Now if there were more of this in the new News Corp. Wall Street Journal…Marc Andreessen has a great annot­ated ver­sion of a let­ter to investors in a col­lapsed hedge fund. It’s so good, I make no apo­logy for run­ning it in full:

…the let­ter Sowood [the hedge fund] wrote to its investors is a par­tic­u­larly clear and lucid account of how these implo­sions hap­pen. It’s almost a text­book descrip­tion of what hap­pens when these things blow up:

Today we made the pain­ful and dif­fi­cult decision to sell sub­stan­tially all the funds’ port­fo­lio [what was left of the port­fo­lio — a little more than 40% of what they star­ted the year with] to Cit­adel Invest­ment Group [another hedge fund].

We took this step to pro­tect your invest­ment [they’re being hon­est in say­ing this; the altern­at­ive would have been worse].

Our actions over the week­end fol­lowed severe declines in the value of our credit pos­i­tions [the mar­ket for many of our hold­ings became par­tic­u­larly illi­quid, due to a lack of buy­ers, and prices dropped dra­mat­ic­ally] and non-performance of off­set­ting hedges [everything went to hell at once].

Given what we were facing and our uncer­tain abil­ity to meet mar­gin calls [we were lever­aged — we used debt to double down on our bets to juice returns, com­mon for this class of hedge funds], we sought other buy­ers for some or all of the pos­i­tions [all our peers on Wall Street smelled “blood in the water” and drove down mar­ket prices even further].

Cit­adel offered the only imme­di­ate and com­pre­hens­ive solu­tion [Cit­adel is prob­ably being bril­liant in buy­ing this port­fo­lio at basic­ally 40-some cents on the dol­lar — but time will tell…].

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 [sure, we were already down more than 50%, but if we had actu­ally sold in the open mar­ket, we maybe would have ended up down 80% or more].

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 NAV as of July 30 is approx­im­ately $1.5 bil­lion. [We just vapor­ized more than $1.5 bil­lion dol­lars of your money.]

We under­stand this is a very dif­fi­cult moment for you [well, OK, that is an understatement]…

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 [you can scream at me but I won’t be able to hear you].

[More explan­a­tion follows:]

Dur­ing the month of June, our port­fo­lio exper­i­enced losses mostly as a res­ult of sharply wider cor­por­ate credit spreads [the prices of the debt instru­ments that we held sud­denly fell like a rock] unac­com­pan­ied by any con­com­it­ant move in equit­ies and exacer­bated by a marked decline in liquid­ity [lots of sellers, no buyers].

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. [Most likely true.] Our coun­ter­parties [the banks that loaned us the money we were using to buy more assets than we actu­ally had invest­ment cap­ital to buy] 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. [Shorter ver­sion: the banks hadn’t yet called in any of our loans.]

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. [Whoops, the banks just called in the loans.]

In addi­tion, liquid­ity became extremely lim­ited for the credit por­tion of our port­fo­lio mak­ing it dif­fi­cult to exit pos­i­tions [c.f. “blood in the water”].

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. [This is about as classy as it gets from someone who just lost you more than 50% of your money in three weeks.]

Great stuff.