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Citadel Investment Group Inc.'s biggest hedge fund fell as much as 30 percent this year, because of losses on convertible bonds, stocks and corporate bonds, said two people familiar with the Chicago-based firm.

Kenneth Griffin, who founded Citadel in 1990, said in a letter to investors this week that returns for the $10 billion Kensington Global Strategies Fund may swing wildly as markets are battered by the global credit crunch. Griffin holds 30 percent of the firm's $18 billion of assets in cash, according to an Oct. 8 report by Standard & Poor's.

``In the weeks to come, I expect we will continue to see significant volatility in our earnings as the world manages through the unfolding crisis,'' wrote Griffin, 40. ``It is incumbent upon us to navigate through this period and to create value for our stakeholders over the years to come.''

Kensington's loss, more than double the decline of the Credit Suisse/Tremont Hedge Fund Index, may dent Griffin's reputation as a consummate risk manager with no patience for traders who can't make money. Kensington's only annual loss was a 4 percent drop in 1994.

The current environment is very difficult for nearly all investors and traders, and hedge funds are not excluded. This man has an outstanding track record.

I am actually thriving in this environment, but in order to do so I must expend an enormous amount of energy and time strategizing, researching, and even trading (I am not a trader, but am forced to be fleet of foot due to government surprises and volatility). It is very, very difficult, and is much harder than the previous 7 years of investing combined, yet yields no higher return. I must say that the blog helps, for it assists in my congealing my thoughts as I type them into the computer.

 "Griffin told investors his main mistake was not being pessimistic enough about the extent of the financial crisis, which began in 2007, a year he described in his letter as ``the most successful in the history of the firm.'' Last year, Kensington climbed about 30 percent.

``Regretfully, I did not foresee the financial disaster that was to unfold in September,'' Griffin wrote in the letter, a copy of which was obtained by Bloomberg News."

I just had a conversation with a friend of mine on the phone earlier today, wherein I told him that failings of the major hedge funds are three fold, one of which was beyond their control, and that was the short sale ban. The other two: failing to recognize the depth and the breadth of the financial malaise, and failing to hold the course in being consistenly more pessimistic (really realistic) than the crowd. If you've read my blog from the days, you would know that I was probably the most bearish there was (save maybe Dr. Roubini). I have been totally short the market for 17 months straight, without waiver, save some moving to cash to quell volatility. I decided to take profits and move to cash in lieu of implementing expensive hedges.

See In the Great Global Macro Experiment, the next bubble to burst is... for a snapshot of how I've done in my proprietary account and click here for my investment style, which probably gives me an edge in these volatile times due to my lack of adherence to traditional classes and methodologies.

I cannot promise myself that I can maintain my strong numbers, but I am definitely going to put all I have into it.