What is Side Pocketing?
Side pocketing is a strategy used to protect investors in instruments that have risky asset exposure.
In a debt portfolio, it is an accounting approach for separating illiquid (riskier) investments from liquid and high-quality investments.
When a bond owned in the fund receives a rating drop, the fund houses move the illiquid asset to a side pocket, where existing holders receive a proportional distribution.
The fund’s NAV (Net Asset Value) shows solely the value of liquid assets when side pocketing is used and illiquid assets are put into a separate pocket.
Side pocketing is a technique that should be approached with caution. In addition, the value of illiquid investments is uncertain. As a result, the illiquid asset’s NAV will continue to be a source of worry.
