The letter a hedge fund manager sends to his/her investors in the event of bad news like, say, a meltdown, etc., is an exercise in trying to jam a huge ego and an “I’m sorry, but I’m not really sorry, but I’m saying I’m sorry” onto one page. We’ve been calling him out a lot lately for what he’s done wrong, but one thing James Cayne did right was his memo to investors. As you well know, Cayne informed them that, contrary to what he and his colleagues had been pretending in the weeks previous, Bear Stearns’ two hedge funds were worth jack. As this charade was getting exhausting, and not because it’s wrong to lie, the big guy took it upon himself to come clean with the sad sacks (his words) who were silly enough to give Bear their money only to watch it be lit on fire. This would have all been rather unfortunate, Cayne went on, if it were going to hurt employee compensation at year end, which it won’t, thank god, so that’s pretty much it. Shipshape.
Sadly, Sowood Capital Management founder Jeff Larson has apparently not mastered the art of this particular love letter, and comes off as actually rather regretful and apologetic in the one he sent to his investors yesterday, re: selling “substantially all the funds’ [Sowood Alpha Fund LP and Sowood Alpha Fund Ltd] portfolio to Citadel,” which was more than happy to take them on. Larson even says “We are very sorry this has happened.” It’s actually all rather off-putting. Full letter (which seems to imply Sowood will be shutting down) after the jump.
July 30, 2007
To Our Investors in Sowood Alpha Fund LP and Sowood Alpha Fund Ltd.:
Sale of Assets
Today we made the painful and difficult decision to sell substantially all the funds' portfolio to Citadel Investment Group. We took this step to protect your investment. Our actions over the weekend followed severe declines in the value of our credit positions and non-performance of offsetting hedges. Given what we were facing and our uncertain ability to meet margin calls, we sought other buyers for some or all of the positions. Citadel offered the only immediate and comprehensive solution. The transaction enabled us to avoid anticipated forced sales at extreme prices that would have been made in order to satisfy obligations under our counterparty agreements.
After the transaction with Citadel, the Net Asset Value (NAV) of Sowood Alpha Fund Ltd. and Sowood Alpha Fund LP will have declined approximately 57% and 53% month to date respectively, and approximately 56% and 51% calendar year to date respectively. As a result, our NAV as of July 30 is approximately $1.5 billion.
We will be advising you of plans to distribute assets as soon as we can, subject to reserves and holdbacks for completion of the audit, contingencies and potential liabilities. Proceeds will be distributed in accordance with the governing documents of the funds. We will seek to retain key staff to manage the distribution process going forward. We understand this is a very difficult moment for you and are committed to keeping all lines of communications open. Since we are still working through positions and details of the transaction, it will take us a few days to organize everything in a manner that will satisfy your questions. That said, we are planning to hold one-on-one meetings starting next week with investors. In addition, we are planning a listen-only conference call later this week at which time I will discuss the actions we took over this past weekend and next steps.
During the month of June, our portfolio experienced losses mostly as a result of sharply wider corporate credit spreads unaccompanied by any concomitant move in equities and exacerbated by a marked decline in liquidity. This occurred over a broad range of credit related instruments. In the first two weeks of July, spreads continued to widen, and we experienced a loss similar to June. The weakness in corporate credit - particularly focused on loans and loan credit default swaps - accelerated sharply during the week of July 23. Until the end of last week these developments, while reducing the value of our portfolio, were manageable. Our counterparties had not severely marked down the value of the collateral that the funds had posted nor changed our margin terms, and immediate liquidity needs could be met. However, towards the end of last week, given the extreme market volatility, our counterparties began to severely mark down the value of the collateral that had been posted by the funds. In addition, liquidity became extremely limited for the credit portion of our portfolio making it difficult to exit positions. We, therefore, reached the conclusion over the weekend that, in the interest of preserving our investors' capital, the appropriate course of action was to sell the funds’ portfolio. We believe that the arrangement with Citadel provided our best option under the circumstances, since we were unable to find other sources of liquidity.
We are very sorry this has happened. We have always attempted to do the very best for our investors. A loss of this magnitude in such a short period is as devastating to us as it is to you. We are committed to acting in the best interests of the funds' investors and to keeping investors informed of decisions made in furtherance of this objective. We sincerely appreciate your patience and understanding during this challenging period.