Side Pocket
A Side Pocket is an internal accounting of a Hedge Fund that contains the assets of the fund that are deemed illiquid.
Hedge funds can employ many types of investment and trading strategies including the buying and investing in assets with limited marketability. If a hedge fund manager invests in a security that he later finds out is unsalable or otherwise hindered to sale, he will create a Side Pocket to “store” the asset at the last known valuation.
The creation of the Side Pocket will have the effect of taking the asset out of the Net Asset Value or NAV calculation of the hedge fund’s individual shares. The Net Asset Value of the fund will then use the current and market determined value of the long and short securities in the fund and then add the value of the Side Pocket securities valued at the last known valuation. Any redemption from the fund by shareholders can only be done from the percentage of the fund’s value that is in the currency NAV, and not include the Side Pocket’s assets.
