July 30, 2007 / 6:03 PM / 11 years ago

Hedge fund Citadel takes over Sowood's credit fund

BOSTON (Reuters) - Hedge fund Citadel Investment Group, LLC said on Monday it took over Sowood Capital’s credit portfolio after the smaller fund suffered heavy losses that triggered speculation it may have to shut down.

Chicago-based Citadel, which manages $14 billion, came to the rescue after Boston-based Sowood, which managed $3 billion, got into trouble with bond trades this summer. Rumors that Sowood might be forced to shut down roiled financial markets late last week.

No terms were announced, but hedge fund managers and investors speculated on Monday the deal was worth hundreds of millions of dollars.

Sowood, which manages money for prominent investors like Harvard University, lost 8 percent in July and 5 percent in June, bringing losses to 10 percent for the year, a person familiar with its operations told Reuters last week.

Losses came quickly at Sowood — which had been up earlier this year and posted double-digit gains last year — when investors got out of risky sub-prime mortgages and other debt instruments, several people said.

Citadel’s move calms some nerves and also indicates liquidity is still available with buyers standing on the sidelines ready to move in to snap up beaten down portfolios.

“This transaction provides for an orderly transference of risk between the parties,” Citadel’s founder and chief executive Ken Griffin said in a statement.

Sowood’s losses spooked markets on Friday as traders and other hedge fund managers worried the fund would have to sell into a falling market to meet margin calls. Such selling could trigger a panic among investors at other hedge funds worried about the health of their own portfolios.

Sowood Capital did not comment on Monday.

When Sowood was launched in 2004, founder Jeffrey Larson quickly attracted high-profile investors, including Harvard Management Company, where he managed foreign stocks.

Unlike Harvard’s in-house investment group, which has to say how its investments fare and how much it pays its managers, Sowood was able to keep an extremely low profile.

The fund, located in Boston’s tony Back Bay neighborhood, does not report to any of the $1.75 trillion hedge fund industry’s performance trackers, several said.

Based on Larson’s pedigree and recent performance, the fund had a very good reputation and so, when speculation mounted that Sowood was forced to sell positions into a falling market late last week, industry analysts were quick to fret.

Outsiders said that, even though Citadel moved in, investors likely suffered.

“I don’t think anyone was bailed out here,” said Jim Midanek, whose hedge fund firm, Black Pearl Asset Management, plans to buy cheap subprime mortgage securities battered by the current crisis. He said he had no first-hand knowledge of the deal.

Sowood’s troubles follow on the heels of news two large Bear Stearns funds had essentially lost all of their capital in the subprime mortgage market.

For Citadel, one of the world’s most powerful hedge funds, stepping in to help rescue another fund’s portfolio is nothing new. Last year it snapped up failed hedge fund Amaranth Advisors’ energy portfolio.

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