In yet another sign of the continuing nervousness of the housing market, the sale of a block of Sowood Capital Management which had about $3 billion under management in January, has left some experts speculating about the demise of the hedge fund.
The New York Times reported that Sowood Capital Management is down 10 percent for the year so far, another victim of the shrinking credit markets that have left many hedge funds, their investors and their lenders on edge.
Sowood Capital was started in 2004 by two men who worked for Harvard Management Company. The news source stated that Harvard seeded the fund, which invests in stocks and bonds, with a "significant” amount of capital.
Speculation about problems at Sowood has been circulating because, stated The New York Times, "of observations by market participants…that Sowood Capital was selling positions at distressed prices.”
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A source familiar with the fund’s operations reportedly called the rumors "overblown” and claimed Sowood Capital had met its margin calls.
Even so, stated The New York Times, "the situation is a telling example of the nervousness in the market.”
Of course, there have already been several casualties among hedge funds that invested primarily in subprime mortgages including two large Bear Stearns funds. But "problems have now moved into the broader credit markets, which have sold off sharply and are facing significant structural problems,” the newspaper wrote.
It added that, "Some of the securities in these markets are trading infrequently, which raises questions about whether the pricing portfolios, or "market” position, reflect their true value. With illiquid securities, traders cannot know the true value of the securities until they are sold. Bids and offers, or the prices in the marketplace, have been erratic, traders say.”
An investor letter stated that Sowood Capital was up slightly more than 1.5 percent through March, and marketing documents reportedly indicate that a little less than 15 percent of the portfolio’s risk is in structured credit.
For the time being, Sowood Capital seems to be just selling positions. Investors’ capital is locked up for two years and three months. The fund also reportedly has a so-called gate — once investors have filed to redeem 25 percent of assets, the fund can suspend redemptions.
Still, the situation points to a "teetering market.” The low price, stated The New York Times, "indicates the market is in distress, and the brokers significantly discount the collateral the funds have set aside in order to do business.”
Wall Street has been trying to convince the market that recent problems in the subprime sector were contained, "but as mortgage lenders have become increasingly bearish about the housing market, and the markets recognized the glut of loans and bonds waiting to be sold to finance the buyout boom, concerns have spread to the credit market,” The New York Times observed.
Since some of the credit markets have been illiquid, many funds have to sell stock to make margin calls or to meet tighter collateral standards.
"All of this is mismarked and has been for months,” one hedge fund investors told the news source.
He added that the "death spiral situation” was to be expected, the only question was just who would face it.
"This is more likely an outcome that speculation,” he told The New York Times in an interview.
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