Sowood Capital

Sowood Capital is a Boston based hedge fund that lost 50% of its capital in the credit market turmoil of July 2007. Jeffrey Larson, the founder, worked for 12 years at the Harvard Management Company, the organization responsible for managing some of the business affairs of Harvard University. Harvard had seeded Larson with $500 million. Losses from the collapse were about $1.5 billion. Chicago-based hedge fund Citadel LLC bought out Sowood's position and made huge profits as the markets recovered. How much Citadel made is not a matter of public record. Most of Sowood's portfolio was credit that did not recover later in 2007. Citadel would have made some profits if they sold before markets deteriorated further because of the discount they received. That could not be huge as claimed by an earlier author because credit started blowing up in summer of 2007. The Sowood portfolio if held would have lost many more billions after the stress that continued and extended into 2008.

For the West Yorkshire village with the same name, see Sowood, West Yorkshire.

Sowood can best be remembered for excessive risk taking. Investors got monthly letters describing excessive risk in credit products while in meetings with Jeff Larson and Megan Kelleher they were told that the portfolio was market neutral and hedged. The two decade plus experience of the portfolio manager, Jeff Larson, was not in the strategies run at Sowood namely credit products through capital structure arbitrage and structured credit. Furthermore, the trading team itself had no prior experience in the strategies and was very inexperienced something investors came to appreciate afterwards. The senior members of Jeff's team at Harvard did not join him, having started their own hedge fund. Investors were told for example, that the reasoning behind billions in structured credit trades did not involve correlation and that it was not incorporated in the analysis, analogous to trading options without the concept of volatility. The large losses in a one month span are indicative of the poor hedging and excessive risk across the portfolio as losses were not isolated.

References

• Bloomberg.com
• ft.com (subscription required)