Rating Cuts at Kensington Global Strategies Fund, Wellington LLC Fund

More bad news for Citadel today.

The hedge fund giant suffered a counterparty credit rating cut on its two biggest funds, Citadel Kensington Global Strategies Fund Ltd and the Citadel Wellington LLC fund.

Standard and Poor's cut the ratings on both funds from BBB+/A-2 to BBB/A-3, and said that the outlook is negative.

Members of the Citadel management team have openly admitted that 2008 has been a very challenging year for them, as their two major funds are both down approximately 40% on the year.

The cause? Losses in convertible securities arbitrage, equity derivatives and investment-grade bond basis trades, according to Reuters.

There have also been persistent rumors over the past few weeks that have been dogging Citadel and their management team.

First there was a rumor that examiners from the Federal Reserve were questioning Wall Street counterparties to Citadel about their exposure to the besieged hedge fund company.

Then, another rumor was floated about a week later, stating that several major banks were asking Citadel to post additional collateral to cover "big" losses.

Both of these rumors were shot down by members of the Citadel Investment Group management team. The company even took the unusual step of holding a hastily organized press conference to try and refute some of the rumors and soothe worried investors. Some of the banks that were reportedly asking Citadel to post additional collateral issued public statements, saying that everything was fine and that it was business as usual.

It seems to have worked (somewhat). Reuters is reporting that redemptions for Q4 2008 at Citadel account for less than 10% of all investment capital in the funds, which is "at the lower end of the industry average." For Citadel, this is a bit of good news in a year that has been filled with bad.

Citadel has about $16 billion dollars under management, a great deal of which is now in cash and cash equivalents. The company has also repeatedly stated that it still hase access to billions upon billions of dollars in commercial credit.

The question on everybody's mind is - can Citadel survive this vicious downturn? Bouncing back from a 40% loss is nearly impossible in the cutthroat world of the hedge fund business. Can Citadel survive and persevere, or will they end up being another casualty of the global economic meltdown?

Filed under: Hedge Fund News | The Economic Meltdown

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