Sowood Capital Management founder Jeffrey Larson spoke to his investors yesterday, expressing contrition and seeking to explain how his once $3 billion hedge fund went bust so fast.
In the 10-minute listen-only conference call, Larson revised downward the amount he expected to return to investors to $1.4 billion, from $1.5 billion. He said the firm was unwinding the few positions it had left—it sold the majority of its portfolio to Citadel Investment Group last week—and would then distribute its remaining assets to clients before closing its doors.
“You entrusted us with the management of your money, and we lost a lot of it, to say the least,” Larson said. “No apology is sufficient.”
Larson said the funds lost about 5% in June, but the firm didn’t think it was on the brink of catastrophe.
“Unfortunately, we were wrong,” he said. “July was not just a repeat of June, it was radically worse.... Each day brought greater and greater losses.”
According to Larson, his hedging strategy—shorting junior debt issued by companies in whose senior debt he had invested heavily with borrowed money—went terribly wrong. The firm assumed the junior debt would do as badly as or worse than the senior notes, but that assumption proved incorrect. By last weekend, Larson said, he realized that the only way to keep investors from losing everything was to strike the Citadel deal.
“We did this in order to avoid what we believed was the very real possibility of counterparties seizing our collateral and liquidating or auctioning our positions,” he said. “In such an uncontrolled process, we believe there was a high likelihood that little to no net asset-value would remain for our investors.”
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