The news that Citadel Investment Group, a $14 billion hedge fund, had purchased $500 million of Sentinel Management Group's distressed portfolio didn't bring the joy the firm perhaps thought it would. Penson GHCO, a futures commission merchant, has demanded that the sale be reversed due to the loss Sentinel clients, thus Penson, would take. "Should the sale not be reversed," a Penson press released stated, "based on what we currently know, we anticipate incurring a potential one-time after-tax loss of approximately $6.5 million on the Sentinel Investment."
Citadel, which has made a name recently swooping in and picking up distressed portfolios (it picked up some of Amaranth Advisors fund), bought $500 million of the $1.5 billion fund on Aug. 16. Another bidder was Chicago-based Horizon Cash Management, which even after the Citadel purchase, was still working with Sentinel clients and their attorneys to move assets to a bank so Horizon could manage them.
Another victim of the Sentinel problems was Farr Financial, a non-clearing FCM based in California, which filed a lawsuit agains Sentinel on Aug. 15, demanding its funds held at the firm that amounted to between $16 million and $18 million, and claims in the suit that if it can't get its money, it could be shut down by the Commodity Futures Trading Commission for failing to maintain a minimum level of net capital.Download file
According to the Farr lawsuit, on Aug. 14, Farr had a margin call of $340,000. Further, at the time, based on market volatility, it stated it expected another margin call the next day of $500,000.
Farr's CEO Omid Farr contacted Sentinel requesting the withdrawal of $900,000 to meet the margin calls. A Sentinel representative advised Farr that Sentinel would not "honor" the withdrawal request. In the lawsuit, Farr is requesting $15.2 million in compensatory money damages and $10 million in punitive damages.
A cash management firm, in theory, is sweeping excess margin from the firm's accounts every night and invests the money in overnight cash instruments that produce the highest yields. The risk, theoretically, is low or non existent. However, it appears that Sentinel not only had pooled its clients, thus if one had withdrawn or the firm defaulted on some paper, it could affect the entire portfolio, it also appears to have invested in some long-dated, most likely illiquid, paper. For example, in its Prime Portfolio, the weighted average maturity in the fund was 396 months. As of June 30, it shows 82% of the portfolio was invested in floater, 12% in fixed and 6% in repo products. Download file
Although ML Group (formerly Man Financial) put out a release that it was not affected by the Sentinel problems, it may be one of the few not to get caught up in the current market credit crunch and volatility.