Ken Griffin From Starting a Hedge Fund in His Dorm Room to Billionaire Investor

Which brings me to a quote that describes the ethos of Citadel: things may come to those who wait, but only those things left by those who hustle. Now, here's what I really love about this quote. Who said this? I went off to Harvard to study economics, and in the middle of the winter there was a great story published in Forbes about Home Shopping Network. Now, Home Shopping Network was going to change the world, or so said the bulls who bid the stock up 500% from the time of the IPO. But the author, Gretchen Morgenson, made a compelling argument that the stock was a fad and ripe for a correction. I really liked her argument, and I bought two put contracts on Home Shopping Network, effectively betting the stock would fall. And fortuitously, within days of doing so, the stock did collapse, and I made a few thousand dollars, which as a college freshman is all the money in the world. Now, when I went to liquidate my options, the market maker paid me 50 dollars less than their intrinsic value. And his trading approach really got me interested in learning about the pricing of derivatives. I used to walk across the river to Harvard Business School, where I'd spend hours in the library reading books on derivatives and trying to understand the pricing and financial theory behind derivatives. And I came across a strategy known as convertible bond arbitrage. Now, I'm in Boston, I'm a kid in college, I'm pretty resourceful. I called a broker at First Boston to ask for advice on this strategy that I came across, and this gentleman, Doug Snyder, was quite generous at this time. They said, look, this is really not a strategy that our clients do, but the firm does it with our own money. Now, I may have been young, I may have been naive, but I was no fool. If this is good enough for the firm's money, this is what I want to do with my money. So with two friends, we started a small hedge fund in 1987. We raised $265,000 from friends and family, and yes, I started it in my dorm room. Now, I was armed with all the modern technology: I had a fax, I had a phone, I had an IBM PS2 personal computer, and it is true I put a satellite dish on top of the building, ran the cable through an old unused elevator shaft, pulled it through a window and into my dorm room, so I could have real-time stock quotes. I had all the technology to begin my career as a hedge fund manager. And it was the perfect fit for me. It was a chance for me to marry my interest in the markets with my passion for technology, technology that was used to compute the pricing relationship between convertible bonds and the underlying stock. Now, we started just weeks before the crash of '87. I didn't see the crash coming, but the portfolio that I had built would benefit from periods of market volatility, and volatility I did have. The portfolio did well, and people took note. And soon we were managing a million dollars of capital. Now, as I approached graduation, something very fortunate happened in my life. I was introduced to Frank Meyer, fellow Chicagoan. Frank was the co-founder of Glenwood Partners, based here in our great city. He was also a pioneer investor in hedge funds, and he offered me an opportunity to come to Chicago and to join him at Glenwood. It was a pretty simple proposition: I could manage a small pool of capital for Glenwood. If I did well, I could leave, I could start my own firm, and he'd be my partner in doing so. If performance wasn't so good, I would pick a different path in life, as he said, you can always go back to business school. But Frank offered more than capital and more than moral support; he gave me great advice. He said, don't focus on just a single investment strategy. Focus on building a firm, a platform that attracts the best and brightest people and that deploys capital across an array of investment strategies. Think big. And I took his advice to heart, and I spent a lot of time focusing on hiring the best and brightest people. Well, with Frank's support, in November of 1990, I did launch Citadel. And within a few short years, Citadel was engaged in a wide variety of investment strategies such as equity warrant arbitrage, merger arbitrage, statistical equity arbitrage. Let's talk about what hiring the best and brightest looks like in practice. There's great stories. 1998, for example, Jamie Dimon shut down Salomon Brothers' legendary fixed income trading team, and we swooped in and hired five of the seven most senior people from that team. In 2001, Enron collapsed, and the day they filed for bankruptcy, we flew 16 people to Houston to interview every single talented person we could get our hands on. And we picked up some really incredible people. There's a great Enron story: one of the senior professionals there who ran a big part of the trading floor stood up on top of her desk that morning and told the employees at Enron that they would survive, they would persevere, they would make it through this crisis. And she's telling this story with all of her heart and soul. Behind her on the TV is the breaking news story of their bankruptcy filing. It wasn't really her finest moment. But shortly thereafter, we went to Aquila, which had shut down their energy trading operation, and we did something quite unconventional: we paid the company a few million dollars to be able to interview all 600 of their energy trading professionals. And again, we picked up some really incredible people. And they helped us build what is today one of the most successful energy trading operations in the world. And then there's just plain effort. One of my business heads kept meticulous records of the interviews that he conducted over the course of a decade. In 10 years, he interviewed 5,000 people. It works out to two a day, a day in his life: research, trade, manage, interview, repeat. But talent is everything. And if you want to build a great business, I think you need to heed the advice of Jim Collins: get the right people on the bus, the wrong people off the bus, and the right people in the right seats. And the right people are capable of great accomplishments.

On a Sunday morning in the summer of 2007, one of my partners received a call from one of the two heads of Sowood Asset Management, a competitor based in Boston. Sowood had a very large and complex book of credit-related instruments. And as the credit crisis started to unfold, they found their portfolio did not behave as expected. They had lost hundreds of millions of dollars in the blink of an eye, and they needed to liquidate almost all their portfolio before the open of business on Monday to meet margin calls. We assembled a 50-person team as fast as we could. We flew eight people to Boston to facilitate due diligence and information sharing. To acquire some or all of their 30 billion dollar portfolio overnight was going to be a Herculean task. Now, Sowood had brought in another large bank to provide a competing solution, or potentially to partner with us. We worked feverishly through the day and into the night. And I still remember that night. The senior point person on the deal from the other bank calling me from what I'm sure was a beautiful house in Greenwich—and it was certainly a beautiful house in Greenwich—and he said, look, it's getting late, this isn't going to get done tonight. I'm heading off to bed. I'm telling my guys to go home, and we'll pick this up in the morning. And I said, there will be nothing to pick up in the morning. We're going to get this done. He sort of laughed and hung up. At 6 a.m., before the opening of the markets, we bought that entire portfolio. We bought the entire portfolio, solving Sowood's crisis. Which brings me to a quote that describes the ethos of Citadel: things may come to those who wait, but only those things left by those who hustle. Now, here's what I really love about this quote. Who said this? It was one of our country's greatest leaders. It was President Abraham Lincoln, who like us calls Illinois home. Going the extra mile, doing what it takes, always being active—this is what has driven our success. It often seems chaotic, frenetic. It's not like the well-oiled machine you envision when you read the business books. It's not. I remember discussing the topic of what great businesses felt like with Jack Welch's former head of Human Resources. You know, GE bought hundreds of companies; they've seen it all. They've seen great companies, they've seen bankrupt companies. And I asked, what do the great companies feel like compared to the bankrupt companies? I really wanted to know. And they said, look, the great companies all felt pretty much the same. He said, imagine you're in a Formula One car, and you're hurtling down the straightaway at 225 miles an hour, and the corner's coming up. And you're full on the brakes, the tires are squealing, they're locking up. You're trying to pull the car around the corner. You're sliding up towards the wall. Just missed the wall as you get through the corner. And then you're back on the gas, hurtling towards that next corner as fast as you possibly can. He said, that's what our great companies all felt like. It's a sobering moment. I said, well, what did the companies that you bought out of bankruptcy feel like? He goes, oh, that's easy. Picture you're in a big Cadillac, tops down, the sun shining, and you're going down the road in Texas on the highway at 60 miles an hour. And you know everyone says those companies, jeez, what happened? You see, great companies are always pushing themselves. They're always on the edge. And the great firms are never satisfied. Now, with great talent and great execution, you are still going to face challenges that will test you—decisions you'd rather not make. In the 24 months preceding 2008, we earned 13 billion dollars of trading profits. I'll put this in perspective: that's more money than Amazon.com has made in its entire history. We had built one of the world's most successful trading operations, and we ran one of the largest balance sheets outside of the banking system. Our success drove our confidence. More profoundly, it drove our overconfidence. And not foreseeing the financial crisis of 2008 was the greatest mistake of my career. You see, we are paid to see the unforeseen. And I did not grasp the magnitude and depth of the financial crisis that was growing in our banking system—a crisis so large that virtually every bank in America would have failed if the government had not intervened. Every bank would have failed. And after Lehman failed, we found ourselves fighting for our very survival. We were caught in the maelstrom. We were losing hundreds of millions of dollars a week, if not more. CNBC parked a van in front of Citadel waiting to break the story of our demise. But we weren't going to give them that story. You see, each day we took the steps needed to keep our business going. We sold assets. We closed business lines. We let people go. We suspended redemptions. Our management team absorbed 500 million dollars of costs on behalf of our investors to demonstrate our commitment to the business and our belief in the future. And each thing we did bought us one more day. And day by day, we bought ourselves a future. Often the choice was between painful and more painful, but the one thing we didn't do was put things off. By the end of 2008, we had lost half our capital, but we were still in business. And we kept our team. And our team kept fighting to buy another day. You see, with the right people, with the ability to execute, and with the willingness to make the tough decisions, we were able to save our firm. I believe Andrew Carnegie was right when he said: take away my factories, my plants, take away my railroads, my ships, my transportation, take away my money, strip me of all these, but leave me my people, and in two or three years I will have them all again. We know these three principles are true everywhere: great talent, great execution, a willingness to confront difficult choices. We know these ideas apply universally.