The unexpected collapse of two hedge funds run by Sowood Capital Management, a Boston-based registered investment manager, could cost area foundations and university endowments millions of dollars in losses.
Sowood, which boasted $3 billion in assets at the end of June, saw its portfolio decimated after interest rates on corporate bonds spiked sharply in late July.
The fund, popular with endowments and foundations, liquidated with $1.4 billion.
The state’s largest foundation, the $1.2 billion Daniels Fund, may lose about $12 million from its investment in Sowood, said spokesman Peter Droege.
The Colorado State University Foundation invested $9 million in the fund in 2004 and watched it grow to $11.4 million but now expects less than $6 million back, said president and chief executive Kathleen Henry.
Ben Blalock, president of the University of Wyoming Foundation, also confirmed losses, without disclosing the amount.
This week, the Denver Foundation acknowledged the potential loss of $8 million from its $530 million portfolio.
The Children’s Hospital and its foundation lost $1.2 million of a $2 million investment in Sowood. The total is less than 0.5 percent of Children’s total holdings, said hospital chief financial officer Len Dryer.
Monticello Associates, an established Denver investment consultant, advised many of the local institutions that lost money to invest in Sowood.
Given the broad reach of Monticello’s client list in the region, observers expect yet- unidentified losses to grow larger.
Monticello Associates president Grady Durham did not return a call seeking comment, but his clients defended the firm’s track record.
“We have tremendous confidence in Monticello,” said Denver Foundation chief executive David Miller.
Sowood founder Jeff Larson’s star status at the Harvard Endowment was well-known in university circles, Henry said.
And Monticello clients all had the freedom to pass on Sowood, which the University of Colorado Foundation and the Catholic Foundation for the Roman Catholic Church in Northern Colorado said they did.
Sowood Capital operated in a hedge-fund category called absolute-return funds, which promise to spin off steady returns while cushioning against volatility in the market.
It did so by holding corporate bonds while selling corporate equities short. Shorting is a strategy designed to capture gains when stock prices fall.
In theory, if corporate bonds lost value, the short positions in corporate equities would gain, mitigating losses.
But in late July, corporate bonds suffered price declines far beyond what was imagined possible.
Because Sowood had borrowed heavily to boost its returns, it faced margin calls that it couldn’t meet.
To avoid a total loss, Sowood was forced to sell its holdings at a deep discount to Citadel Investment Group of Chicago.
Sowood’s collapse raises concerns about hedge funds, which typically offer minimal disclosures to investors.
Although some investment committees view hedge funds as a sophisticated way to boost returns without taking more risk, other foundations stay away.
“I am not sure the investment committees of endowments and foundations understand the risk,” said R. Thayer Tutt Jr., president of the El Pomar Foundation in Colorado Springs.
Tutt said he has taken a lot of heat for not investing in hedge funds, especially when Sowood was returning 10 percent to 15 percent while his government Treasurys were gaining only 6 percent or 7 percent.
Even if they had seen trouble, investors in Sowood and most hedge funds are restricted from selling out to avoid a collapse.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
Possible losses
DANIELS FUND
$12 MILLION
DENVER FOUNDATION
$8 MILLION
COLORADO STATE UNIVERSITY FOUNDATION
$6 MILLION
CHILDREN’S HOSPITAL
$1.2 MILLION
