Hedge fund Citadel Investment Group, LLC said on Monday that it took over Sowood Capital's credit portfolio following speculation last week that heavy losses might force the smaller hedge fund to shut down.

Chicago-based Citadel, which manages $14 billion, came to the rescue after Boston-based Sowood, which managed $3 billion, got into trouble with bond trades this summer. Rumors that Sowood might be forced to shut down roiled financial markets late last week.

On Friday a person familiar with Sowood's operations told Reuters that the fund, which manages money for Harvard University and other prominent clients, lost 8 percent in July and 5 percent in June, bringing losses to 10 percent for the year.

This transaction provides for an orderly transference of risk between the parties, Citadel's founder and chief executive Ken Griffin said in a statement.

As talk about Sowood's losses spread on Friday, traders and other hedge fund managers worried that the fund would have to sell into a falling market to meet margin calls. Such selling would trigger a panic among investors at other hedge funds worried about the health of their own portfolios.

Sowood Capital did not comment on Monday.

Last year, Sowood posted double-digit returns and was up early in 2007, the person familiar with its operations said. Also he said people were assured that the fund would not be forced to liquidate.

Sowood's founder Jeffrey Larson, who had become prominent for successfully managing foreign equities at Harvard's in-house investment group Harvard Management Company, quickly attracted high-profile investors, including his old employer.

Industry analysts said Larson's group, which has office space in Boston's tony Back Bay area, does not report performance to industry trackers and generally keeps a low profile.

So when speculation mounted that Sowood was forced to sell positions into a falling market late last week, industry analysts quickly worried about the impact the potential collapse of such a high-profile fund might have.

Sowood's troubles follow on the heels of news that two large Bear Stearns funds had essentially lost all of their capital in the subprime mortgage market.

For Citadel, one of the world's most powerful hedge funds, stepping in to help rescue another fund's portfolio is nothing new. Last year the fund joined forces with J.P. Morgan Chase and snapped up failed hedge fund Amaranth Advisors' energy portfolio.

Investment