Kenneth Griffin - CEO of Citadel | Podcast | In Good Company | Norges Bank Investment Management

If you have a full-time job as a lawyer, dentist, or teacher, you should be in a broad-based equity index product or an actively managed pool of capital that is broadly based in its management; for large institutional pools of capital like sovereign wealth funds, the strategy should be indexing substantial portions to indices while also investing in non-equity assets and using a variety of internal and external managers depending on competitive advantages.

“if you are if you have a full-time job as a lawyer or dentist or as a teacher you should be in a broad-based equity index product or an actively managed pool of capital that's broadly based in its management let's say you were running the Norwegian Sone wealth fund well I I know as a as a factual matter that that you are very thoughtful about indexing a substantial portion of your Capital to indexes that you've developed over the years around the world and that gives you very lowcost exposure to the holistic growth and profitability that we have watched play out around the world in various countries it is a very thoughtful way to deploy the massive quantities of capital that you have to deploy and you're also investing in assets away from equities and then using a variety of either external managers or internal capabilities depending upon what you view to be the relative competitive advantages of the in-house team and the external managers this is how I would recommend any large pool of count Capital to be managed to do what can be done effectively cost effectively inhouse and then to find around the world your best breed managers and the various strategies that give your portfolio diversification”

You cannot determine from a CV whether someone is a good problem solver; you need to meet people in person to assess these qualities, because people know how to write CVs to hit the sweet spot of the employer they are seeking to work for.

“can you see any of this from the CV or do you need to meet people oh you need to meet people I mean let's be clear people know how to write CVS today to hit the sweet spot of the employer they're seeking an employment at”

Great leadership comes down to dealing with the realities of the situation at hand; great leaders are very matter of fact about the problems, issues, and opportunities they face and the decision-making around them, centered in the reality of the situation, not suffering from sunk cost fallacy or undue hope when a situation is not hopeful, making good rational decisions all the time.

“great leaders are just very matter of fact about the problems issues and opportunities that they face and the decision making that they make around the problems the opportunities and the challenges that they face like they're they're just very centered in the reality of a situation they don't suffer from Sun cost fallacy they don't suffer from undo hope when a situation is not hopeful they make good rational decisions all the time”

Gut feeling at the best is subconscious analysis; when people say they believe something in their gut, the question is whether that's their subconscious playing out after many at-bats in that kind of problem where they know roughly what the answer is without fully forming it yet.

“the best gutfield is actually almost like subconscious analysis yeah all right so when people tell me like just in my gut I believe X I'm trying to think about is that their subconscious playing out they've had many at bats in this kind of problem they they know roughly what the answer is they haven't put it down on paper yet but their guts really more of a reflection of an intrinsic ability to analyze a problem and tell you what to do”

The work-from-home phenomenon is unquestionably reducing mentorship, collaboration, leadership development, and innovation, and it is time to bring people back together to collaborate and mentor to avoid a leadership deficit in the Western world 20-30 years from now due to today's work practices.

“the work from home phenomena is unquestionably reducing mentorship collaboration leadership development and Innovation and it's time that we bring our people back together to collaborate and to mentor and to develop leaders so that in 20 or 30 years we're not left we're not left in the very frightening predicament of having a leader ership deficit in the western world because of today's work practices and I worry about that”

A market maker is a firm that provides liquidity to buyers and sellers who are not contemporaneously meeting in the marketplace; when you sell stock, if there is no buyer at that instant, the market maker uses their capital to facilitate the trade and then looks to find the eventual buyer later, doing this at massive scale around the world in fixed income and equity products.

“a market maker is a firm that provides liquidity to buyers and sellers who are not contemporar contemporar meeting each other Marketplace which means that when you go to sell $50 million of a stock if there's not a buyer in the Market at the exact same instant you're not pushing that stock price unduly the market maker will use their Capital to facilitate your trade and then we'll hope to find the eventual buyer of your stock at some point in the future and we do this in a in a massive scale around the world in fixed income and Equity products”

Equity considerations matter with respect to government spending: when governments borrow heavily to maintain current living standards that are not in sync with productivity or with emerging work culture values, they are borrowing from future generations (children, grandchildren, and great-grandchildren), which is unfair as a matter of intergenerational equity.

“there's an incredible Focus around the world today around Equity our our is income inequality for example too high this is an incredible moment of just in some sense um we're borrowing from the future we're borrowing from our children our grandchildren and our great grandchildren right here right now to maintain a standard of living that is not in sync with either productivity or with the culture of work that's emerging across the developed economy it's just not fair as a matter of equity across generations”

The United States is in uncharted economic territory: at near full employment with inflation around 3%, yet the government is engaged in a massive spending binge, which creates hotter inflation than desired and leaves the United States in a more precarious long-term position with fewer degrees of freedom to deal with the next recession or depression.

“we are at that PO moment in the cycle where generally you're trying to pay down your government debt you're trying to put your fiscal house in order you're trying to create that capacity to have flexibility when the rainy day inevitably comes and yet right here right now with the US economy pretty much growing at or Beyond capacity the government is still engaged in a massive massive degree of fiscal stimulus that's creating hotter inflation than we would like to see in the economy and it is leaving the United States in a more precarious long-term position and having fewer degrees of freedom to deal with the next the next recession or God forbid depression”

Griffin believed from the beginning that mathematics and software could be used to understand derivatives pricing relationships in an area where most of the world was still using paper, pencils, and rules of thumb; he hired a rocket scientist to work on pricing models, and a friend at a major bank laughed at the idea of 'putting a man on the moon' to trade bonds, but that bank no longer exists while Citadel and Citadel Securities are now among the most important firms in the world.

“I believed you could use mathematics and software to help to understand these pricing relationships in an area where most of the world was still using paper pencils and rules of thumb and I remember we hired a rocket scientist back in those days to help work on these priceing models and one of my friends from a major Bank literally called me sort of laughing he's like you're not trying to put a man on the moon you're trying to trade bonds now jump forward 30 some years that bank he worked for is no longer in business and Citadel and Citadel Securities are two of the most important firms in the world in the financial markets”

Alternative data use at Citadel is highly problem-specific: for airlines, prevailing airfares; for inflation forecasting, recreating BLS methodology; for commodities, weather pattern prediction through meteorology efforts—always focused on understanding what information drives revenues or demand and securing it appropriately and quickly.

“it really depends upon the nature of where we're investing if you're investing in Airlines you're very interested in prevailing airfares if you're trying to forecast inflation you're literally breaking down every element of what the BLS looks for in the United States and producing their inflation forecast if you are um involved in the Commodities markets you might be running a worldclass meteorology effort to try to predict short-term weather patterns or a dispersion of short-term weather patterns so you're going to focus your use of data and alternative data to the nature of the problem at hand so we're always trying to peel back the onion and understand what information is important to driving the revenues of a business or the demand for a commodity and how do we secure that information in an appropriate way process it quickly and make good decisions with it”

Thoughtful government regulation should encourage entrepreneurship, encourage the growth of small and medium enterprises, and create more competition in the economy; the West must continue to engage in trade policies that bring the benefits of free trade across North America and Europe, and protectionist trends between the continents should be pulled back.

“thoughtful government regulation that encourages that encourages entrepreneurship that encourages the growth of small and medium Enterprises that creates more competition in our economy that's really important and the West must continue to engage in trade policies that really bring the benefits of free trade across North America and Europe so some of the trends towards protectionism between our two continents we really really need to think about push pulling back on and creating greater economic integration”

The commoditization of mathematical derivatives pricing knowledge through Master's and PhD programs in financial engineering has been incredible, and as a society we've increased our knowhow when it comes to investing, but conversely the markets today are much bigger, global, and have far more product proliferation, so there will always be niche opportunities for investors to gain an insight with and to have a competitive advantage in trading.

“the commodation of the knowhow of how to price derivatives for example has been has been incredible you know there's tremendous number of programs around the world with Masters in PhD and financial engineering so as as a society we've really increased our knowhow when it comes to investing but conversely the markets today are much much bigger and they're Global and there's far more product proliferation there will always be Niche opportunities for investors to to gain an Insight with and to have a competitive advantage in trading”

Home Shopping Network put contracts that Griffin bought as a freshman in college were motivated by a Forbes article by Gretchen Morgenson who laid out a thesis for why Home Shopping Network was the meme stock of that moment; the stock later crashed, and though Griffin made only a few thousand dollars, the experience revealed to him that the market maker who bought his puts paid less than their intrinsic value, sparking his curiosity about derivatives pricing.

“in my college dorm as a freshman I bought two put contracts in home Shopping Network and in some sense I owe my career to good journalism there was an article in Forbes by gret morgenson where she set forth a thesis as to why Home Shopping Network was the meme stock of that moment in time and I I loved her thesis I bought these two-p put contracts and fortunately from the perspective of my career the stock Creator shortly thereafter and ready for this I made a few thousand but great you and I both know when you're when you're a freshman in college if you make $2,000 or $3,000 that's all the money in the world when I sold those put contracts the market maker paid me less than their intrinsic value and that made me very curious about the pricing of derivatives”

One key lesson Griffin learned from early mistakes is that people spend too much time trying to learn from their losers and not nearly enough time learning from their winners, which is important because you make money in finance when you have winners.

“one of the things that people do too too often is they don't study their winners they don't try to learn what did they get right in that winning trade because let's be clear you make you make money in finance when you have winners and we all tend to put way too much emphasis on trying to learn from our losers and not nearly enough emphasis in trying to learn learn from our winners”

The largest challenge in riding the mathematical finance wave was the necessity to create your own talent; in the early days, Citadel had to hire people with very different backgrounds from typical Wall Street (physicists, nuclear engineers, mathematicians) and teach them about finance, bridging a knowledge gap between those committing capital and those writing the analytics.

“the largest challenge in riding this wave has been the necessity to create your own Talent so in the early days you had to hire people with very very different backgrounds from the backgrounds typically found on Wall Street at that point in time physicists nuclear Engineers mathematicians you had a hire people who had a very different background in pedigree than you typically found on a Wall Street trading desk and you had to teach them about finance and you had to get them engaged in solving how do you value derivatives how do you value complex Securities and there was a there was a knowledge Gap that had to be crossed or bridged between those of us who were committing the capital and those of us who were helping to write the analytics with which we made these decisions”

Citadel's greatest success comes from having a clear competitive advantage in assimilating information, processing that information, and reacting to that information; the firm is architected around the principle that it is in the research business, with research as the core, and trading is simply how they monetize their research.

“where we are most successful as investors is where we have a clear competitive advantage in assimilating information processing that information and reacting to that information that's that's where we do best and so we architect The Firm around this principle of we are in we're in the research business and the core of this business is research it's good oldfashioned whether it's stock picking or forecasting the weather to trade Commodities it's a research business first and foremost and trading is simply how we monetize our research it's just that simple”

The most difficult problems Griffin has solved involve multi-period optimization: having a view of how a stock will move over different time horizons (day, week, month, year) and creating the optimal portfolio at the current moment given these different views across time horizons, which comes into play in various capital deployment decisions and remains an area not fully solved at Citadel.

“what is that uh you know there's a there's a lot of work that gets it's done a multi-period optimization that's tough to solve multi-period optimization is I have a view as to how a stock is going to move over the next day over the next week over the next month over the next year how do I create the optimal portfolio at this moment giving these different views I may have with respect to time and this comes into play in in just a variety of ways in which we have to to make Capital deployment decisions so that's a that's an interesting fast a problem that we've yet to really fully solve here at Citadel”

When CEOs talk about how their companies have embraced AI and how it's making profound impacts, if you peel back the union of most of these stories there's no AI involved at all, but what is involved is an embracing of modern capabilities and digitalization to improve and enhance businesses.

“when you talk to CEOs they'll tell you about how their companies embraced Ai and how it's making these profound impacts on their business now if you peel back the union of most these stories there's no AI involved at all but what is involved is an embracing of the use of modern capabilities and digitalization to really improve and enhance American and European businesses”

At Citadel, all employees work five days a week in the office (no work-from-home), and the mental health ramifications are profound; it is wonderful to see colleagues meaningfully engaged in their work, happy in their work, and having separation of personal life and professional life.

“no home office in citel uh no we uh we're all back at work and the wonderful thing is the mental health ramifications are profound it's it's so great to see my colleagues meaningfully engaged in their work happy in their work and having that separation of personal life and professional life”

Nearly 30 years ago, Griffin had a young talented woman on his investment team who was thinking of going to medical school; her manager asked Griffin to convince her to stay at Citadel, but Griffin offered to write her a letter of recommendation instead, saying the world desperately needs another great doctor and if that's what she wants to be, he wanted to help her make her dream come true.

“remember there was a a young woman here this is almost 30 years ago she was so talented on the investment team and she was with us for about a year and a half two years and her and her her manager walked in and said she's thinking of going to medical school and I need you to convince her to stay here at Citadel I said well here's the problem the minute she walks in my office I'm going to offer to write her a letter of recommendation the world desperately needs another great doctor and if that's what she wants to be I want to help her make her dream come true”

Some people's careers derail because they are just not good risk takers; even with clear facts in front of them, if they have a highly concentrated portfolio with large positions and cannot demonstrate a clear and concise competitive advantage in why they own those positions, and if these positions go awry without a basis to work together, the relationship won't continue.

“some people just to be blunt they're just not good Risk Takers you can put the facts right in front of their face you have a portfolio that is extraordinar highly concentrated your large positions you cannot demonstrate a clear and concise competitive advantage in why you own those positions if these go Ary we don't have a basis to work together”

Citadel hires people who enjoy winning and being good competitors, because financial markets give you a scorecard each and every day as to how you're doing, and people who like to compete and win love being at Citadel because they see the real-time feedback and success of their research in the portfolios they build.

“we we're Shameless we want to hire people who really enjoy winning and the financial markets give you a scorecard each and every day as to how you're doing as a competitor and what we find is that people that that that like to compete that like to win love being here because they like to see the real-time feedback that goes with being at one of the world's leading financial institutions and seeing the success of their research bear fruit in the portfolios that they build and construct”

When hiring a new portfolio manager with $100 million to manage, Citadel would prefer to give them more capital, would prioritize recruiting a worldclass team around them, and would focus on developing a repeatable investment process that the manager can teach to team members to create operating leverage.

“we'd like to give you a lot more than $100 million to manage okay um thank for thank you all right and and part of this is you know we're bringing really great people here we want them to have access to sufficient Capital to have both the revenues and the profitability to support superlative teams around them we really view investing as the undertaking of worldclass teams because within teams you have a much healthier debate and dialogue that helps one uncover the truth to uncover the real essence of the debate that's at Play and that's so important to how we run our business so when we would hire you as a portfolio manager we'd really spend a lot of time to understand number one what team do we put around you and how to recruit the best and brightest to be on your team and then number two is we want to be very engaged with you in making sure that you have an investment process that's repeatable that you learn from and you learn from both again your successes and your failures and that you can teach this process to your team members to to create operating leverage for yourself”

When interviewing candidates for Citadel, Griffin looks for: (1) ambition—people who want to change the world of finance and have impact; (2) strong communication skills—the ability to convey an idea; (3) ability to reason and rationalize across a broad array of problems—being a good thinker because problem-solving is core to the work; and (4) the ability to find from past experiences evidence of being a good problem solver.

“I look for ambition I want people at Citadel who really want to change the world of Finance they want to have a life that is full of impact they want to make a difference in this world I look for strong communication skills I think the ability to convey an idea is extraordinarily important no matter what commercial undertaking you seek in life you've got to be able to express an idea we're always trying to debate within our four walls the merits of our ideas to get to the truth so I look for ambition I look for communication skills I look for an ability to to reason and to rationalize across a broad array of problems like I want people who are really good thinkers because problem solving is so inherent in what we do in our work day in and day out and people who are good problem solvers are people who Prosper here at Citadel”

The rise of mathematics in finance (which began in the 1980s and 1990s) has long since crested, and mathematical concepts that were really first utilized in that era are taken for granted and used in day-to-day work today.

“we did we did manage to in some sense ride the wave of the rise of mathematics in finance which has in some sense long since crested we all take for granted the mathematical Concepts that were really first utilized in the 80s and 90s in our day-to-day work today”

Citadel is structured as a variety of verticals (global commodities, long-short equities, credit businesses) where business leaders are asked to act as entrepreneurs with access to unlimited capital, asking themselves what is the right team, strategies, and competitive advantages to build and utilize in today's world.

“we think about the business as a variety of verticals for example a global Commodities business a a long short equities business a variety of credit businesses within each vertical we ask our Business Leaders to act as entrepreneurs and to really to say to yourself I have for all intents and purposes access to unlimited capital from that Vantage Point what's the right team the right strategies and the right competitive advantages to build and utilize in today's world in today's environment that's that's how we run our businesses it's very much a mindset of clean sheet of paper what should we be doing today to be one of the most effective deployers of capital in the world's financial markets”

Citadel was started just over a year after Griffin finished college; in November 1990, they raised about $4.75 million and started with one strategy: trading of equity-linked derivatives (convertible bonds and warrants) compared to the common stock.

“Citadel was started just over a year after I finished College we raised about 4 A5 million dollar of November of 1990 and we started with one strategy which was the trading of equity link derivatives convertible bonds and warrants as compared to the common stock”

Citadel receives about 100,000 applicants from colleges and universities around the world for positions; what makes Griffin smile the most is that everybody around the world knows that Citadel works 5 days a week in an office, and this tells him there is an enormous number of young adults who want to be in an environment with mentorship and leadership development where they can have careers.

“we do we have about a 100,000 applicants from colleges and universities around the world wow and let me tell you what makes me smile the most about that everybody around the world knows that we work 5 days a week in an office this tells you that there are an enormous number of of young adults around this world that want to be in an environment which will be a washing mentorship a washing leadership development where they're going to have careers like that makes me very optimistic about the future”

Citadel uses AI in multiple ways: to enhance productivity in day-to-day work among team members (drafting emails, summarizing research, writing memos), for mundane tasks (tagging data), and for important tasks (helping software engineers be more productive).

“we use it in a number of ways to enhance productivity day in and day out amongst our team members in some sense the way that many of us will use AI over the next two or three years helping to draft emails helping to summarize research pieces helping to understand or how to write uh the introductions to Memos and other documentation that's required in the day-to-day flow of business we also use it for some very mundane tasks for example to help tag data and then we use it for some very important tasks such as how to help our software Engineers be more productive”

Citadel has used machine learning for about 8-9 years, and machine learning plays an important role in how Citadel thinks about asset pricing, and has a small role in risk management of assets, with pricing of assets being where machine learning does play an important role.

“if we go back to machine learning which in some sense is the tree from Rich AI Sprouts we've used machine learning for over looking at the the date here on the screen for about eight or nine years here at Citadel and machine learning plays a very important role in how we think about the pricing of assets and has a small role in US thinking about risk management of assets from time to time but pricing of assets machine learning does play an important role here at Citadel”