investment management founded 2005 founder alec litowitz ross laser headquarters evanston illinois products hedge fund aum 13.5 billion website www.magnetar.com magnetar capital is a hedge fund based in evanston illinois . among its many activities the firm was actively involved in the collateralized debt obligation cdo market during the 2006 2007 period . in some articles critical of magnetar capital the firm s arbitrage strategy for cdos is described as the magnetar trade . contents 1 history 2 list of magnetar capital cdos 3 in the press 3.1 tavakoli 3.2 propublica npr this american life report 3.2.1 magnetar capital s response 3.2.2 counter response 3.3 naked capitalism econned 3.4 senate report of 2011 3.5 huber heights ohio 4 see also 5 references 6 external links history edit magnetar capital was founded in 2005 by alec litowitz formerly of citadel llc and ross laser formerly of glennwood capital partners . it is based in evanston illinois . 1 in 2006 magnetar capital began to buy large amounts of equity tranches in cdo deals . partner david snyderman also formerly of citadel llc told derivatives week at the time that magnetar capital was excited about the opportunities in the mortgage derivatives market . 1 from 2006 2007 magnetar capital sponsored bought the equity tranche of about 30 billion worth of cdos . 2 many of the cdos were named after stars or constellations . around 2006 magnetar capital received marketing from goldman sachs regarding short bets against the housing market via an asset backed securities index abx . 3 that year andrew sterge formerly of cooper neff group bnp paribas brought his team from aj sterge investments to work for magnetar capital . 4 magnetar capital also hired michael gross of apollo management 5 and started a reinsurance company called pulsar re . 4 also in the same year a team at calyon bank participated in multiple deals involving magnetar capital cdos . the team led by alexander rekeda left calyon for the mizuho bank in late 2006 . in 2007 mizuho did more cdo deals with magnetar capital . 6 7 8 9 in 2007 magnetar capital participated in a series of cdo deals with gsc partners and jp morgan chase . they would later become the center of an securities and exchange commission case against jp morgan . 10 11 in october of that year magnetar capital set up a credit derivatives product company cdpc named quadrant structured credit products with lehman brothers . employees included gene park formerly of aig martin nance and others . fitch ratings rated it aaa in october 2007 and withdrew its rating in october 2008 . in december 2008 quadrant bought competitor cournot . moody s withdrew its rating in february 2009 . 12 13 14 15 16 17 as of 2010 23 of the cdos sponsored by magnetar capital had become nearly worthless . 18 19 the 2010 ig nobel prize in economics was awarded to executives and directors of magnetar capital among others for creating and promoting new ways to invest money ways that maximize financial gain and minimize financial risk for the world economy or for a portion thereof . in 2012 intesa sanpaolo sued magnetar capital and others for alleged fraud related to pyxis abs cdo 2006 1 . 20 the us federal securities and exchange commission had been investigating deals involving magnetar capital for years for example the jp morgan settlement regarding squared cdo 2007 1 . propublica published a summary of these activities in 2012 . the wall street journal reported that same year that the sec was directly investigating magnetar capital itself . 21 in 2015 institutional investor alpha magazine gave magnetar an a grade and the 4 ranking among hedge funds worldwide . 22 list of magnetar capital cdos edit each cdo is actually considered a corporate entity 23 which is why they have llc ltd etc. they were typically named after constellations of western astronomy . the list is based on lists from propublica 24 and nakedcapitalism . 25 orion 2006 1 ltd cetus abs cdo 2006 1 aca aquarius 2006 1 ltd octans cdo i ltd cetus abs cdo 2006 2 ltd pyxis abs cdo 2006 1 llc octans ii cdo ltd libra cdo ltd dorado cdo scorpius cdo ltd vertical virgo 2006 1 ltd carina cdo ltd cetus abs cdo 2006 4 ltd mkp vela cbo ltd cetus abs cdo 2006 3 ltd lacerta abs cdo 2006 1 ltd octans iii cdo ltd corona borealis cdo orion 2006 2 ltd auriga cdo ltd draco 2007 1 ltd norma cdo i ltd octonion i cdo ltd pyxis abs cdo 2007 1 ltd volans funding 2007 1 ltd sagittarius cdo i ltd tigris cdo 2007 1 ltd squared cdo 2007 1 ltd delphinus cdo 2007 1 ltd in the press edit several journalists and writers have reported on the magnetar capital cdo program . janet tavakoli says that she covered the strategy itself in her book of 2003 before magnetar capital was founded . 26 in 2006 derivatives week did a story on the strategy . in 2008 the wall street journal published a fund behind astronomical losses by serena ng and carrick mollenkamp . 2 in mid 2010 two more indepth analyses appeared one a joint effort between npr and propublica and another in the 2010 book econned by yves smith in connection with her website nakedcapitalism.com tavakoli edit janet tavakoli a financial industry expert and consultant with many years experience had been writing about structured finance in a series of books starting in 1998 . in her 2008 book structured finance and collateralized debt obligations 2nd ed . she specifically mentioned magnetar capital s constellation cdos in the chapter on the credit crunch and cdos . she described the deals as classic long equity short mezzanine a type of deal whose moral hazards she explored elsewhere in the book . 27 in addition she wrote constellation cdos seemed designed to fail and were largely synthetic 28 in her diagram of the capital structure she noted that the monoline insurers were major investors . elsewhere in the book she predicted the monolines would have huge losses related to cdos and time proved her correct 29 she also noted that excess interest is sometimes paid to the equity investor creating a conflict of interest a theme that would be central to subsequent media stories . 28 propublica npr this american life report edit in 2010 this american life of chicago public radio broadcast a radio show on magnetar capital s cdo strategy . the report was by alex blumberg of the npr planet money project . the report consisted largely of blumberg s interviews with jesse eisinger and jake bernstein of propublica whom blumberg had commissioned to research possible financial misdeeds related to the subprime housing bubble . eisinger and bernstein interviewed dozens of people who had worked in the industry and many who were directly involved in magnetar capital deals . 30 eisinger and bernstein won the pulitzer prize of 2011 for their series on the cdo industry . it was the first pulitzer for work published only on the web . propublica s written story came out on their website in april 2010 coinciding with the radio show . it alleged that the company s trades in the cdo market helped worsen the financial crisis of 2007 2010 by helping to structure cdos it was planning to short bet against . 30 the story essentially claimed that magnetar capital sponsored mortgage backed collateralized debt obligations by agreeing to buy the worst tranche portion of the cdo the equity tranche . since very few wanted to invest in the risky equity tranche those few that did were called sponsors ; without them the cdo would never get created . the propublica stories claimed that magnetar capital then shorted bet against the better tranches of those and similar cdos by buying credit default swaps that insured them . when the middle tranches of the cdos failed magnetar capital made back many times its initial investment in the equity tranche by receiving the insurance payoff . 18 31 the report also claimed that magnetar capital tried to influence the managers of the cdos it was instrumental in creating to buy certain risky bonds that would increase the risk of those cdos failing . it also claims that magnetar capital cdos defaulted at a significantly higher rate than similar cdos . this may reflect magnetar capital s superior performance in identifying which of the high quality tranches were most overpriced . they also claim that the cdo market would have cooled off in late 2005 if magnetar capital had not entered the market and that this would have resulted in the financial crisis being less severe . 18 32 33 magnetar capital s response edit magnetar capital disputed the story . many of its responses were explained in propublica s story and in a detailed letter magnetar capital sent to propublica posted on propublica s website . magnetar capital said among other things that it was not betting it was hedging that most of its hedges were against non magnetar capital cdos and that it was not making cdos that were built to fail on purpose . it also claimed that its strategy was not based on a downturn in the housing market that is it did not bet that mortgage backed cdos would default . it detailed many of its objections in a letter and list of responses to propublica which are linked to on propublica s website . 34 35 magnetar capital stated to investors that it never sought to bet on the decline of the subprime mortgage market . 36 rather the firm states it had no embedded view regarding the direction of housing prices the rate of mortgage defaults or the subprime mortgage market generally . instead magnetar capital claimed it sought to profit from arbitrage its perception that the riskiest high yield tranches of cdos were underpriced relative to the less risky low yield tranches . the firm expected to make a profit when either the overpriced securities declined or when the underpriced securities appreciated . with the collapse of the subprime market magnetar capital lost money on the risky tranches but made a net profit because the overpriced tranches declined even further . magnetar capital rejected the idea that it had picked securities purposely so that they would fail . 2 18 31 34 35 37 the theory citation needed is that magnetar capital was essentially betting that the likelihood of multiple defaults on the underlying loans was more likely than was reflected in the price of the higher tranches . the high prices of the high quality tranches reflected the assumption that any defaults would be localized and unrelated so that it was unlikely that much of the portfolio would default at once . magnetar capital was betting that in all likelihood if the equity tranch lost its value the rest of the cdo would lose value as well because many defaults were likely to happen together . this is what in fact happened . citation needed magnetar capital also disparaged the reporters stating that the questions we received from you the propublica reporters last week and the assertions reflected in those questions reflect significant inaccuracies or misunderstandings regarding aspects of magnetar capital s investment strategy . 35 later magnetar capital wrote a letter to its investors rebutting many of the claims in the propublica story . ie we wanted to address the recent publicity regarding our mortgage cdo investment strategy . at the center of these stories is a blatantly false and misleading story written by propublica an online news outlet regarding our mortgage cdo investment strategy that was active from 2006 through 2007 . despite our best efforts to educate propublica s reporters about the specifics of magnetar capital s mortgage cdo investment strategy as well as the