Magnetar: This Old School Hedge Fund is Going Quant

Alec Litowitz, founder of one of the country’s largest hedge funds, raised a simple question at the firm’s investment committee meeting: How often do mergers fall apart?

No one had the answer, so the Magnetar Capital LLC founder assigned a team of analysts to pore through three decades of data to find out. They calculated that while 7% of announced transactions eventually collapse, the market behaves as if nearly twice as many do.

Mr. Litowitz reasoned a computer program could make money exploiting that discovery and thousands of others. So he posed a second question: “What if we could take what was in our head and our database and make rules out of it?”

.. “We start with intuitions and then go see if the data backs it up,” says Mr. Litowitz. “Most people reverse it. They go looking for data and then go find a signal that explains it.”

.. Mr. Litowitz left to start Magnetar in 2005

.. Since inception, Magnetar’s flagship fund has reported only two down years, with an average annualized return of roughly 5%, after fees.

.. positive investment performance including 8% gains in each of the past two years