Grave Dancer

Chicago-based hedge fund, Citadel Investment Group, bought at basement prices the distressed assets of the much smaller hedge fund Sowood Capital. The story here is twofold: (1) there is plenty of money still out there to pick up assets of hedge funds falling off the cliff (Citadel did this before with the distressed Amaranth), and (2) success with Harvard’s investments is not necessarily a guaranty for success in the hedge fund world.

Sowood ran into a liquidity problem last week, one it could not get out of. The good news is that there is still plenty of money on the sidelines waiting to buy cheap assets. Citadel was there and it has earned the title of Grave Dancer.

Sowood’s founder, Jeffrey Larson, sharpened his teeth at Harvard, playing a big role in managing a portion of the university’s endowment. But managing a university endowment, yielding tax free income and artificially inflated returns, is simply not the same as heading a hedge fund. It is much easier to do well at a tax deductible institution than in the real world. Beyond special tax treatments, Harvard’s endowment is so large that trouble in one sector can be offset by assets in others. Those that followed Larson, including Harvard that took a major position, missed these points and have suffered the consequences.

The grave dancers win.