Side pocket meaning

In investment fund practice, a side pocket is a mechanism used by hedge funds and other AIFs to separate illiquid or hard-to-value assets from the liquid portfolio, so subscriptions, redemptions and performance fees are calculated without those assets distorting outcomes. It is a market term, not a statutory or case-law definition; its use is governed by the fund’s constitutional documents and regulation. Typically, assets are designated to a side pocket or a dedicated class/series; only investors in the fund at the time participate, with later investors excluded. Valuation, fees and redemptions are ring-fenced and normally occur only when the assets are realised or recoverable. The tool is used to allocate risks and returns fairly, protect ongoing liquidity for the main portfolio and avoid mispricing and dilution. Managers must meet disclosure, fair-treatment and conflicts duties, including AIFMD requirements on valuation and liquidity risk. For UK or Irish authorised funds (e.g. UCITS, NURS, OEICs, ICAVs), any side‑pocketing is subject to specific FCA/CBI rules and, in some cases, prior approval. Usage is broadly consistent across England and Wales, Scotland, Northern Ireland and Ireland, but documentation and regulatory consents determine the detail.