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March 9, 2022updated 23 Mar 2022 1:13pm

Fund managers call for ‘side-pocketing’ model to deal with Russian assets

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European asset managers have approached regulators to employ a hedge funds-based model called side-pocketing to safeguard their Russia-linked portfolios from tumbling into losses, reported Bloomberg

The model allows asset managers to set up a vehicle to hold assets that are too risky and illiquid to handle.

The Association of the Luxembourg Fund Industry (ALFI) said that side-pocketing may be the most obvious solution to the current market freeze instigated by Russia’s ongoing military attack against Ukraine.

The members of the association, which is considered to be Europe’s main investor hub, are said to together manage $6.5trn in assets.

ALFI deputy director Marc-Andre Bechet in an interview told the publication said: “We think this is the best way of protecting investors’ interests.

“But a side pocket — for the time being — isn’t something which is accepted across all jurisdictions.”

According to Bechet, ALFI is urging European regulators to consider the practice and lift any regulatory barriers that block asset managers from shielding their portfolios from losses linked to Russian holdings.

A spokesperson for European Securities and Markets Association said that standard rules governing the use of side-pocketing do not exist in Europe as of now.

National regulators will have to decide what is appropriate on a fund-by-fund basis, the spokesperson added.

The practice of side-pocketing is banned by German regulator BaFin , while France allows mutual funds and hedge funds to resort to it under ‘extreme’ circumstances.

Ireland permits only hedge funds to use the side-pocketing model. Similarly, Luxembourg has also limited its use.

Switzerland’s FINMA approves the use of side pockets on a ‘case-by-case’ basis, while other European countries allow only limited to no use of the practice.

The International Organization of Securities Commissions (IOSCO) has signalled ALFI’s recommendation merits consideration.

IOSCO in a statement to Bloomberg said 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 aren’t in that situation.”

Free Report
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How attractive are current investment opportunities in Europe?

Europe has been identified as one of the most favorable regions for investors, seeing high investment activity in the past year. Most of these investments have been through Debt Offering, valued at close to $700 billion. The region has provided attractive investments in a diverse set of companies. Companies who tend to major themes such Digital Media, Cloud, Artificial Intelligence, E-commerce, and Big Data are recording the highest number of deals, with Digital Media recording close to 2,000 deals. However, GlobalData’s whitepaper offers a full view of the market, analyzing less successful or attractive points of investment as well, examining statistics on Equity Offering investments and PE/VC deals. Understand how government agencies for economies around the world use GlobalData Explorer to:  
  • Track the M&A and Capital Raising volumes into their target market
  • Identify the top sectors in the target market attracting the investments
  • For any investment segment, identify the top Investors inside and outside the target economy that are already investing in the Segment
  • Assess and showcase the growth potential for various Industries in the target economy
Don’t miss out on key market insights that can help optimize your next investment – read the report now.
by GlobalData
Enter your details here to receive your free Report.

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