Is Citadel unstoppable?
Barring SEC investigations, news of fraud, and a change in leadership, is Citadel unstoppable as the pre-eminent hedge fund nowadays? Their market neutral trading strategies, aggressive risk-management, and pod setup with diverse strategies has helped them not only weather the volatility of recent years (which has wiped out a lot of other big name shops) but also means that their downside risk is minimized while they can aggressively move to take advantage of upside opportunities. The entire company is run highly efficiently and anyone who isn't up to standard is quickly replaced. Is Citadel unstoppable or are there any potential weaknesses in their business model or the macro environment that can bring about their downfall?
Only global warming can stop them (Miami)
Subpar technology, at least on the quant side, is going to take a toll. Middle management not great imo. Also didn’t they have large losses (firm wide) due to bonds going crazy in March 2020?
wellington was up 24% in 2020
For full year, yes, but they were getting crushed before the fed bailed them out and could have blown up
I'm curious, do you mind elaborating or providing sources on your point about their subpar tech? I thought a company like Citadel would have the resources and the drive to stay on top of tech, considering how important quant/electronic trading is to their business.
This is interesting to me - I know CidSec has some of the best infra in the business, and I'd imagine they would share this (common data sets / Execution / etc ) to a degree with the pods at Citadel due to the great economies of scale w/ this sort of thing. Is this the case?
There’s supposed to be a wall between the market making business (CitSec) and the principal risk taking hedge fund - they’ve gotten a lot of looks from the SEC so I’m sure they are wary of anything that looks bad.
I think the point about antiquated tech is about the quant/HFT team in comparison to the Jane Streets, Two Sigmas, and RenTechs. Citadel is definitely a step below pureplay proptrading setups.
I was referring to quant (only space I know). For some MMs, (multi managers), they centralize common quant resources (simpler vwap execution / crossing, common optimizers, datasets like pricing and ones common from vendors) - I was surprised that citadel doesn't do the same for their quant books under the hedge fund structure. Just a bit surprising as doing that is a) not too hard as the work is likely already done b) makes things MUCH more appealing for PMs (always have the option to do things yourself, but having the boilerplate stuff done for you is very nice)
You don't need the best tech to be a great market maker if you can capitalize on your alpha instead of your latency. I think CitSec is on par with Jane Street, likely ahead of the others there
Citadel is massive so it's this might not apply everywhere, but generally what I've heard is that their codebase isn't in the best condition as a result of high turnover among programmers. This clearly hasn't stopped them from crushing it, but this, along with internal politics, are the biggest gripes I hear from people that worked there.
Citadel is obviously a great business but I think Ken has a penchant for taking excess risk (e.g. 2008). They have been venturing into many illiquid strategies (e.g. physical commods). Usually when people start asking if a fund is unstoppable that means something bad will happen.
and since 2008, don't believe they've had a down year. IMO pretty safe to say ken & co learned from that experience and won't be replicating it.
They scrapped the risk model and rebuilt from the ground up. Worked great so far.
Physical commods = illiquid, so it’s inherently a bad strategy?
They're unstoppable because if you have a 2% draw down they take you out back and shoot you in the leg. 3% and they shoot you somewhere else.
Yes but that seems to be working for them, no? Aggressive risk management and market neutral strategies seem to be carrying them very far.
That's my point.
Suprised no one has mentioned Cit Sec which, in my view, is really what makes them unstoppable. A few bad years can be enough to seriously hurt FUM for a Hedge Fund (particuarly where fees are incredibly aggressive). However, the moat they have around the Securities business is unbelievable.
What do you see as the primary moats for Cit Sec and why do you think competitors haven't developed them first?
They own through PFOF a vast concentration of retail trader bid/ask orderbooks and can much better profit off of the spreads there (retail traders are extremely inelastic to spread width and extremely profitable to market make). This is contractually guaranteed exclusivity and first-mover incumbency. Also network effects given that counterparties want their retail flow executed ASAP and with minimal inconvenience.
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