Definition
A separate accounting sleeve within a fund that isolates a specific illiquid or hard-to-value investment from the main portfolio, limiting redemptions against that position.
When a fund holds an asset that becomes illiquid, difficult to value, or subject to legal restrictions—think a private company stake, a distressed loan in litigation, or securities subject to a regulatory hold—managers sometimes move it into a side pocket. Investors' ownership of the side pocket is tracked separately from their main-fund interest. They cannot redeem out of the side pocket until the asset is realized or otherwise resolved.
Side pockets are most common in hedge funds but occasionally appear in other structures. Their legitimate purpose is investor fairness: without them, redeeming investors could receive their pro-rata share of liquid assets while leaving remaining investors holding a disproportionate share of the illiquid position. The side pocket keeps each investor tethered to the illiquid asset in proportion to their original participation.
A common concern is that side pockets can obscure actual fund performance or be used to park underperforming assets away from scrutiny. Governance quality matters significantly here. Families should understand a manager's historical side-pocket usage—how frequently they were created, how long they persisted, and how eventual realizations compared to the original carrying values. This is a meaningful due-diligence question during manager selection. A qualified attorney should review the specific fund documents governing side-pocket creation and valuation authority before an investor commits capital.
Last reviewed August 25, 2026 · Editorial Policy
