Hedge fund side-pockets still thwart clients-S&P

* Some funds of hege funds with some 20 pct in side pockets

* Side pockets for less liquid assets grow as prices rebound

* Managers sometimes reluctant to sell the assets

By Laurence Fletcher

LONDON, July 23 (BestGrowthStock) – Some funds of hedge funds are
still denying clients access to big chunks of their cash almost
two years after the nadir of the credit crisis, said S&P Fund
Services, even though many assets have become easier to sell.
Lead analyst Randal Goldsmith said a small number of funds
that S&P had rated in the past, as well as some funds that had
approached the firm for ratings, had large so-called ‘side
pockets’ — which hold less liquid assets — amounting to as
much as one-fifth of their portfolios.

In some cases, these assets have rebounded in value faster
than a hedge fund’s other holdings, meaning the side pocket has
actually grown as a share of the total fund.

But despite the rebound in the price of the assets, some
funds are still reluctant to sell, for instance because they say
the spreads are still too wide, said Goldsmith.

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

“We’ve been disappointed how slow they’ve been to reduce
them as a percentage of the total portfolio… Quite a lot of
(funds) have come our way where the group is looking to be
(rated), but when we’ve dug a bit deeper (there were big side
pockets).”
Hedge funds created side pockets during the credit crisis in
order to house assets such as asset-backed loans, distressed
debt and complex fixed income instruments, where liquidity dried
up and prices fell sharply, making them hard to value or sell
when clients wanted their money back. [ID:nLDE60J25G]

Investors wanting to get out were usually given their share
in cash from the main, liquid portfolio, as well as units in the
side pocket.
S&P Fund Services said it will not give ratings to funds of
hedge funds which have more than 20 percent of their assets in
side pockets.

Since the market rebound that began last March,
side-pocketed assets have in many cases outperformed the assets
in hedge funds’ main portfolios — often because they are
recovering from very steep falls during the credit crisis.

This has meant that some side pockets have grown as a
percentage of some hedge funds’ portfolios.

Goldsmith gave the example of the Antarctica Market Neutral
fund, whose rating was taken away by S&P in July 2009 after the
proportion of its portfolio in a so-called special purpose
vehicle — similar to a side pocket — rose above 20 percent,
although it has since fallen slightly below that level.

Investment

No-one at Antarctica was available for comment.
(To read the Reuters Funds Blog click on
http://blogs.reuters.com/fundshub; for the Global Investing Blog
click on http://blogs.reuters.com/globalinvesting/)
(Editing by Samia Nakhoul)

Hedge fund side-pockets still thwart clients-S&P