Morning Coffee: The unusual British woman in the shadows at Citadel. David Solomon's disappearing bonus
When Goldman Sachs came through the financial crisis of 2008 with losses far smaller than those of rival banks, it was the firm's risk management system - SecDb (Securities DataBase) that was held accountable. While other banks struggled to establish their risk exposure, SecDb was special because it gave Goldman's risk managers an instant window into the firm's aggregate exposures. In 2008, no other bank had anything similar, but most have spent the intervening years constructing their own versions of the platform. So too, it seems, have hedge funds - Citadel has a sort of SecDb on steroids, and a British woman is at its helm.
Joanna Welsh, a 49-year-old Liverpudlian, is chief risk officer at Citadel and was critical to the firm's $16bn in profits for investors last year. As described by Risk Magazine, Welsh runs something called Citadel's Portfolio Construction Group, a 50-person unit that runs Citadel's proprietary risk factor model and that constantly simulates scenarios to establish Citadel's risk exposure. "We can see what might happen to supply and demand in commodities with a regular price shock, say, or with a price shock and a weather move, or with both and an infrastructure problem as well,” Welsh tells Risk.
This requires technology, and it's technology that Welsh has implemented during her five-year tenure at the firm - although not necessarily in the form of cutting-edge AI systems. The way Welsh tells it, success is all about the prosaic tagging of data with metadata so that the system can understand the links between "risk in different dimensions, seamlessly." Even before the invasion of Ukraine, the fund was already considering the implications of a delay to Nord Stream 2, and granular tracking data on commodities supply and demand facilitated modelling of the new situation.
Information about each trade permeates the business, from the portfolio managers to the trade operations professionals responsible for administering the purchase or sale. Big screens help: at its new office at 425 Park Avenue, Citadel will have a 35-foot by 8-foot screen which will show its stress-rest results, performance and risk analytics as a single narrative.
Welsh and her 50-person team are critical to Citadel's success. Welsh works closely with Citadel CEO Ken Griffin, but she doesn't have the sort of bulge bracket bank pedigree that might be expected - after graduating from Oxford University, Welsh worked for Nomura and Commerzbank, before spending nearly 16 years at Tudor, where she was chief risk officer for nearly eight years from 2008.
Welsh is a break from the norm. She has tattoos and before joining Citadel was a powerlifting champion. The implication is that she thinks differently, and by all accounts this is what Citadel and Griffin look for, both in staff and strategy. "We’re not taking beta. We’re not chasing factor themes. We’re looking for idiosyncratic winners and losers,” says Welsh. At Citadel, generating alpha is about idiosyncratic variance. It's also about empowering individual portfolio managers, within limits. Although Welsh chairs a committee that assigns annual risk limits to individual portfolio managers, exceptions can be made. “Ken often talks about pushing decisions to the most junior person who is capable of making them, who is also often the closest to the relevant information,” Welsh adds.
It seems to work. What Citadel has achieved is almost "impossible" one client informs Risk, and Welsh and her team are responsible for that: “They’re just so dialled-in on exactly what it means when they are taking a position.”
Separately, Goldman Sachs still has SecDb, which has morphed into Marquee - a format in which it's now accessible to clients, and SecDb almost certainly helped its fixed income traders achieve large profits last year. But it won't have done much for Goldman's loss-making consumer bank, which had nearly a $1bn of credit loss provisions in the fourth quarter.
It was this that almost certainly resulted in the shriveling of CEO David Solomon's bonus so that his total compensation fell 30% to $25m last year. Goldman said Solomon's bonus was cut on the basis of its performance framework, but noted that he had shown "strong individual performance and effective leadership" in a challenging operating environment.
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