A struggling casino in Vietnam, a soybean-crushing operation in Brazil, a bunch of high-yield, high-risk loans.
These are among investments that hedge fund managers -- during the depths of the financial crisis -- shoveled into what’s known as side-pockets. Since those dark days, stocks have rocketed and the U.S. economy has boomed, yet these stakes languish in investors’ portfolios like moldy leftovers sitting in the fridge for too long.
The stakes have miffed one investor so much that he’s dubbed them “the little sh-ts.”
The trouble started soon after Lehman Brothers Holdings Inc. went bust and hedge fund clients sought to redeem hundreds of billions of dollars. Even holdings that managers thought were liquid turned out to be tough to sell, never mind the private deals that would have been difficult to exit quickly in the best of times. So, instead of a fire sale, managers pushed the positions into side-pockets, to hopefully be sold at a better price at a later date.
Investors estimate that $200 billion to $360 billion were side-pocketed in 2008 -- or as much as 20 percent of the industry. They calculate that about $25 billion still remains.
In some cases, side-pocketing made sense. The best example may be Lehman bankruptcy claims, which have made tens of billions of dollars for patient investors.
Seeking to alleviate the pain of side-pockets, investor-friendly managers reduced their fees or waived them entirely. They laid out liquidation plans and stuck to them. Not everyone was so generous. Some managers have stubbornly refused to provide details on the investments and made little effort to sell the assets. Many side-pockets have even outlasted the firms that created them.
When will investors get their money back? It’s unclear if they ever will, and time may be running out.
"If you can’t find an exit for them now, when will you be able to?" said Lars Lindqvist, founder of Cattegatt Capital, a broker for secondary interests in private equity, real estate, hedge funds and other illiquid assets. “The markets are healthy, there is good liquidity, there are lots of private equity firms hungry to do deals.”
Here are five side-pockets investors consider particularly irksome. Except where noted, representatives for the firms declined to comment.