Half the story of Sowood fund's failure

There are lots of fancy streets in the posh Boston suburb of Wellesley (average home price: $1.4 million), some that are fancy-shmancy and even some off-the-charts uber-fancy cul-de-sacs where prices are counted in the tens of millions. South Woodside Avenue ain’t one of those. It’s an ordinary, suburban lane with modest homes, tidy lawns and the occasional dog barking.

So maybe it’s a bit surprising that one-time superstar hedge fund manager Jeffrey Larson named his company, Sowood Capital Management, for that little avenue where he used to live and not after some grander neighborhood, Greek goddess or bit of obscure finance jargon. In today’s papers, you can read all about how Sowood was done in by wrong-way bets on corporate bond spreads and flawed hedge positions. You can even read about how Larson formed Sowood in 2004 after Harvard University ignited a storm of protests by paying him $17 million as one of its top endowment fund managers that year. Oddly, you don’t get much sense of the man.

You don’t for example read that during his 12-year stint at Harvard, his foreign equity investments beat market averages by nine percentage points a year. His last year at Harvard, overseeing a couple of billion dollars, Larson’s positions rose 15% versus a 4% gain in his benchmark index. And you certainly don’t read that he’s chairman of the board of trustees of Macalester College in St. Paul or an active figure in Boston philanthropic circles.

In 2007, fortunes rise and fall quickly in hedge fund land. Last year, Sowood’s assets rose 30%. This year, or should we say this month, they declined over 50%. In a frank letter to Sowood investors that quickly made its way to onto the web, Larson didn’t hide behind computer models that failed to anticipate last week’s tumult or try to argue that if he’d just held out for another few weeks, the market would have proved his bets correct. Instead, after explaining that selling the remains of the portfolio to Citadel Investment Group would preserve the most of what remained, Larson apologized. Then again, maybe it’s just not as good a story when a nice guy screws up.

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