Magnetar’s Magnetism

The Wall Street Journal’s Heard on the Street column (“A Fund Behind Astronomical Losses”) is about Magnetar Capital, a hedge fund founded by former Citadel trader Alec Litowitz.

The Journal describes Litowitz as an “astronomy buff” who named his hedge fund Magnetar, “a neutron star with a powerful magnetic field that was a remnant of a supernova”. Under Magnetar’s star power were CDOs* named after constellations – Aquarius, Scorpius, Sagittarius, Carina, and Orion. Several of these CDOs such as Carina, Cetus, Octans, and Orion have declared “events of default”, meaning they face liquidation. It’s no surprise to me that the Sagittarius CDO is involved in a legal dispute, as Sagittarius rules the law and legal issues.

While Magnetar hedged its “constellations”, Wall Street got burned.** Any investor who understands that names have meaning would have not given a hedge fund named Magnetar the time of day. A neutron star’s decay emits copious amounts of electromagnetic radiation such as gamma-rays, which is generated by radioactive atoms (like in nuclear explosions). Gamma-rays kill living cells. The symbolism of Magnetar’s CDOs becoming toxic to investors became reality. Pluto rules nuclear energy and anything that is toxic. Financially, Pluto rules debt. It represents extremes, from wealth and power to bankruptcy. Things reached a crescendo last month when Jupiter and Pluto conjoined in Sagittarius. This represented the loss of massive amounts of money through investing in risky asset-backed securities that have become toxic nuclear fallout spread worldwide.

*Collateralized Debt Obligations – Packages of asset-backed securities and derivatives bundled together and sold off in slices (tranches) to investors worldwide.

**Magnetar purchased insurance against higher-rated CDO tranches (that they did not own); they purchased the lowest rated tranches paying 20%+ interest. Magnetar knew that the implied volatility in the insurance that they purchased was extremely understated. The theory was that if the party continued, they would collect high interest payments. If things faltered, they would collect high insurance payments on policies with low premiums.

1 comment:

Anonymous said...

But they made millions betting against those same CDOs...