Hedge fund manager Sowood Capital Management is looking down the barrel of a credit crisis.
The $3 billion Boston-based investment vehicle, which has been upended by risky bets in the credit market, is unwinding, according to a letter to investors from founder Jeff Larson obtained by
Sowood's funds Sowood Alpha Fund and Sowood Alpha Fund saw half their values wiped out, declining 56% and 51%. The net asset value of the funds is approximately $1.5 billion, according to the letter.
"We understand this is a very difficult moment for you and are committed to keeping all lines of communications open," Larson writes in the letter. Key staff are expected to be retained to manage the process of selling the company's remaining assets, it says.
Sowood has hired New York-based firm Abernathy & MacGregor Group to handle public relations. A spokesman at the firm declined to comment and calls to Sowood officials were not returned.
Last week, creditors came calling for Sowood, which informed its investors that it had been forced to sell some of its investments to provide its lenders more collateral. The problem is that the funds were forced to sell off assets at deeply discounted prices, given the dwindling appetite for credit that the debt market has been faced with as of late.
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
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
"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."