Side Pocket
A side pocket is a separate account within a fund used to hold illiquid or hard-to-value assets, often with restricted liquidity.
Allocator relevance: A liquidity and valuation risk flag—side pockets can delay exits and complicate NAV trust.
Expanded Definition
Side pockets are used in hedge funds or vehicles that normally offer liquidity but occasionally hold assets that can’t be fairly priced or quickly sold. Placing assets into side pockets can protect remaining investors from unfair dilution or redemption arbitrage, but it also reduces transparency and can trap capital for longer than expected.
Allocators focus on side pocket governance: valuation methodology, disclosure, and how assets enter/exit side pockets.
How It Works in Practice
The manager designates assets as side pocketed according to fund rules. Investors may have different redemption rights for side pocket assets, and valuations may be updated less frequently.
Decision Authority and Governance
Governance determines designation rules, valuation oversight, and disclosure requirements. Allocators diligence the manager’s history with side pockets and how conflicts are handled.
Common Misconceptions
- Side pockets are always abusive.
- Side pockets guarantee accurate valuation.
- Side pockets don’t affect liquidity planning.
Key Takeaways
- Side pockets isolate illiquidity but create trapped-capital risk.
- Valuation governance is central.
- Understand triggers and manager track record.