Morning Coffee: Tactics of the new high performers at hedge fund Citadel. UBS makes more pre-bonus cuts

Congratulations to Citadel, which is not only your ideal hedge fund to work for, but has won the “hedge fund of the year” award from Risk magazine. And congratulations to Citadel's Chief Risk Officer, Joanna Welsh, who has done a lot of the heavy lifting for them this year. (Literally as well as figuratively – she was once a powerlifter in her spare time).

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The title of CRO is almost a misnomer in the context of a big multistrategy firm like Citadel, because the job of managing the aggregate risks taken by the different portfolio managers and making sure that they add up to a strong overall risk-adjusted return is pretty much the whole name of the game – it involves a lot of responsibilities which might just as easily fall within the scope of the Chief Investment Officer at another firm.  This year’s performance seems to have been particularly well managed in that regard – according to Welsh, there are some years when they have one particular “tall tree” (AKA the commodities team run by Sebastian Barrack) driving the overall returns, but this year the whole forest grew finely.

Within that forest, though, one of the leafier specimens was Navneet Arora’s Global Quantitative Strategies division. Part of the reason for that is that Citadel seem to have got quite a lot better at hiding their intentions from predatory algorithms. So-called “high frequency” traders are now, apparently, willing to hold onto positions for much longer (minutes rather than milliseconds), in order to profit from the predictable price effect of a big fund like Citadel piling into or out of a position.  That means that, as Arora says you can’t just “make good predictions, do your risk management and you’re off to the races” – you have to worry about the “last mile” of making the trades without losing all your alpha in execution.

Navneet’s rather slangy description of one of the most fearfully technical aspects of quantdom actually seems to be another of Citadel’s winning ways.  Welsh suggests that one of the ways in which her team has helped portfolio managers over the last year has been to stop talking about “principal component analysis” (a statistical technique which, when applied to bond markets, extracts the risk factors associated with the level of rates, the slope of the curve and its curvature).  Instead, they have been talking about specific points on the yield curve and market-based indicators that everyone can see. 

So, among the ingredients of the secret sauce are cutting out the BS and being fussy about trade execution quality.  Strangely enough, these are also among the characteristics of the world’s most successful banks.  Citadel might be, according to its owner, reaching the limits of how much money it’s possible to invest in the pod-shop model.  But that’s an achievement in itself; Navneet Arora and Joanna Welsh have earned their places in the hall of fame.

Elsewhere, UBS has made another four cuts to its Asian loan syndication team – Terence Chia, the local head in Singapore, along with executive director Irene Liao and two more junior ranks in Hong Kong.  In previous years, it might have been seen as odd timing to fire people so close to bonus time, but this year quite a lot of banks have done something similar.

It should probably be seen as telling us something about the likely shape of the bonus season, at the end of a year in which the overall revenue pool hasn’t been great, but which seems to be ending strongly with a decent degree of optimism for the next year. That tends to lead to a greater degree of concentration of rewards on top performers and teams, as there isn’t spare money for one pool to cross-subsidise another, but management want to hang on to their rain-makers.

In that sort of environment, banks are likely to be thinking about ways to soften the blow by reducing the number of mouths that have to be fed from a limited pot.  And it’s arguably better to be fired in December and miss out on the bonus round, than to be fired next year after having got zero anyway.  At least this way, you can try to tell people that the only reason you got cut is that they couldn’t afford you.

Meanwhile …

The basic problem with “one bank” strategies to make wealth managers and investment bankers work together and cross-sell is that you can’t build a long term relationship as a trusted advisor while simultaneously pushing the living daylights out of the house product.  Or at least maybe you can, for a while, but it always goes sour and the best bankers don’t like doing it.  Which fact is always annoying for the managers who launch these initiatives. (Financial News)

It is always hilarious when a regulator can’t follow its own policies – the Financial Conduct Authority in London has had to tighten up its whistleblower policy after a previous share gave away the identity of some complainants without their permission. (FT)

As much as half of all the content produced by LinkedIn thoughtfluencers is apparently AI generated. The rest just looks as if it was. (WIRED)

“It’s difficult to take something away that’s already been given … Employees increasingly see the ability to work flexibly as part of their total compensation.” The amount of flexible working in the USA has settled down at a post-pandemic norm of about one day a week. (Bloomberg)

The people who invested in Twitter alongside Elon Musk have been given an attractive bonus in the form of shares in his new AI venture.  But did the bankers who put up the LBO debt get anything? (FT)

Apparently, Gen Z believes (in, it has to be said, the face of pretty strong scientific evidence to the contrast) that you can become incredibly attractive by spraying yourself with pheromones extracted from sweat and urine.  But if this was really true, certain brokerage firms wouldn’t need to spend so much on expensive restaurants. (WSJ)

Former Deputy Prime Minister and current pub quiz question Oliver Dowden has landed a £500-a-day strategic advisor role at Caxton. (Daily Mail)

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