Escolar Documentos
Profissional Documentos
Cultura Documentos
Funds:
Magnetar and Peloton
Case summary
Magnetars success
Pelotons failure
Housing boom & burst- Low interest rate, CDOs, rating agencies
Cov-lite corporate bank debt
Financial Crisis
Enables a bank to design loans to homeowners to make more loans as bank can sell
loan to third party principle agent problem
Many CDOs became liquid due to size, investor breadth and rating agency coverage
Securitizatio
n process
took time
Reason of
Holding CDOs
Kept a
small
holdback
amount
Trading
divisions
made
markets in
the
security
Magnetar strategy
Equity and Mezzanine tranches of ABS CDOs had same risk but
very different yields
Trades were constructed in such a way that the cash inflow from
long positions in equity tranche were much higher than the cash
outflow due to short positions in Mezzanine tranche.
Their strategy would only lose money if the equity got wiped out
while the Mezzanine tranche stayed intact, the probability of which
was very less.
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