The hunt for the next LTCM

April 01, 2011   Lawrence Delevingne


Washington has a big new oversight mandate, but hedge funds think it would be crazy to call them systemically important

In autumn 2008, Citadel seemed about as big a threat to the global financial system as a hedge fund could get. Ken Griffin’s firm had counterparties across the financial world and was big and highly leveraged—the three red flags of systemic importance most often cited by regulators looking to avoid another financial meltdown.

Citadel’s tentacles extended to more of Wall Street than the typical hedge fund, given its market making, stock loans and administration businesses. With $20 billion under management as of mid-2008, the firm was the 12th-largest American hedge fund. And Citadel was purposely heavily indebted, with gross leverage in January 2008 of 8.2 times capital.

Arguably, these reasons are what gave traction in the crisis days to wild, unsubstantiated rumors, all denied by Citadel, that the Federal Bureau of Investigation had been poring over the firm’s books and that the Federal Reserve was engineering...

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