S&P: Side Pockets Grow As Asset Values Rebound

Jul 23 2010 | 12:23pm ET

Despite a major rebound in the values of once-illiquid assets, hedge funds with side-pockets have proven resistant to selling them or desegregating them, according Standard & Poor’s Fund Services.

In many cases, the side-pockets have actually outperformed the hedge funds’ main portfolio, according to S&P’s Randal Goldsmith. That has had the side-effect of increasing the size of the side-pocket relative to the whole portfolio. But in spite of that fact, and in spite of the fact that a rebound in asset values have made such assets easier to sell, some hedge funds are holding on to them.

“It’s the most stubborn area of illiquidity to resolve,” Goldsmith told Reuters.

While the assets have become increasingly liquid, some hedge fund managers are still concerned about wide spreads, Goldsmith said. Still, S&P has been stripping some of the hedge funds it rated whose side pockets become too large.

“We’ve been disappointed how slow they’ve been to reduce them as a percentage of the total portfolio,” Goldsmith said. He added that S&P has been denying ratings to some funds that have sought them after due diligence found large side pockets.

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