News

23 January 2009
News

Side Pockets for Funds of Hedge Funds

Due to the actual market situation, the Swiss Financial Market Supervisory Authority FINMA is confronted with some requests from the Swiss Funds Association SFA, fund management companies and representatives of foreign collective investment schemes concerning liquidity issues that Funds of Hedge Funds (FoHF) are facing.

In certain cases abroad, in order to avoid the suspension of the redemption of all units, so called "side pockets" can be created. The illiquid assets of a collective investment scheme are then separated and the redemptions for the illiquid part of the portfolio are suspended.

In general, "side pockets" can also be approved for Swiss FoHF. The creation of “side pockets” is subject to the prior approval of FINMA and must be in the interest of all investors. The rights of the investors have, moreover, to be preserved, in the case of creation of "side pockets".

In this context, FINMA reminds all market participants, in particular fund management companies, representatives and distributors, that the issue of new units, respectively, the distribution of partially illiquid collective investment schemes does in principle not comply with the code of conduct as set out in the Collective Investment Schemes Act, in particular the duty of  loyalty and the duty to inform.

As the creation of "side pockets" only applies to partially illiquid FoHF and since the issue of new units, respectively, the distribution of partially illiquid collective investment schemes can constitute a breach of the Code of Conduct as set out in the Collective Investment Schemes Act, the issue, respectively, the distribution of affected FoHF has in principle to be suspended regardless of the creation of "side pockets".