Negative Exposure

Rising counterparty risk turned a seemingly ideal bet into a loser; not least among the casualties—Citadel Investment Group, which had been using credit default swaps to hedge positions in—among other things—high-yield and investment grade bonds.

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In the weeks after the September 15 bankruptcy of New York investment bank Lehman Brothers Holdings, Chicago hedge fund firm Citadel Investment Group sustained stunning losses. So dire was the situation at Citadel — whose funds were down nearly 50 percent on the year through November — that CEO Kenneth Griffin held a special conference call for bondholders (unique among hedge fund firms, Citadel had issued public debt).

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