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Denver Foundation's assets sliced

Hedge fund's dive erases $8 million from portfolio

James Paton, Rocky Mountain News

Published August 7, 2007 at midnight

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The Denver Foundation's investment portfolio has taken a hit, losing roughly $8 million in a hedge fund flameout.

The organization, which raises money from area donors and provides grants to charities, had nearly $14 million - or 3 percent of assets - in Sowood Capital Management at the end of May. Sowood is the Boston hedge fund operator that lost more than half of investors' money in a matter of weeks as bets on corporate bonds and loans went south.

The foundation now is subjecting the rest of its investments to closer scrutiny in the wake of the hedge fund's collapse.

But its more than $500 million in assets are well-diversified, with money in the hands of more than 40 fund managers, each with its own specialty. As a result, the foundation can weather turmoil such as the Sowood decline, CEO David Miller said.

The Denver Foundation is not alone. A number of Sowood's clients are university endowments and community foundations.

The local organization entrusted $10 million to the hedge fund in late 2004 and saw the sum grow to $14 million before the nasty fall sliced the investment to about $5 million or $6 million, Miller said.

"This has caused us to look very carefully at all our investments and to try to understand better what went wrong, to try to make doubly sure this is an extraordinary confluence of terrible events and to ensure this will not happen again," Miller said in a phone interview Monday.

The foundation has never sustained such a sharp loss in a short period, and it's cause for concern. But Miller sought to put it in perspective. While it sounds dramatic, the news hasn't had much impact, he said. At the end of July, assets topped $530 million.

"Obviously, when you invest in anything other than Treasury bills, there's risk involved," he said. "Certainly, we are aware that many of these investments have higher risks. We were surprised though at the magnitude of the losses and the rapidity with which those losses occurred."

The foundation has racked up an average annual return of 9.9 percent over the past decade, putting it in the top 9 percent of 1,400 institutional organizations. The median group has posted an average gain of 7.5 percent a year during that span, Miller said.

The CEO said the foundation has recorded those figures with relatively low volatility and risk.

The organization at the end of last year had 20 percent of its assets in "absolute return" funds, which aim to generate positive results in all kinds of markets, and another 15 percent in portfolios that have the ability to sell stocks short on a bet they will fall. About 5.5 percent of the assets were devoted to private equity, according to the quarterly report.

Other names in its absolute return category include Peloton and Highbridge.

Sowood, which had more than $3 billion in assets at the end of June but then sustained a sharp decline, said it would return $1.4 billion to investors.

Sowood Capital founder Jeff Larson - in a letter to investors obtained by the Rocky Mountain News - said: "We are very sorry this 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."

The Denver Foundation at a glance

• Established: 1925

• President and CEO: David Miller

• Mission: To improve life in metro Denver through philanthropy, leadership and strengthening the community

• Service areas: Seven counties of metro Denver

• Assets: Approximately $530 million

• Focus areas: Through its Community Grants Program, grants are awarded in the four major areas of arts and culture, civic and education, health and human services

• Grants: $36 million - the most in its history - awarded in 2006

How the foundation's assets break down

Absolute return funds   20 percent

Private equity   5.5 percent

Fixed income   10 percent

Long/short funds   15.4 percent

Real assets   2.1 percent

Stocks   19.9 percent

International stocks   17.4 percent

Cash   9.7 percentNote: Data As Of Dec. 31, 2006

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