The side pocket predicament

Fri Apr 27, 2007

Administrators worry about valuations, redemptions and making sure best practices are followed by fund clients

By Barry Cohen

Investors' worst fears about side pockets were realized last year after troubles surfaced at Ritchie Capital Management, the multibillion-dollar multistrategy hedge fund that began a bumpy decline in August 2005. At that time, Ritchie asked investors to agree to a side pocket, allegedly to hold its less liquid investments as the firm moved into private equity. A few months later, however, investors were furious to find out that the fund's dogs were being cordoned off into the side pocket - a segregated pool of positions whose losses would affect neither Ritchie's performance nor management fees and where investor capital could be locked up as long as the fund's management decreed was necessary.

Horror stories like the Ritchie one so far have been the exception rather than the rule, which is consoling given that...

ISSN: 2151-1845 / CDC10004H

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