A brief overview of side pockets - finance

1. Side Pockets
by fundsacademy.com

2. What is a Side Pocket?
• a type of account used by hedge funds to
separate illiquid investments from other more
liquid assets

3. What happens to the funds?
• investors at the time of the creation of the
side pocket will be entitled to a share of the
proceeds of the side pocket when it is
eventually realized

4. Why are side pockets created?
• Typically side pocket investments are hard to
value and do not even have a comparable
security/ assets that can be used to price
them against
• When this occurs the fund can decide to
create a side pocket in order to allow time for
the position to be unwound

5. How are shareholders affected?
• Existing: Issued shares in new side pocket
vehicle
• Redeeming: Receives liquid portion now and
side pocket share when side pocket realized
• New: No entitlement to side pocket

6. Considerations when creating a side
pocket?
• existing shareholders will receive a pro-rata
share of the new class
• documentation of the fund should be
amended
• new class of shares will be valued on each
dealing day

7. Some issues around side pockets:
• Some parties feel side pockets are just
another way of protecting manager's fees by
putting certain investments into a magic box -
never to be seen again.
• Complex issues have arisen surrounding the
crystallisation of performance fees and the
adjustment of High Water Marks. This just
serves to highlight the potential conflict of
interests that may emerge over time.

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