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.<\/p>\n
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.<\/p>\n
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.”<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n