Side Pocket
A side pocket is a segregated account for illiquid or hard-to-value assets within a fund, often limiting redemptions for those positions.
Definition
Definition Side pockets are used to separate assets that cannot be fairly priced or liquidated within normal redemption terms. Investors’ interests in side-pocketed assets are typically locked until those assets are realized or valued with greater certainty. Side pockets exist to protect remaining investors from dilution or unfair pricing during redemptions. Allocator Context Side pockets appear most often in hedge funds and credit strategies that can hold distressed, private, or illiquid securities. Allocators evaluate side pocket terms as part of liquidity and valuation governance, including who decides to side pocket assets, how valuations are handled, and what rights investors have. Decision Authority Because side pockets affect liquidity rights, they often receive committee scrutiny. Institutions may have policy constraints on strategies that can side pocket assets, especially if side pocket usage is broad or discretionary. Why It Matters for Fundraising Managers should define side pocket usage narrowly and transparently. Overly flexible side pocket provisions raise concerns about liquidity traps and valuation uncertainty. Key Takeaways Protects fairness when assets are illiquid or hard to value Reduces redemption rights for side-pocketed assets Governance and valuation discipline are central Overly broad discretion increases allocator concern