Alpha - September 2007 - (Page 25)

Interview Barry Bausano Balance Deutsche Bank co-head of prime brokerage Barry Bausano says that, despite the recent market turbulence, the relationship between hedge funds and their prime brokers has evolved into something of a partnership. By Frances Denmark A Delicate S ay it ain’t Sowood. If ever there were an example of the vital — and delicate — relationship between hedge funds and their prime brokers, it is the case of Sowood Capital Management. The Bostonbased hedge fund ﬁrm was ﬂying high this spring. Its ﬂagship $3 billion Sowood Alpha Fund was up 16 percent for the 12 months ended in June, despite a 5 percent drop that month, and its main prime brokers, Morgan Stanley and UBS, were more than happy to extend the firm the necessary financing and securities to support its investment activities. Within a few weeks, however, the situation changed dramatically. Sowood’s long credit positions, especially loans and loan credit default swaps, got caught in the fallout from the subprime mortgage crisis, triggering margin calls in the fund’s prime brokerage agreements. Faced with plummeting securities values and panicked investors — and unable to obtain additional ﬁnancing — Jeffrey Lar- son, Sowood’s managing partner and founder, was forced to liquidate the portfolio. On July 30 he agreed to sell the bulk of Sowood’s holdings to Chicago’s Citadel Investment Group for $1.4 billion. Barry Bausano, co-head of global prime finance at Deutsche Bank in New York, says that neither hedge fund managers nor their prime brokers should be surprised by this summer’s events. “This is not a new lesson,” notes the 44-year-old Bausano, who joined Deutsche Bank in 2002 after working for three hedge fund titans: Julian Robertson Jr., Michael Steinhardt and Louis Bacon. As Bausano sees it, the recent market shock isn’t that different from the savingsand-loan crisis of the late 1980s. But unlike that situation, when hundreds of thrift banks went bankrupt because of a mismatch in their assets and liabilities, the recent credit troubles will be nothing more than a temporary setback for the hedge fund industry and the prime brokers that finance it, says Bausano. SEPTEMBER 2007 • INSTITUTIONAL INVESTOR’S ALPHA • 25

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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