Dear John of the Hedge Fund, by gimleteye

Florida is the epicenter of crashing housing markets. Here you can hear teeth grinding, too.

Here in 2003 WCI Communities, whose former chief Al Hoffman was finance chair for both Jeb and George W. Bush, crowed to the Washington Post that suburban sprawl was "an unstoppable force". Today, WCI Communities can't find a buyer in its attempts to sell the company. Its stock price is literally half what a corporate raider, Carl Icahn, offered only a few months ago.

No one likes a loser.

What kind of visions are spurred by the memory of the growth machine trampling citizens trying to protect their communities from the impacts of suburban sprawl, the Everglades, the bays and estuaries now clogged with pollution?

Well, before making up my mind, let me share the latest "Dear John" letter to its hedge fund shareholders, exposed to financial derivatives tied to subprime mortgages, whether they knew it or not.

How much of Sowood (whose manager was recently a big performer for the Harvard University managed assets) heartbreak is tied to zero-lot line housing in Florida wetlands, that environmentalists and citizens tried to stop but couldn't because of the overwhelming influence of the development lobby on local government and the Florida legislature?

Maybe the Florida bankers and land use lawyers who read this blog can tell us.

Sowood
CAPITAL MANAGEMENT LP
July 30, 2007
To Our Investors in Sowood Alpha Fund LP and Sowood Alpha Fund Ltd.:
Sale of Assets

Today we made the painful and difficult decision to sell substantially all the funds' portfolio to Citadel Investment Group. We took this step to protect your investment. Our actions over the weekend followed severe declines in the value of our credit positions and non-performance of offsetting hedges. Given what we were facing and our uncertain ability to meet margin calls, we sought other buyers for some or all of the positions. Citadel offered the only immediate and comprehensive solution. The transaction enabled us to avoid anticipated forced sales at extreme prices that would have been made in order to satisfy obligations under our counterparty agreements.

Performance Update
After the transaction with Citadel, the Net Asset Value (NAV) of Sowood Alpha Fund Ltd. and Sowood Alpha Fund LP will have declined approximately 57% and 53% month to date respectively, and approximately 56% and 51 % calendar year to date respectively. As a result, our NAVas of July 30 is approximately $1.5 billion.

Current Plans
We will be advising you of plans to distribute assets as soon as we can, subject to reserves and holdbacks for completion of the audit, contingencies and potential liabilities. Proceeds will be distributed in accordance with the governing documents of the funds. We will seek to retain key staff to manage the distribution process going forward.

We understand this is a very difficult moment for you and are committed to keeping all lines of communications open. Since we are still working through positions and details of the transaction, it will take us a few days to organize everything in a manner that will satisfy your questions. That said, we are planning to hold one-on-one meetings starting next week with investors. In addition, we are planning a listen-only conference call later this week at which time I will discuss the actions we took over this past weekend and next steps.

500 Boylston Street, 17th Floor Boston, MA 02116
T (617) 603-3400 F (617) 603-3401


Sowood
CAPITAL MANAGEMENT LP
Background
During the month of June, our portfolio experienced losses mostly as a result of sharply wider corporate credit spreads unaccompanied by any concomitant move in equities
and exacerbated by a marked decline in liquidity. This occurred over a broad range of credit related instruments. In the first two weeks of July, spreads continued to widen, and we experienced a loss similar to June. The weakness in corporate credit¬particularly focused on loans and loan credit default swaps - accelerated sharply during the week of July 23. Until the end of last week these developments, while reducing the value of our portfolio, were manageable. Our counterparties had not severely marked down the value of the collateral that the funds had posted nor changed our margin terms, and immediate liquidity needs could be met.
However, towards the end of last week, given the extreme market volatility, our counterparties began to severely mark down the value of the collateral that had been posted by the funds. In addition, liquidity became extremely limited for the credit portion of our portfolio making it difficult to exit positions. We, therefore, reached the conclusion over the weekend that, in the interest of preserving our investors' capital, the appropriate course of action was to sell the funds' portfolio. We believe that the arrangement with Citadel provided our best option under the circumstances, since we were unable to find other sources of liquidity.
Conclusion
We are very sorry this has happened. We have always attempted to do the very best for our investors. A loss of this magnitude in such a short period is as devastating to us as it is to you. We are committed to acting in the best interests of the funds' investors and to keeping investors informed of decisions made in furtherance of this objective. We sincerely appreciate your patience and understanding during this challenging period.
Sincerely,

Jeff Larson
500 Boylston Street, 17th Floor Boston, MA 02116
T (617) 603-3400 F (617) 603-3401