Citadel Takes Over Sowood Capital's Credit Holdings (Update2)

Date: Monday, July 30, 2007
Author: Katherine Burton and Jenny Strasburg, Bloomberg

July 30 (Bloomberg) -- Citadel Investment Group LLC took over Sowood Capital Management LP's credit holdings after the Boston-based hedge-fund manager suffered losses on corporate bonds and loans. Terms weren't disclosed.

Sowood, which manages $3 billion, said July 27 that returns fell as investors fled riskier debt such as subprime-mortgages and bonds used to fund leveraged buyouts. The risk of owning corporate bonds soared today to the highest on record in the U.S. and Europe, credit-default swaps show.

``This transaction provides for an orderly transference of risk between the parties,'' Kenneth Griffin, Citadel's president and chief executive officer, said today in a statement.

Bryan Locke, a Citadel spokesman, declined to comment. Megan Kelleher, Sowood's general counsel and a managing partner, didn't immediately return calls seeking comment.

Citadel, which manages $14 billion, and JPMorgan Chase & Co. took over the energy trades of Amaranth Advisors LLC when the Greenwich, Connecticut-based hedge fund collapsed under the weight of more than $4.6 billion in losses on natural gas. Citadel later bought the positions held by New York-based JPMorgan.

Sowood, started by former Harvard University endowment manager Jeff Larson, uses a variety of strategies in trading convertible bonds, commodities, bonds and stocks. As of March 31, the fund owned about $6.4 billion in stocks, according to a U.S. Securities and Exchange Commission document.

Harvard a Client

Larson, 49, opened Sowood in 2004 and early investors included his previous employer, Harvard, which put in $500 million. He joined the university's investment unit, Harvard Management Co. of Boston, in 1991 from the finance division of Cargill Inc., the largest U.S. agricultural company. He started at Cargill in 1979 as an economic analyst.

At Harvard, Larson managed foreign stocks and a commodities portfolio and ran about $3 billion of the endowment of the Cambridge, Massachusetts, university. He earned $17.3 million in 2003, a year when Harvard paid more than $100 million to internal money managers, raising the ire of alumni.

Harvard's $30 billion endowment, the largest for a university, was to increase its allocation to Sowood's hedge fund and a separate private-equity fund this year, according to a December statement from Sowood. The private-equity fund was spun off this month as Boston-based Denham Capital Management LP.

John Longbrake, a university spokesman, declined to comment. Mohamed El-Erian, CEO of Harvard Management, didn't immediately return phone calls.

Seeking Higher Returns

El-Erian said in the December statement that splitting the hedge-fund and private-equity businesses would boost returns for both. The Harvard fund was the sole initial investor in the Sowood private-equity fund, whose assets increased 10-fold in two years to $2.3 billion as of December.

Sowood's name came from ``South Woodside Avenue,'' the street in Wellesley, a suburb of Boston, where Larson lived when he started at Harvard Management. The fund raised $2 billion before closing to new investors.

Hedge funds are largely unregistered pools of capital that cater to wealthy individuals and institutions and allow managers to participate substantially in profits from investments. They control about $1.74 trillion, more than double the amount five ago.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net ; Jenny Strasburg in New York at jstrasburg@bloomberg.net .