Citadel Keeps Gates

Chidem Kurdas

Last year Citadel Group ended its freeze and allowed investors to redeem. This month Fitch affirmed the ratings of two big Citadel funds, Kensington Global Strategies and Citadel Wellington, at BBB-.  Fitch revised its rating outlook for the funds to “stable” from “negative”.

The freeze had been instituted after heavy losses and redemption requests in 2008. In 2009, Citadel had very strong returns. So the rough patch appeared to be over.

But the funds did not fully recover and redemptions remained restricted, according to an investor.

While redemptions were allowed starting November 2009, gates remained in place. For instance, if Citadel Wellington gets redemption  requests of more than 3% of the capital, investors are not allowed to redeem more than 1/16th of their money during the redemption period.

Redemption requests exceeded the 3% limit, so the gate came into effect even though the general freeze was over. Investors had to wait till the end of June 2010 to get most of their capital back, having indicated that they wanted to redeem more than a year ago.

To add to the injury, net asset value remains below the 2008 peak, although the funds recovered part of the loss.

From the creditworthiness perspective, restricted redemptions are a benefit. “Management has demonstrated the financial acumen to sustain its operations with sufficient liquidity cushion during extreme markets,” said Fitch. “When performance dramatically declined, management exercised its right to protect creditors through the suspension of redemptions.”

But for clients, suspensions and gates on fund redemptions reduce their own liquidity.

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