As I drove down to London over the weekend to see some friends, I passed a large bill board advertising the services of Black Rock, a global investment manager. Their tag-line message is not particularly revelatory, but it really struck home and I have been contemplating it ever since: ‘OPPORTUNITY FAVOURS THE PREPARED MIND’.
On a separate note, the weekend edition of the Financial Times ran an interesting article on recent disclosures of expenses by Citadel, a top-tier hedge fund. Last year, the group paid more than $5.5bn in interest, fees, and other investment costs, and yet Citadel’s two funds have net assets of just $13bn (approx). These costs are unbelievably high and certainly help to explain why investment banks will often go out of their way to service hedge funds over other businesses (corporates). The FT notes of Citadel ‘it’s costs are high because it’s managers trade frequently and take on huge leverage.’ Indeed, once debt is factored in, the group’s gross assets tally up to some $166bn, a leverage multiple of 12.5x. Frequent trading and excessive leverage often destroys small traders, but Citadel’s disclosure reminds me that is not leverage and frequent trading per se that is the problem, it is the trader and their strategy or behaviour, or both. If a particular strategy displays very strong performance metrics, I believe it is logical to exploit this proven advantage to the fullest extent possible, without going over the edge.
Citadel was set up in 1990 by Ken Griffin, who is just 38 years old. The group has an annualised return rate of 26%. For more information on Citadel see this interesting article from Bloomberg.