06/10/2009

Citadel Fund Carries Novel High-Water Mark


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CORRECTION: A June 10 article, "Citadel Fund Carries Novel High-Water Mark," incorrectly reported the liquidity terms for Citadel Investment's two main funds, Kensington Global Strategies and Wellington. Citadel offers two options. One permits investors to redeem any amount of capital once every two years with 90 days' notice, and to withdraw profits annually. The second option allows quarterly redemptions with 45 days' notice, so long as total redemptions from the fund don't exceed 3% of assets. If the 3% threshold is reached, investors can redeem no more than one-sixteenth of their money at a time. If they wish to withdraw more than one-sixteenth, then they face a 5-9% penalty. The liquidity terms will go back into effect once Citadel lifts its suspension on redemptions from the two funds.

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Citadel Investment, whose multi-strategy funds remain underwater after falling 55% last year, is about to launch a single-strategy fund with an unusual high-water-mark provision.

Ken Griffin's $11 billion hedge fund firm has begun pitching a long/short equities vehicle it plans to launch next month. According to a marketing document, Citadel Global Equities Fund will charge a 2.5% management fee and 25% performance fee.

If the new fund falls below its high-water mark, it will still charge a performance fee, albeit at a reduced rate of 12.5%. The lower rate will remain in effect until the fund has earned back 250% of the drawdown. If the fund were to lose 20%, for example, it would have to gain 63% before it could resume charging the full 25% performance fee.

Citadel's two main vehicles, the multi-strategy Kensington Global Strategies and Wellington funds, charge no performance fees if assets drop below the high-water mark. In the wake of last year's losses, the funds faced a 122% climb before they could resume charging a 20% performance fee. They are up 21% so far this year. The two funds have a combined $8 billion under management.

Citadel plans to pitch the new fund at a Goldman Sachs capital-introduction event next week in New York. Citadel is launching the fund now because equities have been a strong driver of recent gains in its multi-strategy funds, and investors have expressed interest in a single-strategy vehicle targeting stocks.

The new fund would offer monthly liquidity with no lockup period. Investors would be allowed to redeem up to 16.7% of their shares each month with 45 days' notice. They would thus be able to withdraw 100% of their investments after six months.

Citadel suspended redemptions from Kensington and Wellington last year, although the firm may begin honoring withdrawal requests in the third quarter. Once the current redemption orders have been satisfied, the funds are expected to return to their previous liquidity terms, which offer investors two options. One requires a two-year notice for withdrawals. The other allows investors to withdraw up to one-sixteenth of their money every month, so long as total redemptions from the fund don't exceed 3% per month. If the 3% threshold is reached, investors must pay a fee to withdraw.

In preparation for the new fund, Citadel has reorganized the team that manages equities for Kensington and Wellington. The group includes 11 portfolio managers, 30 analysts, nine senior associates, 16 associates and eight senior traders.

Brandon Haley, Jeff Runnfeldt and Steve Weller will serve as managers for the new fund. Haley will be based in New York, Weller in Chicago and Runnfeldt in San Francisco. Jonathan Ledden will serve as the fund's chief operating officer.

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