FINMA Addresses Fund Of Hedge Fund 'Side Pockets'

by Ulrika Lomas, for LawAndTax-News.com, Brussels

11 February 2009

On the request of several hedge fund bodies the Swiss Financial Market Supervisory Authority (FINMA) has released a statement addressing concerns surrounding liquidity issues for Funds of Hedge Funds (FoHF), arising from the financial crisis.

In certain cases, in order to avoid the suspension of the redemption of all units within funds of funds, so called "side pockets" have been created. The illiquid assets of a collective investment scheme are separated and redemptions for the illiquid part of the portfolio are suspended.

In general, side pockets can also be approved for Swiss FoHFs. The creation of side pockets is subject to the prior approval of FINMA and must be in the interest of all investors. The rights of the investors have, moreover, to be preserved, in the case of creation of side pockets, states FINMA.

“In this context, FINMA reminds all market participants, in particular fund management companies, representatives and distributors, that the issue of new units, respectively, the distribution of partially illiquid collective investment schemes does not comply with the code of conduct as set out in the Collective Investment Schemes Act, in particular the duty of loyalty and the duty to inform.”

FINMA therefore states that the issue of new units is impermissible for FoHFs that have created a 'side-pocket'.

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