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which we learn. The process is always changing, representing a learning experience." Lessons, negative and positive, are integrated into the learning process.

He feels some firms repeat the same mistakes because they are generalists without an edge. He also feels that some firms don't critically analyze what they're doing and how to do it better next time.

Since inception in 1990 through 1999, every year but one has been double digits to the upside for the longest-running fund. The exception was 1994, which was down 4.3 percent. Griffin says that 1994 was much like 1998 in that convertibles became extremely undervalued during the collapse of the bond market as competitors were forced to liquidate positions due to mounting losses. However, as these undervalued securities returned to more reasonable levels during 1995, Citadel earned significant gains in the portfolio. In 1995, the fund bounced back 36 percent.

LEVERAGE AND RISK MANAGEMENT

On the leverage front, Griffin says Citadel's leverage tends to be moderately higher than that of their peers, and this has been the case since inception. "However, we feel comfortable utilizing higher levels of leverage given what we think are superior risk management capabilities."

Citadel's goal is to try to eliminate beta (i.e., systematic risk). "We don't want performance dominated by beta. We try not to profit from market increases or decreases or interest rate increases or decreases." As a result, net exposure to the stock market is very low.

Citadel attempts to dilute risk by diversification. It forecasts and analyzes portfolio behavior based on historic and expected future volatility as well as extreme market conditions.

Citadel doesn't look for a specific return per trade but rather allows a certain risk per trade, and that varies by strategy. For example, the risk taken on a fixed-income arbitrage trade is often a fraction of that on a risk arbitrage trade.

For hedging, Griffin uses a full array of products—from shorting securities to shorting futures. "Each has a role in the portfolio depending on what you want to hedge. There is not always only one way to hedge."