Ken Griffin Ramps Up Credit Bets, Anticipating US Recession

(Bloomberg) — Ken Griffin, whose hedge fund churned out a record $16 billion for clients last year, is increasing his focus on credit trading as he braces for a potential US recession.

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“We’re much more cautious about 2024,” the billionaire founder of Citadel said in an interview in Hong Kong, adding that the world’s largest economy is unlikely to avoid a downturn that year. “We’ll look at the credit markets as a source of opportunity. Credit should be a meaningful contributor later this year” and next for Citadel, he said.

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Griffin said his hedge fund is particularly focused on the high-yield credit market, with a mixture of long and short strategies. He expects the Federal Reserve to raise interest rates once more this year and then pause hikes for an extended period of time.

US inflation slowed in May, supporting the case for Fed officials to take a breather this week.

Bloomberg Economics’ current baseline is for a US recession to start in the third quarter, while a Bloomberg survey of analysts puts the probability of one occurring within the next 12 months at 65%.

Citadel’s flagship Wellington fund returned 6.1% this year through the end of May, according to people familiar with the matter. The firm’s equities, fixed income & macro, commodities, quant and credit strategies all delivered positive returns last month, the people said, asking not to be named discussing private information.

The Citadel Equities fund gained 7.3% through May, with a 1.2% return last month, the people added. Its Tactical Trading fund rose 7.1% in the five months and the Global Fixed Income fund was up 3%.

China Growth

Griffin is more upbeat on China, where he expects economic growth to surpass the government’s targets even though there’s a lack of confidence among investors.

“There’s a general level of uncertainty as to the level of growth in China today,” he said. “We’re actually more constructive on growth and a bit north” of forecasts for a 5% expansion.

Investor sentiment about the world’s second-largest economy has turned increasingly bearish, with Tuesday’s short-term policy rate cut drawing little enthusiasm from equity traders.

China’s economy probably slowed further in May, official data is expected to show on Thursday, President Xi Jinping’s 70th birthday. Shortly before the figures are published, the central bank will have a chance to cut the rate on one-year policy loans — a move that looks more likely after the surprise trimming of the seven-day reverse repurchase rate.

Citadel remains interested in China for the long term, Griffin said. “Irrespective of who’s the US president in the next cycle, I don’t think that’s going to change Citadel’s strategy” in China, he said. “The scale and scope of the Chinese equity market is incredibly attractive to us as investors.”

Citadel is applying for a Qualified Foreign Institutional Investor license that allows international investors to participate in mainland China’s stock exchanges. Its affiliate Citadel Securities LLC won the same permit in February this year, the company said.

AI Enthusiasm

Griffin said generative artificial intelligence is transforming finance, and improving the productivity of investment professionals and software engineers. People need to be trained for the new wave of innovation to prepare for adverse effects on the job market, he said.

“It’s unbelievable how enthralled people are by generative AI,” Griffin said. “Historically, technological innovation has led to the creation of more jobs. The issue is how will these technologies adversely impact certain sectors of the economy and certain types of jobs disproportionately.”

At Citadel, the firm will use generative AI to help software developers become more productive with programs including Microsoft Copilot.

However, Griffin said the current generation of large language models will “not yet make a meaningful impact” on Citadel’s trading strategies.

Griffin has talked about the potential for AI on multiple occasions and said that his firms are negotiating an enterprise-wide license to use OpenAI’s ChatGPT tool.

ChatGPT has become a global phenomenon since its November launch, providing detailed answers to almost any kind of question. Griffin’s hedge fund and electronic market maker have long been at the forefront of automation and other technological advances.

Asia Opportunities

Griffin’s companies have been expanding in Asia while other Wall Street firms evaluate investment. Citadel has nearly 200 people and Citadel Securities has more than 250 in the Asia-Pacific region.

In his first trip to Hong Kong since the pandemic, Griffin met with the chief executive of the Hong Kong Monetary Authority and the CEO of the Securities and Futures Commission to discuss the city’s future as an international financial hub. He said the regulators were committed to “encourage capital formation and participation by both domestic and foreign firms.”

His companies snapped up extra office space in the city last year for an expanding team, even as other financial firms retreated during Covid lockdowns and political tightening.

Hong Kong is the largest office in Asia-Pacific for Citadel and Citadel Securities, each boasting more than 100 people.

The company is waiting for regulatory approval to set up hedge fund operations in Japan. It’s planning to move some existing talent to the country but will also hire locally as it seeks to return more than a decade after shuttering operations there during the global financial crisis.

Citadel Securities opened an office in Tokyo last year to sell US fixed-income offerings.

“In the long run, our teams are built with local talent,” Griffin said.

–With assistance from Katherine Burton.

(Updates with more details about Citadel’s China activities in 13th paragraph)