Guardian Unlimited- America’s credit squeeze has prompted the demise of $3bn hedge fund Sowood Capital after it lost half its value in a month through disastrous bets on debt-related instruments.
Sowood, backed by Harvard University’s endowment arm, told investors its two funds declined by 57% and 53% during July. It is selling up to Citadel Investment – a Chicago hedge fund known for picking up distressed ventures.
Managing partner Jeff Larson, in a letter to clients, said: “A loss of this magnitude in such a short period is as devastating to us as it is to you.”
The Boston fund’s closure follows a crisis at two hedge funds run by Bear Stearns, which had to be bailed out last week with $3bn after losses on securities linked to sub-prime mortgages. The setbacks are the most dramatic since last summer’s failure of Amaranth Advisers – which lost $6bn in a week on gas futures.
Sowood blamed its problems on a sharp widening in credit spreads – the difference in return between corporate and government debt. The cost of private debt in the US has rocketed because of fears over sub-prime lending and the quality of certain loans funding huge private equity deals.
Sowood was established three years ago when Mr Larkin quit his job as an investment fund manager for Harvard – where he had star status after presiding over a 21% surge in the university’s endowment fund in 2004. He took 14 staff with him and Harvard put $500m into his new venture. The extent of the university’s exposure to Sowood’s losses was unclear yesterday.
