Citadel Retains Collateral Status

Institutions use their fund investments as collateral for borrowing money. But lenders accept only a few hedge funds for this purpose. Certain funds managed by Citadel Group are among the select few. Paulson & Co. funds were also being used as collateral, at least as of late last year, but that could end because of the heavy losses John Paulson suffered.

Citadel Wellington and Kensington funds have the unusual feature of being rated for their creditworthiness. During the financial crisis Standard & Poor’s lowered its counterparty credit ratings for the Citadel funds, citing a negative outlook at the end of 2008. But  performance recovered in 2009 and has on the whole been positive in 2010 and 2011.

As a result about six months ago Fitch affirmed a long-term issuer rating for Wellington and Kensington, judging the funds to have a stable outlook, though assets under management have not grown.

The Paulson funds are not known to be have credit ratings but until 2011 were strong performers. An investor says some lenders may no longer accept the Paulson funds as collateral because of last year’s losses and heavy redemptions. Many investors like to have the ability to use the funds in their portfolio to get credit.

Private equity investments are typically not accepted as collateral because lenders want relatively liquid assets.

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