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Magnetar Hedge Fund Gains as Subprime Lenders Stumble (Update1)

Date: Monday, March 12, 2007
Author: Jenny Strasburg, Bloomberg

 March 12 (Bloomberg) -- Magnetar Capital LLC, the hedge- fund firm started by Citadel Investment Group LLC veteran Alec Litowitz, gained 2.8 percent last month, helped by bets that subprime-mortgage lenders would stumble.

Magnetar's flagship fund returned 6.4 percent through February, the Evanston, Illinois-based firm said in an update last week to investors. The $3 billion multistrategy fund, which had about 17 percent of its capital in subprime-related investments, profited when mortgage defaults increased, according to an investor.

At least two dozen lenders have been forced to close or sell assets since the start of 2006 as subprime loan delinquencies and defaults climbed to their highest rate this decade. Shares of companies including New Century Financial Corp. and Fremont General Corp. have plunged, while insurance on pools of loans to borrowers with bad credit has risen in value as investors seek to hedge their losses.

``Magnetar has been concerned about the excesses in the subprime-housing market since early 2006,'' David Snyderman, 36, Magnetar's head of global fixed income, said in an interview today. ``As a result, we have positioned our structured-credit portfolio such that we are profiting from the recent volatility.''

Other hedge-fund managers that expected more subprime loans to go bad include Paulson & Co., Camulos Capital LP and MKP Capital Management LLC.

Credit-Default Swaps

Paulson, a New York-based hedge-fund manager that oversees $11 billion, gained 67 percent in February in its flagship Paulson Credit Opportunities fund, according to a March 2 letter to investors. The fund, which has almost $2 billion in assets, benefited from bets on derivatives known as credit-default swaps tied to subprime mortgages, according to an investor.

Camulos Capital's flagship fund was up 5.1 percent through the end of February, according to an investor. The Stamford, Connecticut-based firm is run by former Soros Fund Management LLC director Richard Brennan. Bill Young, Camulos's head of investor relations, declined to comment.

MKP, a New York-based hedge-fund manager with $5 billion in assets, was helped by mortgage-industry wagers last month. Its flagship MKP Partners fund, which invests in mortgage-backed securities, gained 6.2 percent and is up 8.7 percent so far this year, according to a letter sent to investors last week. MKP's credit fund returned 9.4 percent in February, bringing the return in 2006 to 11.8 percent.

Fortress Under Pressure

MKP spokesman Steve Bruce declined to comment. The firm is run by Patrick McMahon, Tony Lembke and Maurice ``Chip'' Perkins. It was founded in 1995 by Eric Keiter, who has since retired, and other former colleagues at Salomon Brothers.

Shares of Fortress Investment Group LLC, which in February became the first U.S. manager of private equity and hedge funds to go public, have fallen 7.5 percent since March 8. Last year, the New York-based company bought Dallas home builder Centex Corp.'s subprime mortgage unit for about $554 million and the loan-origination unit of Champion Mortgage that had been part of Cleveland-based bank KeyCorp.

Fortress shares dropped 92 cents, or 3.4 percent, to $25.97 at 4:01 p.m. in New York Stock Exchange composite trading. Fortress spokesman Lilly Donohue declined to comment. The company manages $30 billion in assets.

Hedge funds returned an average of 0.65 percent globally in February, which ended with a selloff that battered stock markets globally, according to Chicago-based Hedge Fund Research Inc. The private pools of capital manage $1.4 trillion.

The Tudor BVI, a $5.6 billion macro fund run by Paul Tudor Jones's Greenwich, Connecticut-based Tudor Investment Corp., returned 0.03 percent in February and is up 1.72 percent so far this year, according to investors.

So-called macro funds, which bet on broad economic trends, fell 0.47 percent on average last month, according to Hedge Fund Research.

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net