Usually only the most illiquid assets, such as delisted shares of a company, receive this type of treatment, because holding illiquid assets in a standard hedge fund portfolio can cause a great deal of complexity when investors liquidate their position.
Overall, side pocket accounts resemble single-asset private equity funds in structure.
They are legal and credible investment accounts, but they are closely monitored by regulatory authorities.
These accounts and their uses must be fully documented for investors.
Side pocket accounts have been the target of numerous investigations and enforcements.
These investigations have mainly been focused on managers who have overvalued the illiquid assets in the side pocket accounts, leading to higher fees from investors.
Industry data tracker HFR reported in September that 530 funds liquidated in the first half of the year, on pace for the second-most shut-downs in a calendar year except for 2008. Richard Perry launched the firm after working at Goldman Sachs’ risk arbitrage desk that was famous for producing star hedge fund managers.
Lawrence Goldfarb and Baystar Capital Management provide a leading case of misappropriated funds from a side pocket account.
“Although I continue to believe very strongly in our investments, process and team, the industry and market headwinds against us have been strong, and the timing for success in our positions too unpredictable,” Richard Perry wrote in the letter. That was down from .9 billion as of late 2013 and around billion in early 2008, according to firm reporting seen by Reuters.
An external spokesman for the New York-based firm declined to comment. The shuttering underscores continued pressure on the hedge fund industry following a period of poor performance. Co-founder Leff and former co-chief investment officer David Russekoff have departed in recent years.
More than 400 hedge funds closed their doors in the first half, a 14% increase from a year earlier, Hedge Fund Research reports.
This year has seen the closures of Avesta Capital Advisors, Bell Point Capital Management, Boyer Allan Investment Management, Brencourt Advisors, Cadogan Management, Camargue Capital Management, Centaurus Capital, Edoma Capital, Grant Capital Partners, John W.
Henry & Co., Kingsbrook Capital, Lasair Capital, Libra Advisors, Millbrook Capital Management, Novaterra Capital, Octavian Advisors, OMG Capital, Orvent Asset Management, Pivotal Investments, Ridley Park Capital, Sequence Asset Management, Sharp Peak Capital Management, Thaddeus Capital Management, Tell Investments, Tiger Asia Management, Voras Capital Management and Weintraub Capital Management.