Managers Signing Up for Citadel’s Know-How
A Citadel unit that sells the firm’s investment technology to other hedge funds is adding clients at a rapid clip, less than a year after it began marketing.
The Chicago-based operation, Citadel Technology, had only a handful of customers when managing director Stuart Breslow took the helm in September 2012. Since then, the unit has more than doubled its client base, including a mix of fund operators and institutional investors. Breslow, previously chief executive of ConvergEx RealTick, oversees a staff of 30. The unit operates independently of Citadel’s $13 billion hedge fund business.
It’s unsurprising that other asset managers would want to license trading, portfolio-management and risk-management technology that has helped Citadel’s funds reap billions of dollars of investment gains over a period of about 20 years. But a few former Citadel investors pointed out that the technology was developed over time largely on the dime of limited partners, who are charged for fund expenses on a “pass-thru” basis. Citadel retains the rights to the intellectual property it develops, whether as part of its hedge fund business or other operations.
“You have a third party paying for it and you capture all the upside,” said a former investor, noting that managers have little incentive to keep expenses down with a “pass-thru” structure versus a fixed management fee. Citadel’s expense charges, assessed as a percentage of investors’ assets, are known to be in the mid-single digits or higher, compared to an industry-standard 2% management fee.
Fund operators commonly pass along technology and other infrastructure costs to investors. But Citadel has been more innovative than most of its peers in turning expense items into profit centers. The firm previously formed a fund-administration unit called Omnium and, in the aftermath of the financial crisis, started a brokerage business called Citadel Securities. Citadel sold Omnium to Northern Trust in 2011 for roughly $100 million.
The genesis of Citadel Technology dates to 2009, when a prospective Citadel investor paying a due-diligence visit to the hedge fund liked what it saw and struck a deal to license some of the technology. A year later, a European pension fund also signed a licensing deal with Citadel.
But it wasn’t until Breslow’s arrival last year that a formal marketing effort got under way. The unit’s sales team includes Elizabeth Campbell. Another salesman, Charles Garcia, left earlier this year.
Clients can access the technology by installing software or through the web. It is applicable to all asset classes and supports multiple prime-brokerage relationships.