Credit Woes Topple Sowood

The damage to the firm apparently hit harder than most expected, particularly since on late Monday, Kenneth Griffin's hedge fund Citadel agreed to purchase a portfolio of Sowood assets at deep discounts.

Sowood's debt dilemma is not directly due to the troubled subprime mortgage market as is the case of the two Bear Stearns(BSC) hedge funds rendered essentially worthless after ill-fated bets on securities backed by mortgages issued to borrowers with less-than-stellar credit. But the situation underscores the insidious effect that subprime has had on the wider financial markets. Credit concerns resulting from questions about underwriting standards and debt investors demanding higher premiums to take on risk have stifled liquidity and chances at upending a host of investment managers not related to subprime paper.

Larson launched Sowood three years ago. He was a part of Harvard University's investment management team, which manages the university's endowment. Sowood's losses serve as a blemish on a stellar history not just for Sowood and Larson but potentially for Harvard, as well, which was one of Sowood's earliest investors, according to a report from Bloomberg.

"We are very sorry this has happened," Larson writes in the letter to investors. "We have always attempted to do the very best for our investors. A loss of this magnitude in such a short period is as devastating to us as it is to you."

>To order reprints of this article, click here: Reprints