Fun with hedge funds: quote-unquote “short term cash”

From Bloomberg:

Sentinel Management Group Inc., the Illinois-based cash-management firm that oversees $1.6 billion, froze client withdrawals after saying that credit-market turmoil made it impossible to trade without incurring losses.

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. [What?]

“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 [understatement — try “catastrophic”] 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. …

[Sentinel said,] “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.” …

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.

“Finally, maintaining very short duration helps ensure stable values even in volatile market conditions,” according to the Web site.

At least one of the BNP funds that cratered was also being marketed as “short-term cash management” or “enhanced cash”.

What’s the point? These are funds for which the whole objective is to be able to pull out the cash at any time. What on earth were they holding that caused them to have drastic declines in value and forced them to stop their investors from getting their cash out?

We are going to learn a lot of dirty little secrets over the next few months…