Side pocket

Fund management - illiquid assets.

A side pocket is a segregated account created by a fund manager to hold portfolio assets that are illiquid, or less liquid.

Creating side pockets can enable the rest of the fund to continue, less encumbered by the presence of the illiquid assets.

It will also generally improve the reported performance of the rest of the fund, as the excluded illiquid assets will normally have a worse investment performance than the rest of the fund.

Financial Conduct Authority (FCA) consults on side pockets - Russian assets - sanctions

"The FCA has begun discussions with stakeholders about options to allow UK authorised retail funds to make exceptional use of 'side pockets' given the significant practical challenges in disposing of Russian and Belarussian assets in the context of suspensions and extensive global sanctions.

Side pockets would potentially give authorised fund managers the option to separate Russian and Belarussian assets, that are difficult to sell and/or hard to value, from the fund’s other core investments.

Side pockets could allow:

• New investors to enter the fund without getting exposure to Russian assets
• Existing investors to redeem the rest of their investment, while illiquid Russian assets remain in the separate side pocket (and in many cases marked to zero), while retaining rights to any eventual value
• Some funds to end their current suspension of dealing.

We will consult on proposals with the aim of ensuring that any side pockets that are introduced, and the date on which the side pocket takes effect, treat existing, redeeming and subscribing investors fairly, and do not encourage speculative new investment at the expense of existing investors.

The use of side pockets by the authorised fund manager would be optional, based on acting in the best interests of each fund it manages. The side pocket proposals would be limited in scope to assets that are illiquid as a result of the Russia/Ukraine war. The precise scope would be determined as part of the consultation.

It is the authorised fund manager’s duty to ensure that assets are valued fairly and accurately, and that subscriptions and redemptions take place at a fair price."

Financial Conduct Authority (FCA) - March 2022.

See also

• Financial Conduct Authority (FCA)
• Fund
• Fund manager
• Hedge fund
• Illiquid
• Liquid
• Portfolio
• Redemption
• Regulation
• Sanctions
• Suspension

Other links

• FCA to consult on use of 'side pockets' for retail funds with exposure to sanctioned and suspended Russian assets

• Russia-Ukraine crisis - resources for treasurers - sanctions lists