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A Tale of Two Hedge Funds
A Tale of Two Hedge Funds
Funds:
Magnetar and Peloton
Financial Crisis
Enables a bank to design loans to homeowners to make more loans as bank can sell
loan to third party
Many CDOs became liquid due to size, investor breadth and rating agency coverage
Rating Agencies
Limited Manpower
Correlation
Magnetar
Founded in 2005
Bought less risky CDO equity and credit default swaps(CDS) protection on
tranches
Performed its own calculation of Risk for each tranche and compared that with
the return that the tranche offered
Results showed Two classes of securities had very similar risks but
significantly different yields
Peloton
Founded in 2005
Became bankrupt after one month of getting two prestigious awards-at Black tie
euro hedge ceremony
Shorted the US housing market before subprime crisis and was profited
Leveraged Profit
The investors purchased the senior tranche of CDO yielding LIBOR +50 bps
Investors believed that the default rates would hit higher level that in 1930s
and would stay there till maturity
Was thought to have limited near term default as companies ran until cashless
Yield on secured cov-lit bank loans and compare it with unsecured bonds of same
company
Bank debt had pressure of selling as held in large by investors. Whereas, bonds did not
Thank You
Amrita Das
Ankit
Chokhani
Shreyansh Jain
Vivek S Nath