Funds News

Failed Sowood hedge fund manager raising new money

BOSTON (Reuters) - One year after Jeffrey Larson lost about $1.5 billion in one of the hedge fund industry’s most spectacular collapses, he is trying to raise fresh capital for a new fund, people familiar with his plans said.

“Larson is back and he has been calling virtually everyone in town, leaving no stone unturned,” said a Boston-based investor who was contacted by Larson but declined to be identified so he could speak candidly about the new fund.

Larson’s $3 billion hedge fund firm, Sowood Capital Management, lost half of its capital a year ago following heavy losses on his bond market investments.

Within days, the 50-year-old manager, who once helped invest Harvard University’s $35 billion endowment and still managed money for the school in his own fund, was forced to shut down his three-year-old company. Sowood became known as one of the hedge fund industry’s biggest collapses, and Larson apologized to investors.

He is now approaching his past backers and others, highlighting his successes at Harvard and trying to convince endowments and pension funds that he’s worth another bet.

Larson and former Sowood legal counsel and managing partner Megan Kelleher have formed Larson/Kelleher Capital Management, an investment firm with 18 people that promises to manage a “limited leverage, value driven portfolio,” according to a copy of the pitch obtained by Reuters.

The team, which includes Doug Francis, a Sowood alumnus who briefly moved to Tisbury Capital Management, promises to focus on stocks of small- to mid-sized companies that have been battered by collapsing financial and housing markets.

LK Capital will also focus on short-maturity LBO (leveraged buyout) debt, people who have seen the documents said.

“We focus on investments with a ‘margin of safety’ and, where appropriate, attempt to further enhance risk/return profiles through the application of hedges,” Larson wrote in a written presentation that he is making around the country.

So far, the reaction to Larson’s new firm has been mixed.

Several hedge fund investors, asking not to be identified so they could speak freely, said they would never consider putting money with Larson after he lost so much capital.

The reputational risk is just too great, one person said, adding that his investors would “crucify” his fund for any bet on Larson.

“Relaunching a problem is not for us,” said another Boston-based person familiar with Larson’s plans.

But other people said Larson’s strong record at Harvard, where he worked from 1991 to 2004, is impressive and counted him among the small number of failed hedge fund managers who might be successful in starting up again.

John Meriwether, whose Long-Term Capital Management hedge fund collapsed in 1998, for example, was able gather roughly $2 billion for a new fund.

At Harvard, Larson delivered a 15.9 percent annualized gross return including benchmark in the developed markets portfolio. At Sowood, which he ran from 2004 through last July, Larson delivered a 10.7 percent annualized net return, excluding July.

To sweeten the deal, Larson is promising investors generous conditions where they can get out twice a year after giving 90 days notice.

“It might be worth following up,” said one person who was approached.

Editing by Braden Reddall