Headlines from www.marketwatch.com : 1) Citadel got big discount for taking Sowood positions on 2) Sowood returning $90 mln in 2006 incentive fees to funds 3) Sowood hedge funds had roughly $1.5 bln earlier this week 4) Sowood hedge funds have $1.4 billion in assets, Larson says 5) Sowood is cooperating with regulators, Larson says http://www.marketwatch.com/search/default.aspx?doctype=806&refresh=on Much worse then initially thought...Unbelievable risk management !!
Sowood founder apologizes for hedge fund losses Sowood Capital Management Founder Jeff Larson apologized to investors during a conference call on Friday after hedge funds run by the firm lost more than half their value at the end of July. The esimated net asset value of the funds is $1.4 billion, Larson said. That's down from a $1.5 billion estimate earlier this week, he noted. Sowood sold most of its portfolio to Citadel Investment Group because that was the best option. Without that deal, Sowood investors would probably have been left with a total loss, Larson said. Citadel got a "substantial discount" for taking on the positions, he noted. Sowood has been contacted by regulators who want to know what happened and the firm is cooperating, Larson explained. The firm is putting roughly $90 million in incentive fees that it earned in 2006 back into the hedge funds, he also said. Sowood will now unwind its few remaining positions and return capital to investors as quickly as possible, Larson said. "There is no way to express how sorry I am about what has happened," he concluded. "This experience has harmed not just our clients but our friends."
Their risk management was probably nothing more than saying a few "Hail Marys" at church on Sundays. As I compose this, Larson is probably trying to start a new fund elsewhere and stage a comeback.
why would the fund have 0 value if citadel doesn't buy it? citadel bought at a discount, so obviously there's still some value, correct?
Its so annoying when so called experts lose money like that. If I had +$1 Billion to manage I would do wonders with minimal risk. Its incredibly annoying the people who get given money to manage and dont have a clue...
Because OPM is an option. You, as the manager, go for double or nothing. You lose 100% and you haven't lost anything (except time and some operating expenses). You double the funds value, your 20% of profits is worth a few hundred million. There's little money in playing it safe. The question is why these rich people invest with these hedge funds.
so if i understand correctly, the credit spreads widened , but the main reason for their collapse and other funds collapse is the margin right? the leverage they use.. and citadel, probably has the power to hold the positions until they reverse to mean? so the big big issue here is leverage and not necessarily credit spreads? or was it the swaps, that they were "earning" income from, and now were asked to provide the principle? i dont understand swaps very well..so pardon me if that seems wrong
Same thing that happened to LTCM. Most of their bets were guaranteed to converge (they had some directional bets, which was wrong, but that didn't break the bank). If they had enough capital or used less leverage, they would have survived and made money. But when you assume spreads can only go to X and they go to three times X.... CRASH!