SEC probes hedge funds' use of side pockets (reported by WSJ)

Federal regulators are examining whether hedge-fund managers abused tools known as "side pockets" that helped prevent clients from withdrawing billions of dollars of assets during the financial crisis.

The issue is one of several investigative priorities recently set by a newly organized Securities and Exchange Commission enforcement unit focused on ferreting out misbehavior by private-equity funds, hedge funds and other asset managers.

The group, run by co-chiefs Rob Kaplan and Bruce Karpati, held its first full staff meeting this week. Some 60 attorneys are assigned to the unit across nine offices, said people familiar with the matter. The unit is delving into a number of issues surrounding hedge funds and asset managers, including whether the funds are assigning fair values to assets and accurately disclosing information about investment strategies, assets and performance to investors.

Side pockets aren't a new tool for hedge funds, but they grew more common and more controversial in 2008. At the time, funds were inundated with withdrawal requests amid market losses. Many fund managers barred clients from exiting from their investments. Side pockets can protect investors by confining new or long-held investments until markets improve, potentially limiting losses. But during the crisis, clients complained managers weren't disclosing reasons for creating side pockets, nor disclosing which assets were being stashed there.

Link to complete WSJ Article

Not to be confused with Hedge Fund Side Pocket