Report: Concern over hedge fund ‘side pocket’

Investors in funds managed by Ritchie Capital have expressed concern over the firm’s use of ‘side pocket’ accounts for less-liquid investments. Side pockets are used by many hedge funds for private equity investing.

Some investors in Ritchie Capital, a Geneva, Illinois hedge fund and asset manager, have expressed concern at the firm’s approach to “side pocket” accounts, according to a report in the Wall Street Journal.

In the past year, investors have withdrawn roughly $1 billion from funds managed by Ritchie Capital, according to the report, which noted that the firm’s main fund was down slightly for the year.

Side pocket accounting is used by many hedge funds to segregate private equity and less-liquid investments from liquid assets. The accounts create complexity when new investors come in and existing investors redeem holdings because of the need to place a value on the side-pocket assets.

Ritchie Capital’s partners are asking investors to slow their redemptions. Paul Wolfe, a partner at Ritchie Capital, was quoted in the article as saying: “If you sell something sooner than you should or pull money away from a winning trader, it hurts investors. . . All the noise about the [side accounts] has made it difficult to raise capital.”

The report stated that Ritchie Capital is offering investors the chance to convert their interests in the side pocket accounts into fixed-income instruments, an offer that has been taken by some investors.

According to the report, some investors have criticised the hedge fund, led by 40-year-old Thane Ritchie, for placing the debt of Adelphia Communications in a side account. These investors reportedly claim that since an active market for the debt exists, it should not be segregated from the other assets. Investors also have complained that they are not given enough information about the assets in the side-pocket accounts.

The firm, with additional offices in New York, London, Bermuda, Menlo Park, Chicago and Hong Kong, has branched out from its initial arbitrage and relative value trading strategies into other forms of investing, including venture capital. Earlier this year, for example, the firm invested $10 million in Major League Gaming, a professional league for video games.