Money man bet wrong -- and lost $1.6 B !!

[Breeze54]

Money man bet wrong -- and lost $1.6b

http://www.boston.com/business/globe/articles/2007/08/16/money_man_bet_wrong____and_lost_16b/

By Christopher Rowland, Globe Staff | August 16, 2007

When Boston hedge fund millionaire Jeffrey B. Larson visited a classroom of economics students
at his Midwestern alma mater last year, he picked up a marker and diagrammed a low-risk strategy
for maximizing profits when investing in a company's stocks and bonds.


Hedge fund strategist Jeffrey B. Larson focused on low-risk
strategies, his colleagues and former college professor say.
(MACALESTER COLLEGE)

The probability "of success was exceedingly high," remembered professor Karl Egge, who taught
Larson in the late 1970s and invited him back to his class at Macalester College, in St. Paul.

And at the time, Larson's investment strategy was working -- a 16 percent return from June 2005
to June 2006, nearly double what stocks returned that period. But a month ago, Larson's
supposedly seaworthy $3 billion hedge fund at Sowood Capital Management LP abruptly foundered
in turbulent debt markets.

His loss of $1.6 billion of investors' money is the biggest hedge fund collapse this year.
Much of it occurred during a few frantic days in July, when a meltdown in the subprime mortgage
market triggered a shock wave that caused the values of many debt securities, such as those held
by Sowood, to drop sharply. Larson suddenly did not have enough money to repay his lenders, and
he was forced to dissolve the fund. He sold off the remnants and closed Sowood on July 30.

Larson's sudden fall has left investors, colleagues, and friends wondering how a prudent
Midwesterner from River Falls, Wis. (population, 14,000), -- who came East and starred as a
highly paid investment manager for Harvard University until he launched Sowood three years
ago -- could have miscalculated so badly.

A former Macalester classmate who stayed in touch with Larson, Minneapolis lawyer David Bolt,
said he was shocked Larson's carefully-conceived investment strategy proved to be so vulnerable.

"I've always thought of him as fairly conservative. He was never a risk-taking kind of guy when
we were in college," he said. After Sowood succumbed to the markets, Larson's wife, Janet, sent
his friends from Macalester, where Larson also served as chairman of the college board of trustees,
an e-mail seeking moral support for her husband.

Hedge funds have earned a reputation for making elaborate bets on securities as straightforward
as stocks to more complicated currency and commodity trades that can earn their managers amazing
sums. The most successful hedge-fund managers earned more than $1 billion in 2005, according to
a survey by Alpha magazine. Average pay for the top 25 in 2005 was $323 million.

Because of the risky and sometimes opaque nature of their strategies, hedge funds are off-limits
to all but the most sophisticated and well-heeled of investors -- pensions funds, for example,
or families rich enough to pony up the $5 million or so entry fee typical at some shops.

"Until the last six weeks, Jeff had an impeccable 25-year career," he said. "Virtually everyone
I have spoken to feels horrible for Sowood's clients and employees, but most of all for Jeff.
And believe me, no one feels worse about what happened than he does."

Larson has refused numerous requests for interviews and also declined to answer e-mailed questions.
He has issued two brief statements in which he apologized to Sowood's investors, but otherwise has
not provided a detailed explanation of its collapse.

snip-->

But in Sowood's case, Koelsch said, it appeared Larson's fundamental problem was not having enough
cash or liquid assets in case his bets went wrong and his lenders, as they ultimately did, demanded
their money back.

snip-->

Sowood won other prestigious clients: the Massachusetts state employees pension fund, and
the Boston Foundation.

In late spring, the market for bonds and other debts issued by corporations was rocked by
a crisis in subprime mortgages. As happens in routs, the market deteriorated in ways Larson
failed to anticipate: investors abandoned many forms of corporate debt, not just those related
to the mortgage markets, and did so without regard to the underlying fundamentals of specific
companies. The careful research Larson and his managers performed to pick strong companies
didn't matter once investors made a mass exodus.

As a result, Sowood's bond-related holdings plunged in value. Meanwhile, stocks that were
supposed to fall -- the hedge -- didn't fall enough. The lenders who provided Larson with credit
to place his heavily leveraged bets wanted their money back. Scrambling to raise money during the
week of July 23, Larson could not sell his drastically devalued holdings fast enough. As demand
for these holdings dropped and they declined in value, the more he had to sell to raise cash,
which in turn pushed their prices down even further.

Within a week, this classic death spiral had claimed Larson's company. After a weekend of
scrambling for a bailout he announced Monday morning, July 30, that he was shuttering Sowood
and selling its remaining holdings to Citadel Investment Group.

Harvard's endowment lost $350 million; the Massachusetts pension fund $30 million,
and Boston Foundation close to $20 million.

Larson, who lives in a $2.5 million house in Wellesley, has made two carefully scripted
statements since Sowood's failure, each with one overriding theme: I'm sorry.

"You entrusted us with the management of your money, and we lost a lot of it to say the
least," he said in one statement, delivered during a conference call with investors Aug. 3.
"No apology is sufficient, but I want you to know how profoundly sorry and deeply pained I am
about what has happened." Investors listening to the call were not permitted to ask questions.



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[SoCalDem]

1. The "market" is just an esoteric slot machine..sometimes you win

and sometimes you lose.. It all depends when you quit :)

[Breeze54]

3. Yeah but what about those pensions??

What's going to happen to those people? :shrug:

I'm sure he feels really bad, as many of his colleagues

have stated but Yikes!! :wow: That is a whole lot of money!!!

[SoCalDem]

5. This sort of thing happens with regularity.. Oldies amass wealth

for their later years, and some young snotnosed whizkids come along with the latest technological gizmos and steal it ..

and in 15 years or so, we all fall for another scam..

[enid602]

2. "Average pay for the top 25 in 2005 was $323 million."

I'm sure he he feels so bad about this that he'll cover the losses out of his own pocket.

[Breeze54]

4. Not likely!!

I wonder if he'll sell his house too! :eyes:

"The most successful hedge-fund managers earned more than $1 billion in 2005"

:wow:

He lives about 10 miles or so from me.

[soothsayer]

6. eh, it wasn't HIS money , so what does he care?

[DS1]

7. Rich people are just as stupid as everyone else

The only difference is, they have a degree to prove it.

[SmokingJacket]

8. What the HELL is a pension fund doing in a hedge fund???

That's public money. Damn. Idiots. Why not just take it to Vegas???

[Breeze54]

9. I have no idea. Seems stupid if it's not a

rock solid investment. But I'm not an economist. :(

[onethatcares]

10. "and no one feels worse than he does"

except of course george and laura who have never know want, or need.

Did you notice this guy isn't about to give up his 2.5 mil home, but he had the nutz to say "no apology is sufficient".

[Breeze54]

11. Yeah, I think that was mentioned a couple

of times. He actually isn't even talking to anyone!
The press or the people/investors hurt by this!