Historically, side pockets have tended to be used to deal with assets that have become hard to value and where a decision has been taken to write down their value in the books of the fund. By using a side pocket, investors of record who have borne the write down are able to take advantage of any future recovery in the value of the asset(s) rather than subsequent subscribers acquiring that opportunity at an undervalue at the expense of those investors. sanction available to the governing body of a fund is to suspend redemptions. It is long-established practice for the terms of issue of all open-ended funds to include provisions permitting such a suspension in a range of circumstances. The terms of issue of most hedge funds also permit the governing body to suspend the calculation of the fund’s net asset value (which may in turn necessitate a general suspension of subscriptions and redemptions).
disclosed to investors in the information memorandum of the fund. Arrangements of this nature typically include: ^ Satisfying redemption proceeds in specie or in kind. Many private investment funds include provisions permitting redemption proceeds to be satisfied by the transfer to the investor of assets of the fund having an equivalent value as determined in accordance with the normal valuation provisions of the fund (a redemption in specie ). ^ Side pockets. Side pockets are often used as a mechanism for a fund to separate assets or positions that have become illiquid and/or hard to value from the fund’s general portfolio. The relevant assets are managed and realised as a separate pool either within the fund (in which case they tend to be represented by a separate class of interests in the fund issued to investors) or are transferred to a separate liquidating vehicle. The attraction of a side pocket arrangement is that all investors of record at the time of imposition of the side pocket participate in the side pocket, while subsequent investors in the fund do not.
^ Suspension of dealing. The ultimate
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