Sowood To Shutter After Citadel Sale, 50% NAV Drop

Jul 31 2007 | 12:28pm ET

Contrary to earlier reports, Sowood Capital Management will be closing its doors after losing more than 50% as a result of the collapse of the sub-prime mortgage market. And manager Jeffrey Larson, who made his name investing Harvard University’s substantial endowment, is saying “sorry.”

Sowood, which once boasted over $3 billion in assets under management, is the largest hedge fund casualty of the sub-prime market slide. After what Larson, in a letter to investors, called “the painful and difficult decision to sell substantially all the fund’s portfolio to Citadel Investment Group,” Sowood plans to return the remaining $1.5 billion to its investors.

Larson apologized to his clients, writing, “We are very sorry that this has happened. 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.”

The precise magnitude of the disaster was laid out in the letter: Following the Citadel deal, the Alpha Fund Ltd. is down 57% in July and 56% year-to-date, and the Alpha Fund LP is down 53% on the month and 51% on the year. And this, Larson points out, is the bright side.

“Citadel offered the only immediate and comprehensive solution,” he wrote. “The transaction enabled us to avoid anticipated forced sales at extreme prices that would have been made in order to satisfy obligations under our counterparty agreements.”

“We believe that the arrangement with Citadel provided our best option under the circumstances, since we were unable to find other sources of liquidity.”

Larson said Sowood will distribute is assets “as soon as we can.” The firm will hold a listen-only conference call later in the week.

Sowood is folding in spite of not facing redemptions until 2008. The firm was founded by Larson after he left Harvard Management Co. in 2004. Harvard is one of the firm’s biggest clients.



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