Picking Pockets

At DealVector we recently received a portfolio of over 100 Side Pockets to work on. Side Pockets are portions of hedge fund portfolios that are segregated (or “Side Pocketed”) because they are illiquid. The illiquidity makes it difficult to truly mark the asset and, therefore, to fairly distribute proceeds to any partners that redeem. For this reason the illiquid asset is put into a kind of time capsule apart from the rest of the portfolio which continues being traded, marked, and allocated among partners day-to-day.

Side Pockets became quite common during the 2008 crisis. In fact Pension and Investments estimated that even 3 years later in 2011 there were still $100 billion in total frozen hedge fund assets. Side Pocketed assets are typically held at cost, an approach that usually would be considered conservative. But in 2008 cost-pricing would have been a dream for most structured assets, and some managers were sued for over-charging clients.

The buy-side has responded to the entire Side Pocket episode by favoring Co-Investment frameworks and Single Managed Account (SMA)  frameworks. In these arrangements the investor is not co-mingled with fund partners at all even at inception, so there is never any confusion as to which investments are mixed with other fund assets or not.

But yesterday’s problems can be today’s opportunity, so if you have interest in reviewing the Side Pocket portfolio we are working on, please let us know!