Harvard’s endowment has been cited as a model for achieving high-growth rates, but one investment choice led to a staggering loss of at least a quarter of a billion dollars late last week after the collapse of former Harvard Management Company (HMC) bigwig Jeffrey B. Larson’s hedge fund.
Larson’s fund, Sowood Capital Management, received an initial investment of $500 million from the University when he left in 2004. On Monday, Sowood sent letters to its investors explaining that the $3 billion fund suffered losses of more than 50 percent and had to sell off its assets to the Citadel Investment Group.
“Citadel offered the only immediate and comprehensive solution,” Larson wrote in his letter to investors. “The transaction enabled us to avoid anticipated forced sales at extreme prices that would have been made in order to satisfy the obligations under our counterparty agreements.”
Larson was one of Harvard’s top money-managers in his 13 years at the University, helping the endowment balloon from $4.7 billion in 1990 to $25.9 billion by 2005. His team gained national media attention when he and four other prominent HMC members left the company during a six-year period leading up to Larson’s 2004 departure.
Harvard’s endowment sits at $29.2 billion as of the most recently-reported figure by the University. Sowood’s collapse may have resulted in a loss of as much as $350 million for Harvard, according to The Wall Street Journal.
In a statement released Monday by Citadel, President and CEO Kenneth C. Griffin ’89 said that his firm’s acquisition of Sowood underscores its strength even in times when other funds are also suffering from the poor credit market.
“This transaction provides for an orderly transference of risk between parties,” Griffin said in the statement.
Larson gave an explanation for his fund’s staggering losses in the letter his investors received on Monday.
According to Larson, Sowood’s portfolio was experiencing losses in June—due to pessimism in the credit market—that were worrisome for the firm but still “manageable” due to the fact that the fund’s collateral was still valued highly.
He wrote that he blames “extreme market volatility” for the rapid decline in value of this collateral at the end of last week, and other investors’ attempts to sell off the same assets hindered Sowood’s ability to minimize its losses.
Other members of the team of highly-paid investors that revamped the endowment have also had difficulties as they try to re-work their investing magic outside the ivory tower.
Jack R. Meyer, former president and CEO of HMC, started Convexity Capital Management in 2005, but his team—including 30 former HMC employees—reportedly had difficulty
just breaking even as of earlier this year. Harvard also invested $500 million with Convexity.
University spokesman John D. Longbrake declined to comment specifically on Sowood’s collapse, but said that hedge funds are just one of the methods by which Harvard protects against investment losses.
“We manage our risk using several instruments, including direct hedges, market hedges, and diversification,” he said.
Currently, 15 percent of HMC’s investments are in hedge funds and similar assets.
In his letter, Larson was apologetic to investors, asking for their continued patience.
“We have always attempted to do the very best for our investors,” Larson wrote. “A loss of this magnitude in such a short period is as devastating to us as it is to you.” —Staff writer Nathan C. Strauss can be reached at firstname.lastname@example.org.