FUND LOCKOUT
A Chicago-based money manager that invested hundreds of millions of dollars of its professional investor clients’ money in what were believed to be safe portfolios announced yesterday that it was suspending fund withdrawals.
Sentinel Management Group, whose portfolios were designed to behave like a money-market vehicle for commodity trading advisers and futures traders, took the action because investors had overwhelmed it with redemptions, or requests to pull out money.
Unlike money-market funds available to retail customers, the funds facing potential trouble cater to hedge funds and high-net worth individuals.
Since the fund was heavily invested in floating-rate corporate debt, according to its Web site, any sales would have locked in massive losses given the collapse of bond prices over the past two weeks.
The Sentinel Prime Portfolio’s 6.83 percent return on an annualized basis in June apparently could not overcome investor fears about the continuing collapse in many sectors of the bond market.
Long seen as the safest of havens for investors big and small to park their cash, it is turning out that institutional money-market funds may become the latest casualty in the credit market meltdown, as they are heavily invested in sectors of the bond market that have proven to have more risk than previously anticipated.
Ironically, Sentinel’s Web site bragged about having “constructed a fail-safe system that virtually eliminates the risk from short-term investing.”
Last week, hedge funds and other high-net worth investors were shut out of two BNP Paribas money-market funds when the French bank was forced to halt redemptions after the funds suffered sharp losses in the subprime debt debacle.
The implications of Sentinel’s troubles will take several days to sort out, although it is likely to force some portfolio managers to scramble to line up other funding to meet redemptions and margin calls.
If the investors cannot put up the cash, their clearing brokers might be stuck with millions of dollars of trades they’ll be forced to liquidate.
The $1.6 billion fund’s portfolios were designed to appeal to the specific needs of commodity and futures traders who seek to earn extra yield on their excess cash positions. Given the volatility of many futures and commodities, the traders need nearly instant access to meet margin calls or to add to positions.
Diane Mix, a former Sentinel executive who founded rival firm Horizon Cash Management, said that in the cash management business, “anything possibly affecting your ability to provide [your clients] with their capital immediately is a massive red flag.”
Mix said that one possible problem with Sentinel may have been its use of pooled accounts – or the co-mingling of client capital – rather than individual accounts.
