Ken Griffin: Wall Street’s Ultimate Competitor

Caemin (0:10)

Morning, folks, and welcome to today's episode called Ken Griffin, Wall Street's ultimate competitor. And forgive me if I sound a bit blocked up, I've had a cold all week. Now, Griffin has been on my list from day one. I mean, he's the 32nd richest person in the world with a net worth of 60 billion. But I wasn't in any real rush to cover him until about two weeks ago, when I finally got around to watching Dumb Money, the movie about the GameStop short squeeze. And it's a pretty good movie and it's pretty accurate. I mean, it's still Hollywood and all that, but well worth watching. But anyway, in the movie, the two or three times when Griffin's name is mentioned, it's followed by the word prick. So that kind of got me interested. Like, is he really that bad or is it simply jealousy as a result of his success? Because even compared to the other Masters of Universe on Wall Street, Griffin is seriously successful. His hedge fund is the most successful hedge fund ever in history. But even more than that, he has this second separate business, a securities business, and it trades more than $170 trillion worth of securities a year, making it one of the biggest trading businesses in the world. How did he get to where he is? This is a fascinating story. Enjoy.

Ken Griffin was born in Daytona Beach, Florida, 1968 His father worked at General Electric. His mother was a housewife. By the time Griffin is a teenager, he's big into computers, taking them apart. He learns how to program. After finishing high school, he goes to Harvard to study economics and government. And he said that it was around this time that his main ambition was to get into private equity. And I'm guessing he was heavily influenced by probably my favorite book ever, Barbarians at the Gaze, because that was released around this time. Because Griffin said that his hero back then was Henry Kravis of KKR, and he is one of the central characters in the book. Now myself and Keith, we did an episode on Barbarians at the Gaze about two years ago, so that's well worth a listen. Anyway, while he's at Harvard, Griffin starts trading and spends a huge amount of time learning how markets work. And he comes across something called convertible arbitrage. And the basic idea is that a company might issue a bond that can eventually be converted into shares. And because of that option, the price of the bond and the price of the stock are tied together. But back then markets weren't as fast, and sometimes the bond price is lagged behind the stock price. So if the stock price jumped, the bond was supposed to go up too, but sometimes it was a bit slow to catch up.

So Griffin would buy the underpriced bond and simultaneously bet against or short the stock. So shorting the stock protected him if the market crashed, making the trade virtually risk free. And as soon as the bond price caught up to where it was supposed to be, he closed the trade and pocketed the difference. And so now he writes a computer program to find these opportunities and to calculate how to hedge and manage the trades. So all he needs now, of course, is money. So he visits a broker friend working in a bank and he starts explaining his model. And by pure chance, a wealthy retired Wall Street investor overheard Griffin's pitch and said he'd invest $50,000.

Then on the back of this, and obviously feeling pretty confident, Griffin goes to his family and other contacts and raises $265,000.

And to ensure that he can get live market prices quickly, Griffin persuades Harvard to let him keep this satellite dish that he put up on the roof of his dorm. By the time he graduated from Harvard in 1989, he's managing more than a million dollars. Now he closed that fund because straight out of college, he got a job at Glenwood Capital. That's a hedge fund in Chicago. And in his first year, he produced a return of 70 percent. Frank Mayer, he was one of the founders of Glenwood Capital, and he said the following of Griffin, Ken is the most focused human being I've ever met. He calculates probability distributions while other people are clearing their throats. And Mayer is so impressed with Griffin that just after a year of Griffin having joined Glenwood, he leaves and Mayer helps him raise $4.6 million to start his own hedge fund. Now, initially, it wasn't called Cicadel. That happened a few years later, but I'm going to stick with Cicadel. It just makes it easier for all of us.