Citadel employees have significantly increased their investment in the firm’s $45bn flagship hedge fund over the past four years, driven by strong returns and compensation lockups tied to performance, according to a report by Bloomberg.
The report cites regulatory filings as showing that the combined stake of Citadel’s principals and staff in the Wellington fund rose to 20% by the end of 2023, up from 12% in 2019. In dollar terms, their investment has more than tripled to around $9bn during this period, including the holdings of Citadel’s founder, Ken Griffin.
The growth highlights how Citadel is balancing rewarding its team and retaining top talent during a period of stellar investment performance. Wellington, Citadel’s largest fund, delivered annualised returns of 25.9%, resulting in higher payouts for portfolio managers, who are required to leave about half of their incentive bonuses locked in the fund for three and a half years.
Ed O’Reilly, head of Citadel’s client and partner group, said: “Our employees have invested in our funds for over 30 years. The alignment of interests with our external capital partners underscores our commitment to building a lasting franchise.”
However, there is a downside to Citadel’s success for investors in so far as some of the firms funds can only handle a certain amount of capital before performance starts to wane, meaning that for decades, the firm has returned profits to investors annually, including $6bn from Wellington in 2023 alone, leaving the fund with $44.8bn at the start of this year. In contrast, employees’ deferred compensation remains invested until their lockups expire, giving them an advantage as the fund grows.
In addition to deferred compensation, Citadel allows principals to make voluntary investments in its funds. Over the past five years, assets in two of these vehicles, CEIF and CEIF Partners, have doubled to about $5bn. Employees pay the same fees on their invested cash as external clients.
Griffin, 56, remains the largest individual investor in Wellington, with his stake in Citadel Advisors and its funds accounting for almost half of his $41.8bn fortune, according to the Bloomberg Billionaires Index.
The growing employee stake in Citadel’s funds reflects a broader shift in its capital base. Over the years, the firm has replaced money from funds of funds with capital from institutional investors, such as charities and universities. By the end of 2021, institutional cash peaked at 60% of Citadel’s net assets, up from 41% five years earlier, while funds of funds dropped from 32% to 9%.
Since then, employees have become the fastest-growing segment of Citadel’s investor base, rising to 29% of total assets by mid-2023, compared to 21% at the end of 2021. Meanwhile, institutions now account for 54% of overall assets, down from their peak but with their holdings still growing in value as Citadel’s net assets surged to $64bn.
The increase in deferred compensation also makes it more difficult—and expensive—for competitors to lure Citadel’s traders and portfolio managers, with recruiters often having to compensate new hires for deferred pay they leave behind when switching firms.
