Ali’s blog

Mostly quant stuff with occasional digressions

The sordid realities they won’t teach you at quant school

Posted by alifinmath on January 14, 2008

Interesting story:

The trading strategy of a little-known hedge fund run by an astronomy buff contributed to billions in losses on Wall Street, even as the fund itself profited from the subprime-mortgage crisis.

The hedge fund, run by Alec Litowitz, 41 years old, facilitated the creation of a few of the worst-performing collateralized debt obligations, or CDOs. These are giant packages of subprime-mortgage securities and derivatives that are bundled together and sold off in slices to investors around the world. The investments came with names like Orion, Aquarius, Scorpius, Carina and Sagittarius and were managed by third-party money managers. In all, roughly $30 billion of these constellation CDOs were issued from mid-2006 to mid-2007, with Magnetar as their lynchpin investor.

Even as it helped to spawn CDOs that would later wrack Wall Street with painful losses, Magnetar, which has around $9 billion in assets, itself made a tidy profit. Its funds returned 25% across a range of stock and debt strategies last year, thanks largely to the way it hedged these trades.

Its trading highlights the important role some hedge funds played in the great debt unwind that is now plaguing financial markets. Many hedge funds realized early on “that the loans and securities that went into CDOs were extremely toxic, and they designed structures to exploit that,” says Janet Tavakoli, a structured-finance consultant.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: