Hedge fund reveals big loss

Hedge fund operator Sowood Capital Management said Friday it would return $1.4 billion to investors after losing an estimated 60% of their money last month betting on corporate bonds and loans.

Sowood, based in Boston, had more than $3 billion in assets at the end of June, the firm’s founder, Jeff Larson, told investors in a conference call.

The fund sold most of its holdings Monday to Chicago-based Citadel Investment Group after failing to meet lenders’ demands for more collateral.

Sowood, which had estimated that it would return $1.5 billion to investors, lost money as the markets for risky debt, including sub-prime mortgages and some corporate bonds, declined. Its losses accelerated last week, as spreads between yields on investment-grade corporate bonds and yields on Treasuries widened.

Larson, a former star trader for Harvard University’s endowment, spoke with several financial institutions last weekend about selling them the fund’s positions, he said.

“We believe there was a high likelihood that little to no net asset value would remain for our investors” if Sowood didn’t conduct such a sale, Larson said. Citadel made the best offer but still bought the assets at a “substantial discount,” he said.

Sowood is returning $90 million of 2006 fees to investors.

Most of Sowood’s investors are college endowments and community foundations. Boston-based Harvard Management, which oversees about $30 billion for the university, initially invested $500 million in Sowood and in December said it planned to increase its Sowood allocation this year.

John Longbrake, a Harvard spokesman, declined to comment Friday.

The Denver Foundation, a community endowment serving seven Colorado counties, had $14 million, about 3% of its assets, invested in Sowood.

“We think our diversification will offset the losses,” foundation spokeswoman Rebecca Arno said.