By Svea Herbst-Bayliss, Manya Saini and Anirban Sen
July 31 (Reuters) - When rival hedge funds face catastrophic losses, billionaire investor Ken Griffin has a habit of identifying opportunities and showing up with a checkbook.
Citadel's founder this week reprised his role as one of Wall Street's rescue buyers, stepping in to salvage California hedge fund Situational Awareness as it buckled under souring bets on artificial intelligence stocks.
Amid market rumblings that at least one firm was in trouble,
Griffin, 57, assembled his top lieutenants to investigate, according to five people with knowledge of the matter.
By Wednesday morning, Citadel executives had reached out to Situational Awareness, and Griffin spoke directly with Leopold Aschenbrenner, the fund's young founder and a former OpenAI researcher.
Together with Citadel co-Chief Investment Officer Pablo Salame, Chief Operating Officer Gerald Beeson, Perry Vais, its head of equity quantitative research, and Chief Legal Officer Shawn Fagan, Griffin pulled an all-nighter to analyze the trading book positions of Situational Awareness and how liquid the bets were, the sources said.
After a selloff in AI stocks, the Situational Awareness portfolio lost 67% of its value in July, and the fund was forced to unwind most of its $16 billion public equities book. By Thursday, Citadel had bought a chunk of its book.
"We let you down," Aschenbrenner wrote to his investors in a letter seen by Reuters.
Word spread quickly on Wall Street that Citadel, one of the world's largest hedge funds which prides itself on disciplined risk-taking and seizing market opportunities, had stepped in.
"There are only a few firms that could take down this much risk," said one investor familiar with the deal who was not authorized to speak publicly.
Reuters could not ascertain how much money Citadel had made on the deal, although many AI stocks in the portfolio have risen since.
Representatives for Citadel and Situational Awareness declined to comment.
A DECADES-OLD PLAYBOOK
For Griffin, who began trading from his Harvard University dormitory some four decades ago and now oversees $71 billion in assets, it is a playbook that stretches back decades.
"During market stress, the collective judgment of our business leaders, risk managers and portfolio managers enables us to capitalize on market opportunities when others, who depend on simplistic stop-loss approaches, cannot," Griffin wrote in a 2023 letter to investors seen by Reuters.
When energy company Enron filed for what was then the largest bankruptcy in U.S. history in 2001, Griffin chartered a jet that same day, dispatching top Citadel executives to interview nearly all of the energy traders and analysts who had worked there, the Financial Times reported last month and one of the sources confirmed.
The recruits would go on to shape Citadel's commodities franchise for years. It was an approach Griffin would return to time and again as markets lurched from one crisis to the next.
In 2007, $3 billion hedge fund Sowood Capital transferred a portion of its portfolio to Citadel after Sowood became the first high-profile fund casualty of the global financial crisis sparked by subprime lending that led to the collapse of firms including U.S. investment bank Lehman Brothers.
"Citadel offered the only immediate and comprehensive solution," Sowood founder Jeffrey Larson wrote to clients, Reuters reported at the time.
The Sowood move followed on the heels of Citadel rescuing the energy portfolio of failed hedge fund Amaranth Advisors, which went out of business after losing $6.4 billion from bad bets on natural gas trading.
And in 2021, when Main Street investors uniting on social media platform Reddit took the opposite side of prominent hedge fund Melvin Capital's bet against ailing video game retailer GameStop, Citadel stepped in again.
Together with Steven Cohen's hedge fund Point72 Asset Management, where Melvin's founder Gabe Plotkin had previously worked, Citadel injected $2.75 billion into the troubled firm.
'CAN I TOLERATE THAT LOSS?'
Griffin was born in Daytona Beach, Florida, in 1968.
After placing his first convertible bond trades as a college student, he founded Miami-based Citadel in 1990 in Chicago and built it into one of the world's most profitable hedge funds.
Forbes estimates Griffin's personal fortune at roughly $52 billion. In 2002, Griffin expanded beyond hedge funds by co-founding Citadel Securities, a market maker that has become a cornerstone of global trading.
Griffin has donated more than $2.5 billion to causes ranging from medical research to educational institutions, and made headlines for giving more than half a billion dollars to his alma mater, Harvard.
Griffin is known as a prominent Republican donor who has weighed in on thorny topics like President Donald Trump's tariffs, calling them a "huge policy mistake."
On the Goldman Sachs Great Investors Podcast in June, Griffin said, "You'll never manage a portfolio for every possible tail event but you should stay very focused on what is the worst-case scenario. Can I tolerate that loss? And monitor and maintain your exposures such that that loss is a tolerable loss."
(Reporting by Svea Herbst-Bayliss and Anirban Sen in New York and Manya Saini in Bengaluru; Editing by Michelle Price and Will Dunham)
