Many hedge funds are experiencing problems in today's environment with over-leveraged capital and overly zealous managers. Sowood Capital Management became yet another example today after a stunning 50% loss in one month led to it's announcement that it would begin winding down its firm. The Boston hedge fund is one of the largest to fall as its assets were cut in half from $3 billion to $1.5 billion in record time.

Sowood said in a letter to its investors that it "made a painful and difficult decision" to sell nearly all of the fund's portfolio to Citadel following "severe declines in the value of [their] credit positions and non-performance of offsetting hedges". That statement caused some to recall the LTCM fiasco that led to a similar downfall of one of the largest hedge funds at the time. And why? Because they were over-leveraged and over-exposed to certain markets.

Meanwhile, the deal could be sweet for Citadel who is known for making purchases in downward markets at bargain prices. Last year, the hedge fund assumed a number of energy positions held be Amaranth after that hedge fund experienced substantial losses - eventually they profited on the deal. Whether or not this particular deal turns out to be a good buy, however, remains to be seen. Regardless, this is definitely a situation to keep a close eye on in the near future!