Side pockets

Side pockets could affect anyone who invests in funds that are exposed to Russian assets. Find out more about how side pockets work and what investors can expect.

First published: 08/09/2022 Last updated: 20/03/2023 See all updates

When you invest in a fund, it usually includes a range of different assets. 

Sometimes one particular asset, or a small number of them, can run into difficulties. This could then affect the whole fund. For example, if an asset can’t be bought and sold, it can be difficult to value the fund correctly.  

A side pocket is a way of separating the problem assets from the rest of the fund, until the problem can be resolved. In a fund sold to the public, this can only happen when there's an emergency that the fund manager can’t control, such as the impact of the war in Ukraine.

Russian invasion of Ukraine

The sanctions and trading restrictions imposed in response to Russia’s invasion of Ukraine mean that some assets, including some Ukrainian assets, have become hard to trade.  

If an asset can’t be bought or sold, then accurate prices may not be available. This can make it difficult to value the funds that invest in these assets.  

In some cases, where the affected assets form a significant proportion of the fund, its managers have suspended buying or selling units of the fund.

This means investors can’t invest more in the fund or redeem their investments.

How side pockets work

Side pockets are an emergency measure that allow fund managers to structure funds differently. Managers will be able to separate the problem assets from the rest of the fund, until the situation can be resolved.

The main fund would then be valued in the usual way, separately to the assets in the side pocket.  

Existing investors in the fund would receive extra units that relate only to the side pocket, giving them the right to a portion of the affected investments. The side pocket would then close to any new investment. 

Side pockets could also allow: 

  • new investors to invest in the fund without investing in the affected assets 
  • existing investors to sell units in the main fund 
  • some funds to end their current suspension of dealing  

Side pockets are not mandatory and won’t be beneficial in all circumstances. There may also be some extra costs to investors if side pockets are created.  

It’s up to fund managers to decide whether to introduce a side pocket. They will consider if it’s in the best interests of investors and if the potential costs don’t outweigh the benefits.    

Contact your distributor to find out what your fund manager plans to do and how this will affect you.

Assets that are affected

  • Equities and fixed-income securities issued by governments, public authorities and companies in Russia, Belarus, and Ukraine.
  • Assets listed and traded on other stock exchanges that are backed by affected securities, such as the above.
  • Securities issued by companies whose operations are severely affected by the current situation, or which are owned or controlled by individuals who are the subject of UK or international sanctions relating to Russia.

What investors can expect

If your fund manager decides to create a side pocket, you can expect to receive a written notification that explains the reasoning behind their decision. This includes:   

  • the expected benefits and costs  
  • how it affects your ability to exercise your rights  
  • the main features of the side pocket class  
  • the practical information you'll need about changes to your investments  
  • a statement confirming the details of the units in the side pocket including the number and type of units held in the fund  
  • any risks associated with creating a side pocket  

You should contact your fund distributor if you have any questions or complaints.

What happens as assets recover value

The fund manager will manage the side pocket with the aim of disposing of the affected investments and ending the side pocket, when this could be done in the best interests of investors.   

The affected investments may never recover their lost value but, if they do, investors holding units in the side pocket would benefit.

Your rights if you want to transfer your side pocket units

There are certain situations where you may be able to transfer side pocket units to third parties. 

This could include a deal where you sell the units to another person at an agreed price. But this may not always be in your best interests.   

It’s important to be aware that some people might have a commercial interest in buying up 'distressed assets' (these are assets priced below market value), especially if they're better informed about the prospect of affected investments recovering in value.  

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