Magnetar Capital is a

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...

based in

Evanston, Illinois Evanston ( ) is a city, suburb of Chicago. Located in Cook County, Illinois, United States, it is situated on the North Shore along Lake Michigan. Evanston is north of Downtown Chicago, bordered by Chicago to the south, Skokie to the west, ...

. The firm was founded in 2005 and invests in

fixed income Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the prin ...

energy In physics, energy (from Ancient Greek: ἐνέργεια, ''enérgeia'', “activity”) is the quantitative property that is transferred to a body or to a physical system, recognizable in the performance of work and in the form of ...

quantitative Quantitative may refer to: * Quantitative research, scientific investigation of quantitative properties * Quantitative analysis (disambiguation) * Quantitative verse, a metrical system in poetry * Statistics, also known as quantitative analysis ...

and

event-driven Event driven may refer to: The term event-driven refers to a methodology that focuses on events and event dependencies. Examples include * Event-driven finite-state machine, finite-state machine where the transition from one state to another ...

strategies. The firm was actively involved in the

collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS).Le ...

(CDO) market during the 2006–2007 period. In some articles critical of Magnetar Capital, the firm's

arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between t ...

strategy for CDOs is described as the "Magnetar trade".The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going
, by Jesse Eisinger and Jake Bernstein,

ProPublica ProPublica (), legally Pro Publica, Inc., is a nonprofit organization based in New York City. In 2010, it became the first online news source to win a Pulitzer Prize, for a piece written by one of its journalists''The Guardian'', April 13, 2010P ...

, April 9, 2010 The company has additional offices in

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London, England London is the capital and largest city of England and the United Kingdom, with a population of just under 9 million. It stands on the River Thames in south-east England at the head of a estuary down to the North Sea, and has been a major se ...

Houston, Texas Houston (; ) is the most populous city in Texas, the most populous city in the Southern United States, the fourth-most populous city in the United States, and the sixth-most populous city in North America, with a population of 2,304,580 i ...

, and

Minneapolis, Minnesota Minneapolis () is the largest city in Minnesota, United States, and the county seat of Hennepin County. The city is abundant in water, with thirteen lakes, wetlands, the Mississippi River, creeks and waterfalls. Minneapolis has its origi ...

. In 2006–2007, Magnetar Capital "facilitated the creation of a few of the worst-performing collateralized debt obligations", many named after stars or constellations. 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. As of 2010, 23 of the CDOs Magnetar Capital invested in had become "nearly worthless". "The Inside Job. Act One: Eat My Shorts"
(Episode 405), ''

This American Life ''This American Life'' (''TAL'') is an American monthly hour-long radio program produced in collaboration with Chicago Public Media and hosted by Ira Glass. It is broadcast on numerous public radio stations in the United States and internati ...

''. (2010-04-09), Alex Blumberg, Jake Bernstein, Jesse Eisinger Despite investigations by the U.S. Securities and Exchange Commission into several deals in which Magnetar Capital invested, there was no enforcement action filed against the firm.

History

Magnetar Capital was founded in 2005 by Alec Litowitz (formerly of

Citadel LLC Citadel LLC (formerly known as Citadel Investment Group, LLC) is an American multinational hedge fund and financial services company. Founded in 1990 by Kenneth C. Griffin, it has more than $50 billion in assets under management . The company ...

) and Ross Laser (formerly of Glenwood Capital Partners). Based in

, the firm started with $1.8 billion in capital, making it one of the largest hedge fund launches at the time. Early on, Magnetar Capital's multi-strategy fund invested in event-driven investments and the firm doubled in size to nearly $4 billion by the end of 2006. 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. In 2005, Magnetar began investing in the North American energy sector.

2006–2007 involvement with CDOs

Magnetar Capital was actively involved in the collateralized debt obligation markets during the 2006–2007 period, when it invested in the equity of about $30 billion worth of CDOs. As a proposed means to hedge CDO investments,

Goldman Sachs Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, Ho ...

sent Magnetar Capital marketing information regarding "short bets" against the housing market via an asset-backed securities index (ABX). Banks Bundled Bad Debt, Bet Against It and Won
by Gretchen Morgenson and Louise Story, 23 December 2009, New York Times Partner David Snyderman told ''Derivatives Week'' at the time that Magnetar Capital was "excited about the opportunities in the mortgage derivatives market". CDO investments are divided into risk-based tranches: the highest risk slices offer the highest yield, whereas the safer pieces have lower yields. With what some observers have referred to as the "Magnetar Trade", Magnetar Capital took long positions in the highest risk slices of synthetic collateralized debt obligations and hedged those positions by placing short bets on safer slices called mezzanine tranches via

credit default swaps A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event. That is, the seller of the CDS insures the buyer against some ...

, which act similarly to an insurance policy. This allowed Magnetar Capital to receive payments while the housing market ran smoothly and hedged its downside risk. As a result, it lost money on the riskiest slices it bought, but made much more from the hedges when the market collapsed in 2007. According to mortgage analysts, Magnetar Capital would have benefitted from its Magnetar Trade regardless of whether the subprime market collapsed. ''

''s coverage of the CDO industry, which won the

Pulitzer Prize The Pulitzer Prize () is an award for achievements in newspaper, magazine, online journalism, literature, and musical composition within the United States. It was established in 1917 by provisions in the will of Joseph Pulitzer, who had made ...

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). 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. ''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.

Janet Tavakoli Janet Tavakoli is the president of Tavakoli Structured Finance, Inc., a Chicago-based consulting firm. She has had three books published on credit derivatives, structured finance, and the 2008 global financial crisis. Education and background ...

, 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".Structured Finance and Collateralized Debt Obligations, Second Edition, Janet Tavakoli, publisher John Wiley & Sons, Inc., 2008, Constellation CDOs: pgs 413-415 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. The firm said its investments were market neutral and would have made money whether the housing market went up or down. 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".

2010 lawsuits

In 2010, the Securities and Exchange Commission filed a complaint against

JP Morgan Chase JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, the w ...

for a deal in 2007 that involved securities picked by Magnetar Capital. JP Morgan settled the lawsuit for $153.6 million in 2011. 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".The Magnetar Fallout: Who’s Been Charged, Has Settled, or is Now Being Investigated?
by Cora Currier, ProPublica, July 19, 2012 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. In 2010,

Intesa Sanpaolo Intesa Sanpaolo S.p.A. is an Italian international banking group. It is Italy's largest bank by total assets and the world's 27th largest. It was formed through the merger of Banca Intesa and Sanpaolo IMI in 2007, but has a corporate identity ...

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

Parody Prize

In 2010, Magnetar Capital’s directors, among others, won the

Ig Nobel Prize The Ig Nobel Prize ( ) is a satiric prize awarded annually since 1991 to celebrate ten unusual or trivial achievements in scientific research. Its aim is to "honor achievements that first make people laugh, and then make them think." The name o ...

in Economics for "creating and promoting new ways to invest money—ways that maximize financial gain and minimize financial risk for the

world economy The world economy or global economy is the economy of all humans of the world, referring to the global economic system, which includes all economic activities which are conducted both within and between nations, including production, consumptio ...

, or for a portion thereof".

Diversification into other asset classes

Following the financial crisis, the firm pivoted into quantitative trading 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. Magnetar Capital also invests in European

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

. 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 20th Century Studios, Inc. (previously known as 20th Century Fox) is an American film production company headquartered at the Fox Studio Lot in the Century City area of Los Angeles. As of 2019, it serves as a film production arm of Walt Disn ...

with money to fund a slate of films over a five-year period. In 2014, Magnetar Capital introduced two new energy funds, Magnetar Solar Holdings and Magnetar Solar Opportunities Fund. Magnetar Solar (UK) owned 25 solar farms with approximately 300 megawatts of generation capacity. In 2016, Magnetar Capital owned about 344 megawatts of the UK's solar production. The firm sold its UK solar portfolio to Rockfire Capital in 2018.

Mergers and acquisitions

The

-based

Blackstone Group Blackstone Inc. is an American alternative investment management company based in New York City. Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate bu ...

's hedge fund unit, Blackstone Alternative Asset Management, through its Strategic Capital Holdings Fund, bought a minority stake of Magnetar in 2015. Financials of the deal were not disclosed; Magnetar said the deal would help it expand, and management remained in place following the deal. Magnetar Capital bought a majority stake in auto lender First Citizen, of

Dublin Dublin (; , or ) is the capital and largest city of Ireland. On a bay at the mouth of the River Liffey, it is in the province of Leinster, bordered on the south by the Dublin Mountains, a part of the Wicklow Mountains range. At the 2016 ...

Ireland Ireland ( ; ga, Éire ; Ulster-Scots: ) is an island in the North Atlantic Ocean, in north-western Europe. It is separated from Great Britain to its east by the North Channel, the Irish Sea, and St George's Channel. Ireland is the s ...

, in 2017. 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 Texas (, ; Spanish: ''Texas'', ''Tejas'') is a state in the South Central region of the United States. At 268,596 square miles (695,662 km2), and with more than 29.1 million residents in 2020, it is the second-largest U.S. state by ...

References

{{reflist Financial services companies established in 2005 Hedge fund firms of the United States Companies based in Evanston, Illinois