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When hedge funds die…

Scott Jagow Aug 20, 2007
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When hedge funds die…

Scott Jagow Aug 20, 2007
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TEXT OF INTERVIEW

Scott Jagow: I wanna share a story this morning that illustrates just how fragile life on Wall Street is right now. Between July 2005 and July 2006 a hedge fund called Sowood Capital gave investors a fat 16 percent return. But this July, literally in a few days, the whole hedge fund collapsed. It lost $1.6 billion of investors’ money. Sowood was run by a guy named Jeffrey Larson, a highly-touted money manager. Larson isn’t talking, but the Boston Globe just did a story about him. Globe reporter Chris Rowland joins us. Chris, what exactly happened last month?

Chris Rowland: Well basically what happened was they had made a lot of bets in the credit markets — corporate debt and bond derivatives — and when the subprime industry began to meltdown, that had ripple effects through corporate debt. And the holdings that Sowood had in corporate bonds plunged in value and that caused Sowood big problems because they were heavily leveraged. They had borrowed heavily to make all their purchases of corporate bonds and so they kind of went into a dust pile. They didn’t have money to pay lenders back, they had margin calls and they just had sort of a toxic meltdown over one week’s time.

Jagow: One thing that strikes me about this story is that Jeffrey Larson was not a Gordon Gekko as is cited in your article, bravado and all that, he was very conservative.

Rowland: Yeah I mean he grew up in the Midwest, he came from River Falls, Wisconsin, which is only about 30 miles from St. Paul which is where he went to college. People I talked to out in Wisconsin and Minnesota said he’s a very likeable fellow, and he wasn’t really rolling the dice big all the time. He was, you know, a fairly prudent investor. But the thing is, what happened here, is hedge fund was only about three years old, perhaps he was trying to shoot the lights out using large amounts of leverage to do it, and that’s what got him into trouble.

Jagow: All we’ve heard about the last couple years is hedge funds and how great they are for alternative investments, pension funds getting into them, and you know there’s risk obviously but there’s a huge upside. This kind of points out the risk in a big way.

Rowland: Yeah, well right, so you know if the market seems to be behaving in a certain way, where credit spreads are very stable for three, five years and people forget what happened just as recently as the late-’90s when credit can go south and people just get a little greedy and they start really going for it and they get bitten.

Jagow: Are you hearing from investors about this story and how it might be a good lesson learned?

Rowland: The people who I hear from that this is a lesson learned are the consultants, but the investors themselves are frankly embarrassed and they are not stepping forward to talk and say ‘oh yeah we were gambling in an imprudent fashion with our money.’

Jagow: All right Chris Rowland from the Boston Globe, thanks for joining us.

Rowland: Thanks very much.

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