As hedge funds approach an attrition rate of -7.0% for the full year....

Hedge Fund New York: In the beginning of September Atticus Capital placed its stake of shares in Deutsche Börse into a side pocket in order to protect them from redemptions. Atticus, which has seen its assets under management decrease by half since the beginning of the year is not the only fund facing increased redemptions and looking for ways to keep strategic investments viable during times of fund distress.

Chief Investment Director of GAM’s multimanager business David Smith recently told the Wall Street Journal "I would not be surprised if the hedge-fund industry has net cash outflows for the next few quarters, though I expect the demand for absolute-return products will continue".

Additionally sobering are the statistics released recently by Hedge Fund Research which reported “Throughout the entire hedge fund industry, 240 new funds were started in 2Q 08, while 180 were shut down.”

Opalesque recently spoke with Ingrid Pierce, a partner in Walkers' Corporate and International Finance Department and head of the firm's Commercial Trusts Group about the newest way firms are using side pockets in face of higher levels of investor redemptions. “As a general matter, side pockets have been in use for some time,” Pierce noted. “If the fund documents allow you to acquire certain illiquid securities and place them into a separate side pocket, the investors that have shares in that side pocketed investment are effectively locked up until such time as that investment can be realized. However, when that investment can be realized is a very tricky thing. Especially in this market”

Typically, funds which deal in illiquid securities have detailed the use of side pockets in their offering documents. “In the traditional sense they are quite valuable for both parties,” said Pierce. Side pockets give f......................

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As hedge funds approach an attrition rate of -7.0% for the full year....


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