Magnetar Capital Raises $370 Million for Mortgage-Bond Funds

Magnetar Capital LLC, the hedge fund that profited from subprime defaults in 2007 after helping create collateralized debt obligations, raised $370 million to bet on mortgage bonds.

The firm raised the money in two separate Magnetar Mortgage Securities funds, which were started last year, it said today in filings with the U.S. Securities and Exchange Commission. Hedge funds often raise money in two vehicles with similar names to serve onshore and offshore investors. The $370 million may not reflect any redemptions.

Melinda McMullen, a spokeswoman for Evanston, Illinois-based Magnetar, declined to comment on the funds.

The firm joined companies including Goldman Sachs Group Inc., Cerberus Capital Management LP and Canyon Partners LLC in raising money in 2012 for mortgage-bond funds. Home-loan securities without government backing soared as the housing market emerged from a five-year slump and the Federal Reserve’s effort to stimulate the economy by holding down interest rates pushed investors toward debt with potentially higher returns.

Magnetar’s role in 2006 and 2007 in helping create CDOs, which package assets such as mortgage bonds and buyout loans into new securities with varying risks, has led to regulatory actions and private lawsuits against underwriters and asset managers also involved in the deals.

Legal Claims

A Deutsche Bank AG unit agreed to pay $17.5 million to settle a Massachusetts probe over its alleged failure to disclose conflicts of interests tied to a $1.56 billion mortgage CDO involving Magnetar called Carina, Secretary of the Commonwealth William Galvin said today in a statement. Deutsche Bank and Magnetar co-invested in at least six CDOs with a value of $10 billion, according to the statement.

Deutsche Bank failed to disclose Magnetar was betting against some of Carina, the regulator said. It also didn’t disclose that a Deutsche Bank proprietary trading desk intended to make wagers against “other CDOs whose performance was expected to be similar to the performance of Carina” while participating in the deal, according to a consent order filed today by the state’s securities division.

“We are pleased to have reached this settlement and put this matter behind us,” Renee Calabro, a spokeswoman in New York for Deutsche Bank, said in an e-mail. Magnetar’s McMullen said in an e-mail that “as an investor, Magnetar had no responsibility for the disclosures or marketing of CDOs.”

‘Market Neutral’

In 2011, JPMorgan Chase & Co. agreed to pay $153.6 million to settle SEC claims that it didn’t tell investors about Magnetar’s involvement in helping pick the underlying assets in a CDO. Massachusetts regulators sued Putnam Advisory Co. last year for allowing Magnetar to allegedly recommend collateral for CDOs, without telling investors the hedge fund was betting against those securities.

Magnetar told investors in a 2010 letter that it didn’t help banks create CDOs “built to fail” as it paired purchases of the riskiest slices with wagers that mortgage debt would default. The firm offered limited input on the selection of securities in the deals and made bets that would pay off if they soured as part of a “market neutral” portfolio designed to profit no matter what happened, it said.

After a slump that wiped out the value of certain U.S. mortgage debt in 2007 and 2008, so-called non-agency home-loan bonds without government backing last year returned about 21 percent, according to Amherst Securities Group LP, as some notes tied to subprime borrowers gained more than 40 percent. The debt returned 0.1 percent on average last month, trailing other assets, after outperforming with a 3.3 percent gain in January, according to the bond broker.

Magnetar, which is led by Chief Executive Officer Alec Litowitz and oversees about $9 billion, focuses on fixed-income and energy investments, as well as profiting from sudden changes in securities valuations that result from corporate and other events, according to its website.

Before it's here, it's on the Bloomberg Terminal.