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Wednesday, August 15, 2007

Sentinel "Money Market" Update

by Tanta on 8/15/2007 08:27:00 AM

The news that a "money market fund" was halting redemptions yesterday certainly caused a fair-sized anxiety-attack yesterday. I'm the last person to suggest that what's happening with Sentinel Mangement Group is good news, but it doesn't appear to be the kind of bad news a lot of us assumed at first glance. This is, obviously, a common problem with "hot news": we're all over it before we've had time to stop and really examine it.

I should have known better, myself, because my immediate response was "who the hell is Sentinel?" It's not like I'm an expert in money market funds or anything, but I read the papers and I have a money market fund account myself--with Vanguard--so at least once in my life I did some comparisons of prospectuses. My second response was "how can you have a redemption problem with a money market fund?" The money market is supposed to be the shortest durations available; that is, the most liquid investment there is short of an interest-bearing checking account. I'm sure everyone else thought the same things I did, and so we all got pretty freaked out. The liquidity freeze has hit the money market? Head for the Bankerdome!

Well, but. First of all, it appears that a prudent elderly risk-averse retail customer like me has never heard of this Sentinel fund because it is not a retail investor fund. Second, it doesn't appear to be a true short-duration credit-risk free high-liquidity fund like your usual retail fund. Third, it appears to have, um, made a certain misrepresentation about having asked its regulator for permission to halt redemptions yesterday. Bloomberg:

Sentinel, based in the Chicago suburb of Northbrook, said it contacted the Commodity Futures Trading Commission for approval to halt redemptions ``until we can honor them in an orderly fashion,'' according to an Aug. 13 client letter posted on Web site. Regulators said the firm never made such a request.

``They're not honoring withdrawal requests, and the plan is over time to get out of positions,'' Jeff Barclay, a lawyer with Chicago-based Schuyler, Roche & Zwirner who represents Sentinel clients, said in an interview today. ``Their intent is to return money to clients, which is an admirable position, but it's a breach of contract and bad for a client that needs the money tomorrow for a margin call,'' Barclay said after speaking with members of the firm's legal staff today.

``Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade,'' Sentinel said in its letter, which didn't specify which funds were affected. ``We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients.''

Eric Bloom, Sentinel's president and chief executive officer, didn't return phone calls seeking comment. . . .

The CFTC talked with Sentinel about its status but wasn't asked to approve a freeze, a commission official said. Such a decision isn't up to the Washington-based regulator, added the official, who asked not to be identified because the discussions were private.

``We are aware of the situation and we are monitoring it,'' CFTC spokesman Dennis Holden said. . . .

Sentinel invests for clients such as managed-futures funds, high-net-worth individuals and hedge funds that want to be able to withdraw their cash quickly. Investments include short-term commercial paper, foreign currency, investment-grade bonds and Treasury notes, according to the Web site.

The firm's Prime Portfolio pooled account had 82 percent of its assets in floaters, or debt that pays floating-rate interest, as of June 30, according to the Web site. The weighted-average maturity of securities in the fund was 33 years, mostly in corporate securities. Only about 6 percent of assets were in overnight loans.

In contrast, Horizon Cash Management LLC, a $3.2 billion cash-management firm based in Chicago, has an average maturity across its separately managed accounts of 254 days.

The Prime Portfolio is designed to give clients ``a short- term investment alternative that combines safety of principal, liquidity and competitive yields through a portfolio of investment-grade securities,'' Sentinel said on the Web site. It also said that the firm follows ``concentration limits'' on investment holdings in order to reduce risk.
That Horizon fund is probably the kind of thing most of us think of when we hear "retail brokerage money market fund." Sentinel's fund sounds like another classic case of the high-rollers chasing yield in an "innovation" of the classic money market concept.

I do not give investment or cash management advice to other people. I will simply note that I didn't run right out and close my Vanguard account yesterday, nor do I intend to do it today. Furthermore, I want to ask everyone to bear in mind why it is that this blog is what it is. We aren't here to provide "tradeable news," or to swap investment strategies with each other. What we're trying to do is take some of this "news" and subject it to the collective analytical talents of a group of people--fuddy duddies, for sure--who want to slow down and take a look at these things from a rather wider perspective.

Yesterday, some of those excellent commenters of ours who do that kind of thing got drowned out by a lot of panicked people demanding to know if they should yank their money out of the money market and buy T-bills or gold or ammo or what have you. This morning, we learn that the folks getting burned, at least in this story, are those "qualified investors" who should have known better but didn't. This isn't Brookstreet, where you had small-time retail investors being sold inverse floaters. This is a money market hedge fund learning the lesson that you can't have credit-risk free supershort-duration investments with a NAV = $1.00 and get a higher yield than the unwashed masses get.

In other words, this is part of a pattern that we've been seeing lately. In that respect, it's not really "hot news."