Citadel Said to Ease Withdrawal Rules for Hedge-Fund Clients

May 17, 2011, 2:52 PM EDT By Katherine Burton and Saijel Kishan

(Adds reduction in withdrawal penalty fees in sixth paragraph.)

May 17 (Bloomberg) -- Ken Griffin’s Citadel LLC will allow clients to withdraw their money more quickly from its two biggest hedge funds as the firm attempts to attract new investors, according to a letter.

Starting in July, clients in the Chicago-based firm’s Kensington and Wellington funds will be able to take out 10 percent of assets every quarter, meaning they can exit the funds entirely over two and a half years, Griffin said in a May 16 letter, a copy of which was obtained by Bloomberg News. Currently, withdrawals are limited to one-sixteenth every quarter, requiring four years for investors to get out.

Citadel, which has seen its assets under management fall by almost half since a 2007 peak of $21 billion, is relaxing investor terms that are among the most restrictive in the industry, as it seeks to win clients that have allocated money to rivals. The firm’s biggest funds lost 55 percent in 2008 as global markets tumbled in the wake of Lehman Brothers Holdings Inc.’s bankruptcy, spurring investors to pull their money.

“Since the financial crisis, to have significant restrictions -- even if they are less than before -- is somewhat puzzling,” said Geoff Bobroff, an East Greenwich, Rhode Island- based consultant who advises money-management firms. Typically, hedge funds that restrict redemptions do so for no longer than one year, Bobroff said.

‘Tremendous Stability’

Citadel said in the letter that its withdrawal terms, introduced in July 1998, created “tremendous stability in our capital base” and “allowed us to maximize our returns across numerous market cycles.”

The firm will raise the portion of the funds’ assets that it allows clients to pull to 5 percent from 3 percent, according to the letter. Citadel is reducing penalty fees for excess withdrawals to a range of 4 percent to 7 percent from 5 percent to 9 percent.

Devon Spurgeon, a spokeswoman for Citadel, declined to comment.

The $7.5 billion Kensington and Wellington funds climbed 62 percent in 2009, 10 percent last year and 9 percent through May 16. Citadel still needs to return an additional 15 percent to make investors whole and be able to charge a 20 percent performance fee.

Citadel has also told clients that it’s considering changing its fees. It’s among a handful of hedge funds that pass along all expenses to clients rather than charging the industry- standard 2 percent annual management fee. Expenses at the firm have reached as much as 8 percent of assets, and typically range from 4 percent to 6 percent.

Fee Structure

Citadel has told potential investors it may change its fees to 3 percent of assets, and raise its percentage of profits to 30 percent. The industry charges an average 20 percent performance fee.

Separately, Citadel agreed to sell Omnium LLC, its hedge- fund servicing business, to Northern Trust Corp. yesterday for at least $100 million. Griffin, who founded Citadel as a hedge fund in 1990, started Omnium in 2007 to provide other funds with administration and monitoring services.

He has also expanded Citadel by starting a securities business to advise corporations on mergers and acquisitions, underwriting and trading stocks and bonds. That group has been subject to 10 high-level executive departures since it was created at the height of the financial crisis in 2008.

--Editors: Steven Crabill, Josh Friedman

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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