CITADEL

Ken Griffin on the Economic Landscape and the Firm’s 2018 Areas of Focus

February 2, 2018

Ken Griffin, CEO and Founder of Citadel, recently sent our investors a letter summarizing our outlook on the current economic landscape and the firm’s 2018 areas of focus. We want to pass along some key takeaways, including:

  • Growth prospects around the world remain positive. In the United States, a pro-business regulatory environment and a sweeping tax reform bill have fueled optimism in the domestic economy. In Europe, growth has also accelerated and the rate of unemployment is showing marked improvement. However, some dark clouds potentially loom on the horizon.
  • We will continue to focus on recruiting, developing, and retaining today’s leading investment professionals who exhibit the judgment, intellect, and focus to become the future leaders of Citadel.

The full letter from Ken is below:
 

 

January 31, 2018

Dear Investor,

Citadel had a strong year in 2017. All five of our core strategies contributed to the year’s performance. In 2018, we remain relentlessly focused on bringing together the most talented individuals from across the world to build and sustain the competitive advantages that drive our investment performance.

Looking forward, the macroeconomic backdrop continues to be constructive. Growth prospects around the world remain positive. In the United States, a pro-business regulatory environment and a sweeping tax reform bill have fueled optimism in the domestic economy, and U.S. corporate earnings growth remains strong. In Europe, growth has also accelerated and the rate of unemployment is showing marked improvement. The forward leading indicators we track continue to point upward over the short run. That said, some dark clouds potentially loom on the horizon.

First, quantitative easing is heading into reverse, beginning in the United States. As the U.S. Federal Reserve begins to shrink the size of its balance sheet, yields in the United States will likely climb higher, putting downward pressure on the price to earnings ratios of equities. Second, the U.S. Federal Reserve is raising interest rates to prevent the economy from overheating. We are particularly concerned about the nascent signs of accelerating inflation in many countries around the world, given the general complacency around the risks of an inflationary shock.With the global economy rebounding and resource utilization tightening, we are carefully positioning for the possibility that inflation surprises to the upside. Finally, we must be thoughtful about the heightened level of geopolitical risk that exists and manage our portfolios to be able to withstand the impact of adverse events that may occur, including a trade policy misstep or military conflict.

Over the past three decades, there has been explosive growth in the number of hedge funds and the assets they manage. As is the case following many such growth stories, the industry is now experiencing a period of consolidation. In the past three years, it is estimated that more than four hundred more funds were shuttered than launched. Firms that are unable to sustain a source of competitive advantage are falling by the wayside. In the hedge fund industry and across the broader economy, we are increasingly witnessing a winner-takes-all dynamic at play. Economic profits are accruing disproportionately to industry leaders.

We are well aware of the challenges inherent in this dynamic and continue to focus on building competitive advantages in the areas that drive our investment performance. We strongly believe the quality of our people underlies our ability to compete. We seek to recruit, develop and retain today’s leading investment professionals and those who exhibit the judgment, intellect and focus to become the future leaders of Citadel. I believe our team today is the strongest it has ever been.

As always, we deeply appreciate the trust you place in us to manage your capital and are grateful for the opportunity to continue to do so. I am confident that Citadel’s best days are still ahead and look forward to our continued partnership.

Sincerely,

 

Ken Griffin