Hedge Funds Side Pockets

Hedge Funds Side Pockets

SEC Investigating Hedge Funds' Use of Side Pockets

The Securities and Exchange Commission is investigating hedge funds' use of "side pockets."  The SEC suspects that during the financial crisis some hedge funds may have inappropriately used side pockets to prevent investors from withdrawing money.  This is one of many concerns that the SEC's new enforcement unit will be looking into in private equity and hedge funds.
Side-pockets are just one of several top priorities set by a newly created SEC enforcement unit focused on private equity, hedge fund and other asset managers, the paper said, citing people familiar with the matter.
The unit also is looking into whether investment funds assign fair values to assets and accurately disclose information about their investment strategies, assets and performance, the paper said.
The group had its first full staff meeting this week, the paper said, and has 60 attorneys across nine offices, the Journal said.
Side pockets were widely used in 2008, when hedge funds faced a flood of withdrawal requests amid freefalling markets. Fund managers, not wishing to sell their assets at fire-sale prices, barred clients from redeeming investments.
Many funds stashed illiquid securities into side pockets until markets improved, a move that reduced losses.
Yet many investors complained that fund managers abused the practice, did not disclose reasons for creating side pockets or disclose which assets were set aside.  Source

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