Citadel and Its Peers Are Piling Into the Same Trades. Regulators Are Taking Notice

Even Ken Griffin is a little worried.

Multimanager funds like Griffin’s Citadel have come to dominate the hedge fund industry, riding a steady run of outperformance to oversee more than $1 trillion, including a healthy dose of leverage. But the explosive growth has led the industry giants to pile into many of the same trades.

That has built unease among regulators, investors and traders over these so-called pod shops. And while Citadel’s billionaire founder has vocally opposed any notion that his firm and rivals pose systemic risks and need more regulation, even he acknowledges that crowded trades could lead to widespread losses if all of them head for the exits at once.

“Could you see the multimanager hedge funds take a joint 10, 15, 20% hit to their equity? It’s possible,” Griffin said during a Nov. 9 interview at a Bloomberg conference in Singapore, calling such a drop “painful, but not systemic.”

Citadel, Millennium Management and Balyasny Asset Management are the leaders in a strategy that divvies up money across dozens or even hundreds of teams that operate somewhat independently across a range of markets and strategies.

Their success in the past several years has drawn new investors and competitors. Yet overcrowding in some bets, increased market volatility, an expensive talent war and lower returns this year have prompted market participants to question whether the world of high finance is approaching peak pod.