The World According to Ken Griffin?

Simone Foxman, Katia Porzecanski and Erik Schatzker of Bloomberg report, Citadel's Griffin Urges Breakup of Big Banks, Echoing Trump:

Ken Griffin, chief executive officer of Citadel, said he would be “really excited” to see a break up of big banks to increase competition and boost the economy.

“Would I argue to break these banks into many, many small banks? No,” Griffin said in an interview Monday with Bloomberg TV. “But should we think about separating the investment banks from the commercial banks, a new Glass-Steagall? I would be really excited to see that. I think it would be great for the economy."”

Griffin, 48, echoed comments from President Donald Trump earlier today about bringing back a version of Glass-Steagall, the law which had separated investment banking from retail. Griffin spoke from the annual Milken Institute Global Conference in Beverly Hills, California.

Griffin, whose firm manages $27 billion, also said the hedge fund industry is going through a shake-up, forcing hedge funds to close, as markets have become more efficient.

“We’re going through a period of retrenchment as the dynamics of the playing field are changing,” he told Bloomberg. “It’s harder to create alpha today, there’s more competition, there’s a lot of very sharp people trying to find opportunities in the market place. This is causing some of the second-tier players to fall by the wayside."

Citadel gained about 0.9 percent in its flagship Kensington and Wellington hedge funds in April, according to a person familiar with the matter. The gains brought performance for the year through last month to about 3.5 percent from 2.6 percent in the first quarter, said the person.

The hedge fund manager, who started trading from his dorm room at Harvard University, founded Citadel in 1990. He said the firm uses machine learning, a form of artificial intelligence, as part of its tool kit. He said the technology is “very powerful” when working with a large data set and patterns that persist over time, and “worthless” for analyzing one-off events like the upcoming election in France.

Griffin stressed that banks are burdened with excessive compliance regulations and he applauds the effort of the Trump administration to reduce the rules. At the conference he said regulators should create incentives for private-equity and venture capital firms to get into the banking sector. Griffin in 2011 ended a three-year effort to build his own investment bank.

Griffin views banks such as JPMorgan Chase & Co. and Morgan Stanley as competitors with his market-making unit, Citadel Securities. It sells to buyers and buys from sellers in stock, derivative and U.S. Treasury markets. A change in how those banks are organized and operate could create more competition.

“That’s sort of a mixed blessing,” he told Bloomberg about the possible impact on his firm. “We’d have much more vigorous competitors at these newly created investment banks but I think that’s good for America."

The hedge fund manager said the trend in investing toward passive products will provide an opportunity for active managers that stand after the shakeout.

“The money that’s in passive structures obviously is not pursuing alpha in the same way,” he said. “That should make the markets a little less efficient, which should create a larger profit pool for those who remain. So we’re going to find a new equilibrium in the months and years to come."

When Ken Griffin talks, and he rarely does, investors listen. Griffin is arguably the new king of hedge funds and his multi-strategy fund, Citadel, is part of an elite group of multi-strategy hedge funds that have grown ever stronger after the crisis and now manage billions of assets for large institutional investors all over the world.

Citadel actually posted the Bloomberg interview on its website, saying how it is going on the "offense" which tells me the firm is preparing for a major downturn in markets and a huge shakeout in the hedge fund industry.

And Ken Griffin wants the best and brightest talent working at other rival hedge funds to know, no matter what happens, Citadel will remain open for business and stands ready to hire you in a flash crash millisecond!

I'm being serious here, why do you think Ken Griffin is all of a sudden talking to Bloomberg? He wants to convey a message, one far more important than breaking up big banks, deregulating markets and increasing transparency of markets. He wants the hedge fund world to know that Citadel is growing and always looking for the best and brightest talent and he found the perfect platform to convey that message.

Now, I want all of you to take the time to listen to the entire interview at least once (if not twice or three times!) and start jotting down a lot of notes because there is a lot of good stuff here, some self-serving, of course, but a lot of it provides you with great insights on hedge funds, active managers and markets.

Whether you love or hate him, listen to him speak, you'll realize Griffin is scary smart, extremely driven, very focused and highly competitive. He sees things most investors don't and has a great team to advise him on trends in markets that even the very top investment funds can only dream of.

Below, some of the key takeaways from the interview from my vantage point:

• A broader shakeout in active management, not just hedge funds: There is a crisis in active management, not just hedge funds. Unlike Steve Cohen, who last year told the Milken Institute conference members there is a troubling lack of talent in the hedge fund industry which explains why they are under attack, Griffin was more careful to explain the structural changes that impact hedge funds and other active managers. "Because markets are more efficient, there is less alpha to be had."
• Growth in passive investing will lead to more opportunities: Griffin sees the growth in passive investing in exchange-traded funds (ETFs) will continue and the share of passive versus active investing will grow, but this will present great opportunities for truly great active managers. For more on this, read my comment on the $3 trillion shift in investing. 
• Citadel is going on the offense: "With firms shutting down, there are a lot of good people we want to bring in Citadel." Griffin has a track record of scooping up great talent quickly before anyone else (watch the second clip below).
• Citadel will grow wisely: "Could we manage $25 billion, we do manage that amount. $35 billion is probably outside our reach now." Griffin was careful to explain the psychological element of losing more money as assets under management grow. What he says is so true!
• On deregulation: Griffin applauds the move to deregulate not just markets but other sectors of the economy. I agree with him even though I think he's overstating the beneficial effects of deregulation. But he's spot on here: "I started my business when I was in the dorm room at Harvard. $265,000 and I could launch a hedge fund in 1987. You can't launch a hedge fund today with less than several hundreds of million dollars given the high fix cost of compliance and other regulatory matters that you need to deal with." All you Soros wannabes, take note, good luck starting your own hedge fund, you're best bet is to work for Ken Griffin or other hedge fund quants taking over the world.
• On breaking up big banks and a new Glass-Steagall: “That’s sort of a mixed blessing,” he told Bloomberg about the possible impact on his firm. “We’d have much more vigorous competitors at these newly created investment banks but I think that’s good for America." (truth is he would eat up all his new competitors and squash them like bugs!).
• On what's next for Citadel: Griffin stated "right now the focus is on what we do and doing it better." His focus is on strengthening current business lines, not new business lines. 
• Are machines taking over the world?: Quantitative hedge fund strategies are extremely important to its business but machines will never take over humans in terms of asset management (not very good at predicting or handling random events). He said the technology is “very powerful” when working with a large data set and patterns that persist over time, and “worthless” for analyzing one-off events like the upcoming election in France.
• On private debt: Griffin looked at this line of business but doesn't seem interested in private lending. He said credit growth in Europe is anemic because their banking system is struggling and it has "a very negative impact on their entire economic landscape." 
• Focus on liquidity: "Post 2008, the focus has been on liquid markets. We struggled in '08 like some of our competitors and banks and one of the lessons we learned was stay focused on liquid markets."
• On employee turnover: It's no secret that Griffin has attracted and repelled big talent over the years. Sure, just like Bridgewater and other top hedge funds, there needs to be a cultural fit to work at Citadel (it's not for everyone), but Griffin needs to work harder to improve his fund's work environment. He explains turnover like this: "It's like a sports team, if you're no longer on your game, we don't have room for you on our team." He added: "What works is people who are passionate about finance. If you're just trying to get rich, it doesn't work." On that, I agree with him 100 per cent!
• Concern about education: Griffin is very worried about the US education system. Like Jim Simons of RenTech, he worries about the lack of graduates in math, engineering and other sciences to be able to work in an ever more technologically driven world.

Those are my thoughts in a nutshell. Of course, Erik Schatzker of Bloomberg forgot to ask Ken Griffin about elite hedge funds like his shafting clients on "pass-through" fees, but that topic was off grounds.

Below, Ken Griffin, Citadel's chief executive officer, discusses the state of the hedge fund industry and financial regulation with Bloomberg's Erik Schatzker at the Milken Institute Global Conference.

I also embedded another clip where Griffin covers his early experiences of investing and why hiring the best people is the most important part of his business and coming back after losing money in the financial crisis. Take the time to listen to him, you'll understand why he's one of the most successful hedge fund managers alive, how passionate he is about investing and how he aggressively scoops up talent when opportunities arise.

Lastly, at the Milken Global Conference, Ron Mock, Ontario Teachers' Pension Plan CEO, and one of Ken Griffin's biggest fans, speaks to CNBC's David Faber about the plan's portfolio strategy in the markets right now. Listen carefully to what he says, especially at the end on hedge funds.

Please note I reached out to Ken Griffin at Citadel to discuss this comment but I doubt he will get back to me. If he does, I will update my comment and let you know.