Long Afterlife of Credit Crisis Casualty

Chidem Kurdas
The death of a hedge fund, unlike the end of Willy Loman in Death of a Salesman, takes a while. Often years. Even so, six years is long time for a dead hedge fund to linger on the books, as Sowood Capital has.

Sowood founder Jeff Larson threw in the towel in July 2007 after widening credit spreads caused his two funds to lose 57% and 53% in that month. He sold portfolio assets to Citadel at distressed prices—reportedly Citadel made a handy profit when the market recovered.

Around half of Sowood’s $3 billion assets were lost. As for what remained, Mr. Larson told his clients that portfolio positions and details of the deal had be sorted out but they would get their money back as soon as possible, “subject to reserves and holdbacks for completion of the audit, contingencies and potential liabilities.”

Regarding that last item, there was some talk of a lawsuit. The funds’ documents may have contained a provision that if the manager is sued, investors will in effect bear the expense. That would be a “potential liability.”

Some time later, in 2008, it was reported that Mr. Larson wanted to get back into fund management. While such comebacks have happened, it was highly unlikely at a time of crisis, with daily reminders of credit risk in the headlines.

The remnant of the Sowood funds stayed on investors’ books, marked as “fund in liquidation.” But that word is not quite accurate. Assets were sold to Citadel in July 2007—the Sowood funds were mostly liquidated back then.

This is not a matter of slowly unwinding the portfolio so as to get better asset prices, but rather an example of how investors’ money can get stuck for all kinds of reasons.

A 2007 WSJ article had a neat title: “Sowood’s Short, Hot Summer.” A story on the sequel could be called “Long, Cold Closure.”

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Tags: crisis, Death of a Hedge Fund, The Wall Street Journal