Investors call for a ‘side pocket model’ to manage Russian assets
European asset managers have approached regulators to use a hedge fund-based model called side-pocketing to protect their Russia-linked portfolios from losses, reported Bloomberg.
The model allows asset managers to set up a vehicle to hold assets that are too risky and illiquid to manage.
The Luxembourg Investment Funds Industry Association (ALFI) said side pockets may be the most obvious solution to the current market freeze caused by the ongoing Russian military attack in Ukraine.
Members of the association, which is considered the leading investment hub in Europe, reportedly manage a combined total of $6.5 billion in assets.
The deputy director of ALFI told the Marc-André Bechet news agency in an interview: “We believe this is the best way to protect the interests of investors.
“But a side pocket – at the moment – is not something that is accepted in all jurisdictions.”
According to Bechet, ALFI urges European regulators to consider this practice and remove any regulatory obstacles that prevent asset managers from protecting their portfolios from losses related to Russian holdings.
A spokesperson for the European Securities and Markets Association, standard rules governing the use of side pockets do not currently exist in Europe.
National regulators will have to decide what is appropriate for each fund, the person said.
The practice of side pockets is banned by German regulator BaFin and France allows mutual funds and hedge funds to use it in “extreme” circumstances, according to the report.
Ireland only allows hedge funds to use side pockets. Similarly, Luxembourg has also restricted their mostly limited use.
The Swiss FINMA approves the use of side pockets on a case-by-case basis, while other European countries only allow limited or no use of this practice.
The International Organization of Securities Commissions (IOSCO) noted that ALFI’s recommendation deserves consideration.
IOSCO said in a stamen to Bloomberg that the use of side pockets is “likely to be appropriate where the fair valuation of part of an investment fund portfolio is temporarily very difficult or impossible, but other parts of the portfolio are not in this situation.”
