How Does Citadel HF Make $28bn Revenue with $55bn AUM? Multi Manager Economics
Saw the WSJ article mentioning record returns and revenues for Ken Griffin. Good for him!
What I don't understand is how the unit economics of these behemoth multi managers actually work. I only understand bits and pieces from anecdotally reading about it (they run 6-8x+ leverage, they pay pods 20% of P&L, they charge exorbitant fees, the passthrough normal costs on top of fees etc.) But I don't really understand how $100 of LP capital flows through the Citadel ecosystem that ends up generating $28bn in revenue. Would love if someone can explain it / incorporate all the various elements (form / cost / quantity of leverage, pod returns vs. master fund returns, passthrough fees & overall fee structures, do you charge fees on net $55bn AUM or gross levered AUM, Wellington returned 38.1% net then what is the gross return, if average leverage is 8x then is it fair to say average pod returned 38.1/8 = 4.75% for the year or do you do that math on gross return / 8 etc.).
Please explain like I'm 7 years old who just learned how to do percentage math.
I am willing to bet that a good chunk came from Citadel Securities. Where they acted as a market maker for 20% of shares being traded on exchanges. Look up payment for order flow.
This is not true, they also reported securities at 7bn
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Do you charge fees on gross levered AUM? I give you $100, and you somehow borrow another $800 and now want to charge me $18 / 18% in mgmt fees?
If you don't know the answer (I suspect they charge much more than 2/20 given DE Shaw fees are up to 40% perf fees in some funds now), would be easier if you just said "not sure, also interested from someone who knows" instead of wildly guessing something totally wrong.
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They did not make 100bn in raw pnl that doesn't make sense and it says you are in ib, I don't think you understand how this works
You do not charge management fees on levered AUM. That would make NO sense. Imagine being an investor and your fees depend on the leverage the fund takes (and they are incentivized to lever more because they get paid more).
If you say 8+x levered isn't the math that they had 55*10=550bn of capital deployed and made 28bn gross revenue off that. So they made 5% gross on each unit of risk deployed. Then they take like 50% fees and that leaves the net return ?
Revenue here has to mean revenue to investors. The firm then takes roughly 50% fees from that to pay staff and expenses/profit. So it means that the net return was 14bn/50bn roughly
I’m not sure if I’m following your math on how Citadel pulled in $28bn of top-line revenue last year
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I think this would definitely be valuable, if someone who knows these intricacies could break it down.
I'm surprised - no one has a good answer for this? Does no one actually know (even the various people who work at MMs that frequent this forum?)
Say it’s 28bn trading revenue - then investors pay 20% so net a 22.4bn return. Then they pay 1.1bn 2% management fee and are left with 21.3bn. 21.3/55 = 38.7%, not so far off from the 38.1% they were up this year net of fees.
IMO it helps to think in terms of trading profits rather than return %'s etc for pods/teams.
As a trading team, your goal is to maximize trading profits subject to your risk limitations. That may mean very different depending on your strategy - if you are a equity L/S team with 1b of capital (and a 50M drawdown risk limit), it may be difficult to make more than 2-3% or 20-30M in profits if you are truly factor neutral. You might be working on energy, quant or fixed income strategies that have different returns on capitals (but also very different risk profiles).
In the end, Citadel made 28B of trading revenue. So perhaps they returned 5B on 250B of levered capital in the equity business (this would be net of financing/trading costs), made 10B on 30B of capital in commodities trading (inherently levered, and obviously a massive vol year), etc. At a more granular scale, I have no idea how many pods make up the equity business - perhaps others do - but maybe there are 25 pods that sum up to the total 5B in profits or something, perhaps with a few losing small amounts of money. I don't know the numbers so I'm using something to illustrate the math.
From there, the passthrough expenses would cover many costs - salaries/bonuses, data, offices. Suppose data/infrastructure costs 1B, space costs 1B, and total compensation was 20% of trading profits (this depends on each pod/team economics), you get (28-2)*.8 = 20.8 of net profit after pass through expenses. Now investors pay management and performance fees - let's say average 3%/30% (with 50B of AUM), resulting in 13.5B in profits or 27% returns. They have various funds that returned anywhere from 21%-38% - so this would be somewhere in the average of all that.
Why was their AUM 50B and levered AUM 300B (or whatever)? That really just depends on the specific mix of strategies deployed and the total risk. With 50B in capital, they had enough capital to capture this much much profit and operate with acceptable risk limits (necessary given the required leverage in many strategies).
The fact they use the term "revenue" to supposedly describe fund performance tells you the reporter is confused and out of his depth.
"Revenue" can well apply to Securities, or to the fund's GP.. but no one says "the fund I invest in posted X revenue".
Bad reporting.
I don't think it's that bizarre - when you try to describe how some of these HF owner/founders are so fabulously wealthy, the math isn't just how much money they have personally invested in the fund that compounded at x% but also how much total revenue did the GP bring in as Citadel could one day become a publicly traded entity (alt asset managers should be 50-60%+ margins after comp expense and citadel maybe higher? Though it's also complicated by how revenue gets reported then expenses passed through? That's what I don't fully understand).
Gist of this thread is "what does citadel's income statement look like" and potentially how valuable is Citadel HF (ignoring the market maker)
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