Ken Griffin: How Talent and Technology Are Shaping the Markets

Thank you for joining us. I thought we would just start with, just put together the puzzle of Citadel for us. You've got quantitative strategies, you have a market maker, you've got a fundamental business, you've got different brands like Aptigon, Surveyor. Just give us a sense of what's the overall topology of Citadel.

So it's a great question. So first, thank you for having me here today. The three areas you spoke about—the fundamental strategies, the quantitative strategies, the market-making businesses at Citadel—are all very different from each other. But in the differences between the businesses, there's actually an incredible amount of learning and transference of insights across those activities. Insights in terms of risk management, in terms of how does one manage their transaction costs in trying to get into and out of portfolios. And of particular note, our fundamental research effort is just a never-ending set of opportunities for us to really think deeply about the alphas that we use in our quantitative strategies.

So the judgment of humans—and you can think about this when you're a quant strategist and you're looking at very good visualization tools—the ability for the human mind to wrap itself around a problem is still the ultimate solution in the world. It's far better than AI, machine learning. It's far better than our best mathematical techniques. And we have that large fundamental business. We have just an enormous number of insights in terms of how the world works. So at the core of our business is our fundamental business. But supporting that, the deep quantitative know-how we have is really powerful in terms of constructing better risk-managed portfolios, superior risk management, great return attribution, and trying to understand some of the behavioral biases that humans have.

So where do humans tend to make mistakes because of our own innate risk aversion, and other dynamics that come into play?

It's really unique. There's really, I can't think of another firm that is in the microstructure with market making, human sort of bottoms up work, and systematics. Really your perspective as we dig into the conversation is gonna be fascinating. First we'll just start with something a little softer. As you've gone from four million of assets under management to 29, 30 billion, taking a step back as an investor and as a leader, what's been one of the more sort of lessons learned and kind of humbling aspects of building a franchise that is best in class?

We don't have enough time today to cover all the humbling moments over that 30-year journey. I can start with 2008 and end with that one word, and everyone knows what the word 'humble' means. "The conference call, yeah." Yes, yes. This is actually a funny technology failure. We had a conference call at the height of the financial crisis to talk about the financial conditions at Citadel. And we arranged the call to handle roughly 2,000 incoming callers. Now, we probably had 50 bondholders in total. But we knew this number would get passed around. People would want to hear how things are going. And there's always an interest on the highway. You see a car crash; everyone slows down to look at that car crash.

And this was our car crash moment. The conference call failed. There were so many people calling in that they overwhelmed the 2,000 caller allocation within minutes. The whole call just comes crashing down. So that was one of our better operational risk moments, trying to give the market confidence that we're going to navigate through '08 as the conference call comes to a grinding halt. So with that as a backdrop, nothing has been more important to the success of Citadel over 30 years than the incredibly talented partners that we've been able to recruit over the years. And not just recruit from America, but to recruit globally. The head of our equities business, our biggest equities business, is from the United Kingdom.

The head of our commodities business is from Australia. The head of our market-making business grew up in Beijing, China, went to college in China. I'm very blessed to have partners who really are amongst the most commercially savvy and insightful individuals in the world at Citadel. And the constant focus on talent, I think, has been just a huge driver of the longevity of the firm. Very few hedge funds make it past a few years. And for us, our continued ability to just recruit junior talent and develop it, senior talent, and let it flourish has been just fundamental to our success. That's first and foremost. The second challenge is maintaining a culture of meritocracy. We all know those moments in this business where things seem to be going really well.

They're rare moments, and through the lens of 30 years, those are few and far between. We've all had those moments, but they are few and far between. In those moments, you will sow the seeds of your own demise. Because it's easy in those moments to start to drop the bar on excellence that you need on a go-forward basis. Very few individuals that we would hire from college, for example, would have the ultimate skill set to be an equity portfolio manager. So, to cut to the chase, you need to hire a tremendous number of very bright, up-and-coming talents. But you're going to learn that many of those individuals cannot make it to the ultimate jobs of either your business leadership or your portfolio managers, and you need to have appropriate parting of the ways over time.

What do you think are the success factors at this moment in time in the investment management industry that are determining the winners and those that can't turn the corner?

Well, that's very simple. It's: what is inherently your competitive advantage? So if you were a retailer, how do you outmarket the competition? How does your pricing strategy drive sales and drive a bottom line that's acceptable? We often forget, as we invest in companies across the world, that each of our investment firms is a business. And you have to look yourself in the mirror and go, 'What is my competitive advantage? Where do I excel versus my competition? What do I push on that dimension to win? Where am I weaker compared to my competition? And I should either make the investment to improve or to withdraw.' And it's almost shocking to me how few portfolio managers really appreciate that, at the core, that is what they have to do.

They have to—they themselves can't just criticize other management teams that run public companies. They gotta take a step back and go, 'What do I need to do? What do I need to do with the talent base and resources around me to be an effective competitor?' And at the end of the day, it's incredibly difficult to be an effective competitor in financial services because it has drawn so many bright people into the field. It is an incredibly competitive backdrop in which one plays. And there is only so many different degrees of freedom that you can use to create that advantage.

And so if you have it, are we going to see the big get bigger and effectively concentrate alpha in a smaller number of places?

If they can continually regenerate their competitive advantage. And that's the really important question. So, for example, if I look at our fundamental equities business, which is one of our crown jewel businesses—I mean, its success over the last 18 years has been superlative—I still face the reality that 16, 17 years into a career, people face burnout. How many Intel management meetings do you want to go to? How many conferences do you want to go to? How many presentations do you want to see? The challenge is these really bright people that are attracted to our firm, their intellectual curiosity at some point leads them to want to do something new. All right, so in our equities business, one of the key competitive advantages is that ability to continually groom the associate to be the analyst, the analyst to be the portfolio manager, and to keep that human capital treadmill going.

The second really important dimension is to understand in each company in which we invest, what are the key factors that are going to move prices that we can predict faster and better than those with whom we compete? And then it's concentrating our research effort against those criteria.

So I want to take a step back. When you look at technology and the transformation of its role it's played, I've always been really impressed by just how forward-thinking Citadel's been about technology, both in trying to externalize it, but also using it for an advantage. Describe your strategy around technology and the growth of Citadel.

So I would say that, by background, I grew up in Boca Raton, Florida, where IBM developed the IBM PC. I had an IBM PC back in high school. I'm going to date myself. This is like circa 1983. And you could buy— In Boca Raton? Yeah, that's where they developed it. That's a whole other story. Yes, the Intel chip dominated the Motorola chip because it had an 8-bit bus that would work with cheaper peripherals. And ergo, Intel rules the world and not Motorola. Wow. Don Estridge, brilliant marketer. And I had one of the early PCs, learned macro assembly, a variety of languages, because there wasn't much else to do on a computer other than program it. So I was really just fascinated with how to make this machine do something.

And had a background in mathematics, went to college. How can I apply this sort of nascent use of technology? And we're still at the early days of options pricing theory. How can I apply that to financial markets? And convertible bonds became my area of interest—niche product, not a lot of competitive intensity. And, as you know, one of my friends was at one of the big investment banks, and I hired our first quant, who was a Russian rocket scientist, and he himself was from Russia. My friend at the investment bank—and he calls me, goes, 'That's the dumbest thing I've ever heard. Who would ever hire a Russian rocket scientist to model securities?' All right, that tells you just how long ago this was. Yeah, many a firm since then.

Yeah, many a firm since then. But those are the early days of Citadel. How do we apply financial models and technology to identify opportunities in the financial markets? Jump forward 30 years. Right, today we obviously still do that, but we really think about the technological capabilities that we bring to the table as being systems in our fundamental businesses that drive better decision-making. So, for example, our portfolio managers—and this is, this will sound trite—but having outstanding risk systems and outstanding P&L attribution gives them far more confidence when they're drawing down than the blindness that's common at so many of our competitors. We can go, we know exactly where we're losing money idiosyncratically.

These are the bets. Here's your portfolio breadth. Here's a variety of health metrics in your portfolio. Here are some things you might want to do to help manage your downside tails at this point in time. In real time. In real time. And let's try to get back to an offensive footing. All right, so over my years, what I've seen is my portfolio managers switch into defense mode. I'm better off just writing the check right then and there to somebody. We're going to lose money. Portfolio managers playing defense, that's a terrible place to be. You need to get back to an offensive tilt as fast as you can. But our portfolio managers having really good diagnostics on their portfolio, really good return attribution information, they're just more confident.

And that confidence, I can't emphasize enough. If you look at our best stock pickers, their hit rate in idiosyncratic space is roughly 52-48. If they were brain surgeons, they'd have no patients. We've literally picked a career where my best colleague's win-loss rate is just over 50-50. It just eases you every— On the fundamental side. On the fundamental side. Okay. You said our businesses aren't any better. 55, 45, 52, 48. All right. Lots of volume. You've really got to do everything you possibly can to engender and create confidence.

That's interesting, so you're connecting technology to confidence.

To confidence. And then we use it in a whole litany of ways: managing incoming data from the street, research reports. How do we make the desktop for the analyst as productive as possible? How do we make sure that we're going to the right management meetings at the right time? Everybody can't do every meeting available to them. It's a poor return on invested time. Sure. So we think a lot about our technology suite as being productivity maximizing for our analysts and PMs, because the scarcest resource we have are talented analysts and talented PMs. And if I can make them 10 or 20% more productive, that is a windfall gain for us.

Ken, I always get smarter every time I talk to you, and today is no exception. So thank you very much. Of course.

Raj, thank you so much.