What's the Link Between Top-Earning Hedge Fund Citadel and GameStop Stock?
By Bernard Zambonin,2023-01-25
Ken Griffin's Citadel fund made record profits during the past year. However, two years ago, the fund was involved in a controversy during GameStop's short squeeze.
- 2022 was phenomenal for Citadel's flagship hedge funds, which posted a record annual profit of $16 billion and outperformed all hedge fund peers.
- In January 2021, Citadel was involved in GameStop 's massive short squeeze and has been the target of criticism from retail investors ever since.
- Last year, Citadel's Ken Griffin said in an interview that the decline of speculative assets like meme stocks, cryptocurrencies, and NFTs is healthy for the economy.
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The Best-Performing Hedge Fund of the Year
In 2022, hedge funds lost 6.5%, making it the worst year for returns since 2008, according to Reuters . However, for the Citadel hedge fund, the story was quite different.
The hedge fund company, which is run by Ken Griffin, had the best annual performance in its history during 2022. It posted profits of $16 billion and reported $62.3 billion in assets under management.
For example, the Citadel Wellington fund returned 38% in profits, outperforming peers such as D.E. Shaw, which returned 24.7%, and Millennium Management, which returned 12.4% over the same period.
Key to Citadel's successful strategy was its exposure to bond and forex movements, along with a broader diversification model among other assets. However, Ken Griffin made it clear that the secret to his fund's excellent performance is the excellent collective work of his team.
Griffin said that his staff's high level of collaboration and engagement to assimilate relevant macroeconomic news is also justified because they all work in the same physical space, unlike many competing funds where staff work remotely.
However, even with its extraordinary performance in 2022, the fund has been criticized by retail investors on social media platforms due to the hedge fund's involvement in GameStop's short squeeze event in 2021.
Another reason for retail investors' skepticism is also due to Ken Griffin's connection to Citadel Securities — one of the world's largest market makers — which he also owns in parallel with the hedge fund.
Citadel on GameStop's Short Squeeze Event
In January 2021, video game retailer GameStop 's ( GME ) - Get Free Report stock climbed about 2,000% to all-time highs. The event was caused by a massive short squeeze and had drastic consequences for short sellers. At the time, about 140% of GameStop's outstanding shares were being sold short.
The short squeeze was caused by a socially mobilized investing movement, triggered by retail investors through online forums on Reddit. This event even became the subject of a Netflix documentary called Eat the Rich: The GameStop Saga .
At the time, one of the largest hedge funds that had a sizable short position in GameStop was Gabe Plotkin's Melvin Capital, which took billion-dollar losses on the upward movement of GameStop shares.
However, Citadel comes into this story because during the height of GameStop's short squeeze, Melvin Capital received a $2 billion investment from Citadel.
Furthermore, during GameStop's short squeeze, Citadel Securities, which was also founded by Ken Griffin, was involved in a payment-for-order-flow controversy with commission-free broker Robinhood ( HOOD ) - Get Free Report .*
When Robinhood halted the trading of GameStop shares, many users of the platform alleged that Citadel Securities may have instructed Robinhood to do so. The market maker even ended up issuing a statement defending itself against an "absurd story":
This ended up involving the two parties in a hearing held by the House Financial Services Committee . However, the outcome was positive for Ken Griffin, who denied any misconduct.
In November 2021 the U.S. District Court dismissed a class action suit against Robinhood and Citadel, ruling that there was no evidence that the two had colluded. The matter was closed.
Ken Griffin Is Not a Fan of Meme Stocks
In addition to Griffin's involvement in the GameStop short-squeeze event, the Citadel owner's recent remarks regarding meme stocks and other speculative assets have further received criticism from retail investors on social media.
First, Griffin criticized the stance of retail investors who participated in the meme-stock craze of early 2021 for contributing to Melvin Capital's downfall.
In a Bloomberg conference call, the Citadel owner said, "It's not Gabe's money you're taking. You are taking the money out of a pension plan that belongs to a teacher… You are taking the money out of a pension plan that belongs to a teacher."
Last September, Ken Griffin said in an interview with CNBC during the CNBC Delivering Alpha conference that losses in meme stocks and other speculative assets are healthy for the economy.
The Citadel owner partly blamed the speculative bubble on the U.S. government response to COVID. According to Griffin, the huge amount of money given to households ended up in speculative assets such as NFTs, cryptocurrencies, and meme stocks.
According to Griffin, billions of dollars were invested in companies that will fail. This money could have been better used for nobler purposes such as treating Alzheimer's or Parkinson's disease or educating children.
*Updated on January 30.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)
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