Hub hedge fund will wind down

Sowood Capital Management, a $3 billion Boston hedge fund launched just three years ago by former Harvard endowment manager Jeffrey Larson, sold most of its holdings in troubled debt markets yesterday after telling investors that it had losses of more than 50 percent this month.

The deal to transfer Sowood's credit portfolio to Citadel Investment Group LLC for undisclosed terms highlights the deep worries in debt markets following a crisis this year in subprime mortgage lending.

Last night an investor said Sowood had told clients it had lost 57 percent of its value and was being "completely liquidated."

"A loss of this magnitude in such a short period is as devastating to us as it is to you," Larson, said in a letter to investors. "We are very sorry this has happened."

The firm will start returning what's left of investors' money "as soon as it can," the letter said.

Sowood appeared to be in trouble last week when newspaper websites reported that it lost 10 percent of its value this year. Its woes provided further evidence that the subprime debacle, triggered by mortgage companies that overextended themselves by lending money to poorly qualified borrowers, has upset some other types of risky debt investments.

"Subprime certainly has prompted volatility in the market, and we saw that pick up rather significantly for the month of July," said Diane Vazza, head of global fixed-income research at the bond rating firm Standard & Poor's. She said the hardest hit portions of the credit markets have been in risky corporate junk bonds.

Sowood told Bloomberg News last week that it did not hold any subprime mortgage debt in its portfolio. Nonetheless, it said its devalued bond holdings thrust it into a liquidity crisis and it was forced to sell securities to meet margin calls.

Larson did not respond to a request for comment yesterday. Larson's $17.3 million in payments in 2003 from the Harvard Management Co., which runs the university's endowment, were among the large salaries that drew complaints from Harvard alumni several years ago.

He left, and fellow Harvard manager Stuart Porter left Harvard Management in 2004 and founded Sowood with $500 million in seed money from Harvard. Last year, Sowood spun off Denham Capital Management, which said in December that it would have $2.3 billion under management, focusing on private-equity investments. Denham is run by Porter.

Harvard's endowment in 2006 was worth more than $29 billion. Harvard Management chief executive Mohamed El-Erian could not be reached yesterday. University spokesman John Longbrake said the university does not discuss individual endowment investments.

Yesterday's deal with Citadel, which manages about $14 billion, marks at least the second large hedge fund crisis in the wake of the subprime debacle. The investment bank Bear Stearns last month infused two hedge funds, which did own subprime mortgage debt, with $3.2 billion to keep them from collapsing.

Last year, Citadel bought out the energy positions of Amaranth Advisors LLC.

"This transaction provides for an orderly transference of risk between the parties," Kenneth Griffin, Citadel's president and CEO said of the deal with Sowood.

Christopher Rowland can be reached at crowland@globe.com. Material from Globe wire services was used in this report.