Nanoscale materials offer unprecedented opportunities to investigate and interact with biological systems. Magnetic nanomaterials are especially interesting due to the potential for locating materials inside the body using an external magnetic field. Magnetically targeting chemotherapy drugs, for example, could decrease the systemic effects that make cancer treatment so debilitating. Biomedical applications, however, impose constraints. Magnetic targeting requires large magnetic moments, but also that materials be biocompatible, and stable in air and aqueous environments. Size and surface characteristics (e.g. charge, chemical functionality) must be controlled to regulate how the nanomaterials circulate within the body and interact with different types of cells. After a general overview of the challenges and opportunities for physical scientists interested in applying their expertise to biomedical challenges, I will describe our work developing multifunctional magnetic nanoparticle fluids. These materials are capable of delivering multiple hydrophobic anti-cancer drugs to specific locations, as well as enhancing magnetic resonance imaging of the affected area. In this formulation, the drugs partition in the hydrophobic portion of a double-layer surfactant, which improves drug loading and release, while the outer layer of the surfactant improves the circulation time in the body. I will then describe our use of inert-gas condensation into liquids to produce increased magnetic moment nanoparticles that will improve the magnetic targeting capability, and our efforts to understand the mechanisms by which surfactants change magnetic properties.