ILS Funds - Side Pocketing

Side-pocketing occurs across multiple alternative investment strategies and is the process of segregating illiquid or hard-to-value assets from the main portfolio. The purpose of segregation is to ensure that where there is valuation uncertainty and/or illiquidity, value is allocated fairly between redeeming, existing, and incoming investors, and fees are charged appropriately.

In ILS, valuation uncertainty is often caused by the occurrence of large loss events where the losses have yet to be defined or realised. After such events, insurance strategies can suffer prolonged periods of valuation uncertainty because of the extended process of loss discovery and settlement. Side-pockets are widely used in such times and can play a valuable role in mitigating the consequences of valuation uncertainty.

This memo covers:

• The Objectives of Side-Pockets for ILS Funds,
• ILS Specific Considerations in Side-Pockets including trapped collateral and By-Contract and By-Event methodologies, and
• What the SBAI Alternative Investment Standards say about Side-Pockets.

The memo also includes a list of questions for investors to consider when evaluating side-pockets during their due diligence.