com

Five unmissable stories this week

Bridgewater Associates is set to cap investments in its flagship vehicle and cut about eight per cent of its workforce in the most significant shake-up of the world’s largest hedge fund since founder Ray Dalio ceded control of the firm.

A dozen big US financial companies including BlackRock, Blackstone, KKR and T Rowe Price have warned that a backlash against sustainable investing is now a material risk, in filings that show how acrimony over environmental, social and governance principles has become a perceived threat to profits. It comes as Joe Biden is on course to issue the first veto of his presidency after two Democratic senators sided with Republican lawmakers in opposing a White House rule that allows fund managers to consider ESG factors in their investment decisions.

Oaktree Capital is seeking to raise $10bn for a new fund that will help finance large private equity takeovers, taking advantage of a void on Wall Street as other lenders are sidelined. A gambit to raise cash for US rival Carlyle Group’s latest buyout fund has come up short.

Results from two FTSE 100 asset managers show how a challenging year for markets is weighing on their business models. Profits at Schroders dropped 14 per cent last year, while profits at Abrdn fell by a fifth. The middle of the road is where you get steamrollered, writes Lex.

Inflation will remain high because of strong wage growth in much more volatile markets, says Luke Ellis, chief executive of Man Group, one of the world’s biggest hedge funds, which reported an 18 per cent rise in pre-tax profit last year.

And finally

To the Victoria and Albert Museum’s Sainsbury Gallery, where the tremendous touring Donatello retrospective has arrived in London — the UK’s first show ever devoted to the artist.

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