Side Pockets: Operation, Valuation, Practical Considerations

A side pocket is a segregated account created by a hedge fund manager in accordance with provisions in the fund’s governing documents to hold portfolio assets that the manager deems illiquid or less liquid.  Generally, the values of side pocketed assets are excluded from the periodic calculation of net asset value of the liquid portfolio, the theory being that including valuation of such illiquid or less liquid assets in NAV calculations could distort NAV in a way that does not accurately reflect the current realizable value of all portfolio assets, which could unfairly help or hurt new or redeeming investors.  We explore the mechanics of side pockets, their utility in an environment of heavy redemptions, valuation and ERISA considerations and the interaction of side pockets and fees.

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