Magnetar Capital

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Magnetar Capital LLC
Company typeLimited liability company
IndustryHedge fund
Founded2005; 19 years ago (2005)
Founders
  • Alec Litowitz
  • Ross Laser
HeadquartersEvanston, Illinois[1]
Key people
ServicesInvestment management
AUMUS$13.8 billion (2022)[2]
Number of employees
260[1]
Websitewww.magnetar.com

Magnetar Capital is a hedge fund based in Evanston, Illinois. The firm was founded in 2005 and invests in fixed-income, energy, quantitative, and event-driven strategies.[1] 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".[3]

The company has additional offices in New York City, London, Houston, and Minneapolis.[4]

In 2006–2007, Magnetar Capital "facilitated the creation of a few of the worst-performing collateralized debt obligations", many named after stars or constellations.[5] While the CDOs Magnetar Capital helped create led to losses on Wall Street, the company profited as a result of its hedged investment strategy; Magnetar Capital had protected itself against losses on CDOs by purchasing credit default swaps.[5] As of 2010, 23 of the CDOs in which Magnetar Capital invested had become "nearly worthless".[6][7] Despite investigations by the U.S. Securities and Exchange Commission into several deals in which Magnetar Capital invested, no enforcement action was taken against the firm.[8]

History[edit]

Magnetar Capital was founded in 2005 by Alec Litowitz (formerly of Citadel LLC) and Ross Laser (formerly of Glenwood Capital Partners).[1][9] Based in Evanston, Illinois,[10] the firm started with $1.8 billion in capital, making it one of the largest hedge-fund launches at the time.[1] Early on, Magnetar Capital's multistrategy fund invested in event-driven investments and the firm doubled in size to nearly $4 billion by the end of 2006.[9] The firm launched into other areas, among them private investments in public equity, reinsurance, and traditional asset management, but turned its focus to fixed income.[9] In 2005, Magnetar began investing in the North American energy sector.[4]

2006–2007 involvement with CDOs[edit]

Magnetar Capital was actively involved in the CDO markets during the 2006–2007 period, when it invested in the equity of about $30 billion worth of them.[5] Partner David Snyderman told Derivatives Week at the time that Magnetar Capital was "excited about the opportunities in the mortgage derivatives market".[11] As a proposed means to hedge CDO investments, Goldman Sachs sent Magnetar Capital marketing information regarding "short bets" against the housing market via an asset-backed securities index (ABX).[12]

CDO investments are divided into risk-based tranches: The highest-risk slices offer the highest yield, whereas the safer pieces have lower yields.[5] With what some observers have referred to as the "Magnetar trade," Magnetar Capital took long positions in the highest risk slices of synthetic CDOs and hedged those positions by placing short bets on safer slices called mezzanine tranches via credit default swaps (which act similarly to an insurance policy) because Magnetar considered the former to be underpriced relative to the latter.[9][5] By establishing this arbitrage, Magnetar could profit from this relative mispricing regardless of how the overall housing market changed. When the market collapsed in 2007, Magnetar lost money on the riskiest slices it bought, but made much more from the hedges because of the relative mispricing that it had anticipated.[5] According to mortgage analysts, Magnetar Capital would have benefitted from its Magnetar trade regardless of whether the subprime market collapsed.[5]

ProPublica's coverage of the CDO industry, which won a Pulitzer Prize in 2011, made a number of allegations regarding Magnetar Capital's CDO investments, including that Magnetar Capital's trades in the CDO market helped worsen the financial crisis by helping to structure CDOs the company was planning to short (bet against).[13][14] Other claims made by the ProPublica series include: Magnetar Capital tried to influence CDO managers to buy riskier bonds to increase the likelihood of those CDOs failing; CDOs that Magnetar Capital invested in "defaulted" at a much higher rate than similar CDOs; and the CDO market would have "cooled off" in late 2005 had Magnetar Capital not entered the market, resulting in a less severe financial crisis.[6][13] ProPublica did note that in its view, while Magnetar Capital's CDOs might have prolonged and exacerbated the financial crisis, the firm did not cause the crisis or the housing bubble.[15]

Janet Tavakoli, a financial-industry consultant, wrote in her 2008 book, Structured Finance and Collateralized Debt Obligations, that Magnetar Capital's Constellation CDOs "seemed designed to fail".[16]

Contrary to the allegations, Magnetar Capital maintains that it did not control asset selection for the CDOs in which it invested and that the firm did not place an overall bet against the housing market.[17] The firm said its investments were market neutral and would have made money whether the housing market went up or down.[13] According to the Financial Times, "Magnetar argues that it was not shorting the subprime market, but was arbitraging between different layers of CDOs, taking advantage of the fact that it could get a yield of 20 per cent on the equity and then hedge that by shorting the mezzanine layers".[18]

2010 lawsuits[edit]

In 2010, the Securities and Exchange Commission filed a complaint against JP Morgan Chase for a deal in 2007 that involved securities picked by Magnetar Capital.[19][20][13] JP Morgan settled the lawsuit for $153.6 million in 2011.[21] Separately, in 2012, The Wall Street Journal reported that the government sought to see if Magnetar "had such a strong influence in designing any of the deals that in effect it took over the role of collateral manager".[22][23][24] Particularly, the regulator spent more than a year examining whether Magnetar Capital had any influence over asset selection of a $1.5 billion CDO created by Merrill Lynch called Norma CDO I, but the SEC took no action against the firm.[17][25]

In 2010, Intesa Sanpaolo named Magnetar Capital, and others, in its lawsuit against Credit Agricole, alleging fraud related to the CDO Pyxis ABS CDO 2006-1.[26][27] The suit alleged that a Credit Agricole unit concealed Magnetar's role in the collateralized debt obligation.[27] The case was dismissed, as the court ruled Intesa failed to file the suit in a timely manner.[27][28]

Parody Prize[edit]

In 2010, Magnetar Capital's directors, among others, won the Ig Nobel Prize in economics 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".[29]

Diversification into other asset classes[edit]

Following the financial crisis, the firm pivoted into quantitative trading[1] and exploring new investments, including films, commercial jets, and real estate. In January 2013, the firm became the largest homeowner in Huber Heights, Ohio, by buying a portfolio of almost 2,000 rental homes from the family of the town's original developer. It rents these homes as part of its investment strategy.[30] Magnetar Capital also invests in European real estate.[31]

The firm entered the film financing business in 2013, when it provided most of the funding for a $400 million co-financing deal that provided 20th Century Fox with money to fund a slate of films over a five-year period.[32]

In 2014, Magnetar Capital introduced two new energy funds, Magnetar Solar Holdings and Magnetar Solar Opportunities Fund.[33] Magnetar Solar (UK) owned 25 solar farms with about 300 megawatts of generation capacity.[34] In 2016, Magnetar Capital owned about 344 megawatts of the UK's solar production.[35] The firm sold its UK solar portfolio to Rockfire Capital in 2018.[35]

Mergers and acquisitions[edit]

New York City-based Blackstone Group's hedge fund unit, Blackstone Alternative Asset Management, through its Strategic Capital Holdings Fund, bought a minority stake of Magnetar in 2015.[10][36] Financials of the deal were not disclosed; Magnetar said the deal would help it expand, and management remained in place following the deal.[37]

Magnetar Capital bought a majority stake in auto lender First Citizen, of Dublin, Ireland, in 2017.[38]

As of 2018, energy continues to be an investment interest of the company, including a stake in Double Eagle Energy Holdings III Permian in Texas.[39]

See also[edit]

References[edit]

  1. ^ a b c d e f g Copeland, Rob (24 May 2017). "This Old School Hedge Fund is Going Quant". The Wall Street Journal. Retrieved 2 April 2018.
  2. ^ Mandl, Carolina (7 June 2022). "Magnetar Capital's founder Litowitz steps down". finance.yahoo.com. Reuters.
  3. ^ The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going Archived 2010-04-10 at the Wayback Machine, by Jesse Eisinger and Jake Bernstein, ProPublica, April 9, 2010
  4. ^ a b Jahn Davis and Sean McMahon (14 July 2017). "Magnetar opens Houston office to expand footprint in energy trading". SmartBrief. Retrieved 7 May 2018.
  5. ^ a b c d e f g Ng, Serena; Mollenkamp, Carrick (14 January 2008). "A Fund Behind Astronomical Losses". The Wall Street Journal. Retrieved 7 May 2018.
  6. ^ a b "The Inside Job. Act One: Eat My Shorts" (Episode 405), This American Life. (2010-04-09), Alex Blumberg, Jake Bernstein, Jesse Eisinger
  7. ^ The "nearly worthless" comment is at 36:40 into the This American Life "Inside Job" audio story
  8. ^ Eaglesham, Jean (13 December 2013). "Merrill Settles With SEC Over Crisis-Era Bond Deals". The Wall Street Journal. Retrieved 20 June 2018.
  9. ^ a b c d Amanda Cantrell (4 September 2012). "Meeting the Minds of Magnetar". Institutional Investor's Alpha. Retrieved 7 May 2018.
  10. ^ a b Stevenson, Alexandra (14 May 2015). "Blackstone Buys Minority Stake in Hedge Fund Magnetar Capital". The New York Times. Retrieved 7 May 2018.
  11. ^ Abigail Moses (2006-08-14). "Reach for the Stars: Ill. Fund Swallows Big Chunk of Synthetic ABS" (pdf). Derivatives Week. Retrieved 2010-05-01.
  12. ^ Banks Bundled Bad Debt, Bet Against It and Won by Gretchen Morgenson and Louise Story, 23 December 2009, New York Times
  13. ^ a b c d Eisinger, Jesse. "The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going". ProPublica. Retrieved 4 March 2016.
  14. ^ Adams, Richard (18 April 2011). "ProPublica makes history with web-based Pulitzer Prize win". The Guardian. Retrieved 22 June 2018.
  15. ^ Eisinger, Jesse; Bernstein, Jake (16 April 2010). "Your Magnetar Questions, Answered". ProPublica. Retrieved 22 June 2018.
  16. ^ Structured Finance and Collateralized Debt Obligations, Second Edition, Janet Tavakoli, publisher John Wiley & Sons, Inc., 2008, Constellation CDOs: pgs 413-415
  17. ^ a b Eaglesham, Jean (6 August 2013). "SEC's Hunt for Crisis-Era Wrongdoing Loses Steam". The Wall Street Journal. Retrieved 22 June 2018.
  18. ^ Gapper, John (20 April 2010). "Magnetar comes out fighting on synthetic CDOs". Financial Times. Retrieved 22 June 2018.
  19. ^ "SEC.gov" (PDF).
  20. ^ Ovide, Shira (21 June 2011). "Timeline of the J.P. Morgan CDO Deal". The Wall Street Journal. Retrieved 7 May 2018.
  21. ^ Ovide, Shira (21 June 2011). "J.P. Morgan to Pay $153.6 Million to Settle SEC Charges". The Wall Street Journal. Retrieved 7 May 2018.
  22. ^ The Magnetar Fallout: Who’s Been Charged, Has Settled, or is Now Being Investigated? by Cora Currier, ProPublica, July 19, 2012
  23. ^ Eaglesham, Jean (17 May 2012). "SEC Probes Role of Hedge Fund in CDOs". The Wall Street Journal. Retrieved 7 May 2018.
  24. ^ Bernstein, Jake; Eisinger, Jesse (12 December 2013). "SEC Issues More Fines Over Magnetar Deals – and Appears to Move on". ProPublica. Retrieved 7 May 2018.
  25. ^ Gallu, Joshua (12 December 2013). "BofA's Merrill to Pay $131 Million Over Norma CDO Marketing". Bloomberg. Retrieved 10 September 2018.
  26. ^ Glovin, David (7 April 2012). "Credit Agricole Unit, Magnetar Sued by Intesa Over 'Pyxis' CDO". Bloomberg. Retrieved 10 September 2018.
  27. ^ a b c Stempel, Jonathan (13 February 2013). "Credit Agricole wins end to Intesa lawsuit on toxic CDO". Reuters. Retrieved 7 May 2018.
  28. ^ Stendahl, Max. "Credit Agricole Unit Dodges $180M Suit Over Bum CDO". Law360. Retrieved 17 April 2018.
  29. ^ Sample, Ian (1 October 2010). "Ig Nobel awards go to slime mould and fruity bats". The Guardian. Retrieved 17 April 2018. Awarded jointly to the executives and directors of Goldman Sachs, Lehman Brothers, Bear Stearns, Merrill Lynch, AIG and Magnetar
  30. ^ Perlberg, Heather; Gittelsohn, John (21 October 2013). "Magnetar Goes Long Ohio Town While Shorting Its Tax Base". Bloomberg. Retrieved 7 May 2018.
  31. ^ Gallagher, Alanna (1 November 2017). "High-spec new builds on hip Arbour Hill from €445,000". Irish Times. Retrieved 21 June 2018.
  32. ^ Abrams, Rachel (29 January 2013). "Fox closes $400 million co-financing pact". Variety. Retrieved 21 June 2018.
  33. ^ Taub, Stephen (October 2014). "The Morning Brief: Magnetar, Saba Launch New Funds". Absolute Return + Alpha. Retrieved 21 June 2018. Alec Litowitz's Magnetar Capital has raised nearly $200 million for two new funds, Magnetar Solar Holdings (Cayman) and Magnetar Solar Opportunities Fund. The Evanston, Illinois-based hedge fund firm indicated in a regulatory filing that the new offerings are private-equity funds. The minimum investment for the offshore version is $100,000, according to a filing. Magnetar, which manages $12.4 billion, declined to provide further details.
  34. ^ "Magnetar funds 111-MW solar drive". Platts Power In Europe. 16 February 2015. Retrieved 21 June 2018. Magnetar Solar (UK) Ltd owns 300-MW of PV capacity spread across twenty-five UK sites. Around 100-MW are operational, with the balance in construction. It is owned by US investment fund Magnetar Capital.
  35. ^ a b Stoker, Liam (25 January 2018). "Rockfire shoots up UK solar rankings with 300MW+ Magnetar portfolio purchase". Solar Power Portal. Retrieved 21 June 2018.
  36. ^ Chung, Juliet (14 May 2015). "Blackstone Buys a Piece of Hedge Fund Magnetar". The Wall Street Journal. Retrieved 7 September 2018.
  37. ^ "Hedge fund Magnetar Capital says Blackstone buys minority interest". Reuters. 14 May 2015. Retrieved 7 May 2018.
  38. ^ Burke-Kennedy, Eoin (1 June 2017). "Dublin-based First Citizen nets €28m in new capital raise". Irish Times. Retrieved 21 June 2018.
  39. ^ McEwen, Mella (12 February 2018). "Double Eagle Energy Holdings III secures $1 billion in equity commitments". Midland Reporter-Telegram. Retrieved 20 June 2018.
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