Taking a similar view is hedge fund Magnetar, which was founded by former executives at Citadel Investment Group and Glenwood Capital Investments. It is said to have raised some $500 million for a long/short mortgage fund to plow into derivatives and other structured securities tied to subprime, according to industry newsletter Derivatives Week.

David Snyderman, head of global fixed income at Magnetar, directed calls to a spokesman who declined to comment on the firm's activities.

And Magnetar isn't the only shop scouring for value in subprime. Brigadier Capital Management -- an asset management arm of financial services firm Cohen & Co. -- is on the prowl, according to Ralph Nacey, chief investment officer at Brigadier.

Nacey says Cohen launched Brigadier nearly six months ago, anticipating subprime carnage.

"We thought there'd be opportunities," he says. "I don't think anyone could have predicted the speed at which things unfolded."

Brigadier raised some $120 million for investments back in November and could raise another $80 million shortly. Nacey declined to discuss specifics about the fund, including returns.

Rich Gates, portfolio manager in West Chester, Pa., at TFS Market Neutral Fund, began shorting Novastar in January, when the stock was trading in the $26 range. The mutual fund is a quantitative investment fund that employs some hedge fund savvy to make its bets.

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