This article updates the spread of contagion to blue chip fund Sowood Capital Management LP. According to Bloomberg, the NY Times article I referenced below mentioning a drop of 10% is vastly understated, and instead the firm’s “two hedge funds plunged more than 50 percent amid the rout in credit markets.”

Citadel Takes Over Most Sowood Assets After 50% Loss

As the article also mentions, this fund suffered losses not in subprime loans, but in “corporate bonds and loans”. This surely is contagion in its clearest form.

Interestingly, as I discussed in the last post, Citadel, another hedge fund, still has adequate resources to step in and save off total implosion by buying some of the assets. In other words, at least in this case, the system is digesting the distress (albeit at a highly discounted level).

Unfortunately, I don’t think this will be the last headline like this, especially given the fact that those at the helm of this fund were former Harvard Endowment managers – aka theoretically some of the best in the business.