Starry-Eyed Hedge Fund Profits From Subprime Pain It Helped Create

Jan 14 2008 | 1:04pm ET

A hedge fund with a penchant for facilitating astronomically-anointed mortgage securities profited handsomely from the subprime slide, even as its star-struck creations left many investors swearing at the fickle and inconstant moon.

Magnetar Capital was the lynchpin investor in $30 billion worth of collateralized debt obligations issued between 2006 and 2007, buying some of the riskiest tranches that bankers found hardest to sell, the Wall Street Journal reports. Some of them have been among the worst-performing CDOs during the credit market downturn, and at least six, each of which carried the name of a stellar constellation—such as Cetus ABS CDO 2006-3, Carina CDO and Orion 2006-2—have since been declared events of default, burning the investors and investment banks that bought and held on to the supposedly safer, higher-rated tranches.

The $9 billion firm’s chief, former Citadel Investment Group equity strategy head Alec Litowitz, and its subprime guru, former Citadel credit trading head David Snyderman, shorted the better-rated tranches of the CDOs whose risky bits they owned.  Those bets helped Magnetar return about 25% last year, offsetting any losses it made in the lower-rated tranches.


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