by Paul Bannier | Apr 19, 2022 | News
Recent tragic events in the Ukraine have bought into focus the potential need to side pocket or ring fence assets that are either hard to price, illiquid or otherwise subject to some form of sanctions. The creation of side pockets, liquidating trusts and special purpose holding structures, all of which were designed to achieve a similar outcome was widespread at the time of the 2007/8 financial crisis, particularly in the hedge fund industry. For those not familiar, a “side pocket” is a mechanism used by open ended funds in particular to ring-fence or otherwise segregate from the rest of the investment portfolio assets for which a price cannot readily be determined or are otherwise cannot be sold. Such action is needed to allow the fund to operate in a relatively normal manner and accept subscriptions and redemptions from investors. Before issuing side pockets – or more particularly the Class S shares by which investors hold their exposure to side pockets, it is essential to review the fund’s constitutional documents very carefully and to ensure that the fund’s administrator and custodian / prime broker have a clear understanding of how the side pocket will operate – and have the systems are in place to support the specified method of operation. There are a number of pitfalls for the unwary. Careful thought needs to be given to how the costs of servicing the side pocket will be met and how investors will eventually receive value when the sanctioned or illiquid asset becomes realisable or a fair price can otherwise be established. The team at Icorserv have experience in the structuring, operation...
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