On Bloomberg’s annual list of the highest-earning hedge fund founders published on Feb. 20, Millennium Management’s Israel Englander and Citadel’s Ken Griffin claimed the top two spots with personal investment gains of $2.8 billion and $2.6 billion, respectively. Their secret is simple: hire incredibly bright people and take worthwhile risks.
Citadel and Millennium typically top lists charting the most profitable hedge funds. In 2023, Griffin’s Citadel ranked second with a total profit of $8.1 billion and Millennium ranked fourth with $5.7 billion, according to a report by LCH Investments in January.
Hedge funds are alternative investment vehicles that actively manage money provided by clients, known as limited partners. Unlike mutual funds or traditional asset managers, hedge funds have the freedom to invest in non-traditional assets—like derivatives, private equity and real estate—and are allowed to invest with borrowed money and other high-risk strategies. They typically charge a 2 percent management fee based on AUM and take a 20 percent cut from any returns on investments.
Taking big risks and being right
Top hedge funds employ numerous strategies to invest client money. Firms like Citadel and Millennium are often called “pod shops” for operating numerous nearly-autonomous teams that experiment with various high-risk strategies to achieve returns uncorrelated from one another. This method, known as the “platform model,” reduces overall volatility for a firm.
Such multi-strategy funds have become popular among investors, with assets under management (AUM) steadily rising at “pod shop” funds over the last decade. Citadel saw its AUM climb from $14 billion in 2012 to $62 billion in 2023, while Millennium’s AUM rose from $17 billion to $60.6 billion over the same period. Citadel and Millennium followed Bridgewater Associates as the second and third largest U.S. hedge funds by AUM as of June 2023.
Many hedge funds concentrate their capital in a handful of sectors. The trick is taking big risks and being right. In 2023, Citadel reportedly made around half its profit from commodities. The previous year, Citadel’s most profitable ever, the firm bet heavily on natural gas and power. Sometimes, however, those risks don’t pay off: in 2008, Citadel’s main fund lost 55 percent. Millennium adopts a similar approach, and had more than 90 percent of its equity holdings overlap with Citadel’s in 2023.
“An obsession with talent”
To make sure the risks are worth taking, hedge funds comb college campuses and the financial industry for top talent. Citadel’s Griffin credits his firm’s success to an “obsession with talent,” as Forbes put it in a 2022 profile.
Griffin told Forbes he had interviewed more than 10,000 candidates himself, focusing on engineers and mathematicians from the top colleges. Both Griffin and Millenium’s Englander have said they prefer hiring from Goldman Sachs, one of the most prestigious investment banks in the world.
Hedge funds offer some of the highest-paying jobs in finance, especially for young analysts. Last summer, Citadel went viral for paying interns as much as $19,000 a month. Millennium’s U.S. offices do not disclose pay, but its London office paid an average $1.7 million per employee in 2020.
