For those who run afoul of the financial markets, second chances can be surprisingly easy to come by. Take the case of Jeff Larson, the head of formerly high-flying Sowood Capital Management. Last July, Larson, a seasoned fund manager with years of solid gains, made headlines when his $3 billion, Boston-based hedge fund lost more than half its value in a matter of days after its highly leveraged investment strategy went awry. As we reported in March, the blowup came as a shock to Larson’s investors, who had grown accustomed to the steadiness of his performance (Sowood had returned an annual 10 percent, on average, for three consecutive years). In retrospect, Sowood was seen by some as one of the first funds affected by the brewing credit meltdown.
After returning what he could to investors (which included high-profile endowments like Harvard Management Co., Larson’s former employer, which lost some $350 million of its $500 million investment in the collapse), Larson sold the remainder of Sowood’s portfolio at a deep discount to opportunistic Citadel Investment Group of Chicago. He issued a terse apology and headed for the exit. Though he was just 49, Larson’s career in high finance seemed to have abruptly ended.
Not so fast. Larson, who has yet to comment publicly on the circumstances surrounding Sowood’s demise, is getting back in the game through a new fund that will mirror its market-neutral approach, according to those close to him. The as-yet-unnamed fund will have a much smaller capital base — $250 million to $500 million, according to people familiar with the plan — and will avoid the structured-credit positions that contributed to Sowood’s unraveling. One could also assume that Larson will steer clear of overleveraging (near the end of Sowood’s existence, he had borrowed at least ten times the fund’s cash on hand).
Getting investors to forget a devastating recent past can’t be easy, yet time and again displaced managers have done just that, with varying degrees of success. The most frequently cited case is that of John Meriwether, former head of Long-Term Capital Management, which blew up infamously in 1998. Meriwether founded Greenwich, Connecticut–based JWM Partners in 1999. The firm has struggled this year but still manages $1.4 billion.
Robert Bruner, dean of the University of Virginia’s Darden Graduate School of Business Administration and author of The Panic of 1907: Lessons Learned from the Market’s Perfect Storm, thinks that seeking redemption comes naturally to fallen fund managers.
“To quote Thomas Edison, most of life’s failures are people who didn’t realize how close they were to success when they gave up,” says Bruner. He notes that managers like Larson still firmly believe in the underlying fundamentals of their long-term strategies.
Besides, as history shows, the market has a short memory. “The point is, investors prefer to look at the long-term track record,” Bruner says, “and in Larson’s case, that would certainly be a plus.”
