The Boston Globe reports on how Sowood Capital, a $3 billion hedge fund founded by a former manager of Harvard's endowment, collapsed this week -- costing Harvard $350 million.

Sowood, which has lost $1.6 billion dollars over the last several weeks, borrowed lots of money to bet on what it believed were low risk investments and backed them up with a hedging strategy intended to act as insurance in case anything went wrong. But markets reacted much differently than Sowood expected, driving down the price of its securities and rendering its hedges ineffective.

When Sowood went to sell its assets, it found no buyers. So it arranged for a Chicago-based hedge fund, Citadel Investments, to bail it out -- selling its securities at a deep discount. According to its founder Jeff Larson, Sowood did this "in order to avoid what we believed was the very real possibility of counterparties -- [e.g., lenders] -- seizing our collateral and liquidating or auctioning our positions. In such an uncontrolled process, we believe there was a high likelihood that little to no net asset value would remain for our investors."

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Inside Sowood Capital's $3 billion hedge fund's collapse originally appeared on BloggingStocks on Tue, 07 Aug 2007 08:00:00 EST. Please see our terms for use of feeds.