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You can engage Logical Formulas to review a particular Hedge Fund’s investor side pocket agreements. Such a review is within the process of reviewing the Hedge Fund’s overall investor allocations. Logical Formulas helps investors understand the consequences of the investment manager’s side pocket arrangements – including how the side pocket agreements might affect the allocation of any IRS audit adjustments to a particular investor.
Side pockets are specialized sub-accounts that allow a hedge fund to offer investors a separate share class containing illiquid assets such as private equity. Their use is akin to having a miniature private equity fund inside a larger hedge fund.
If a hedge fund has an investment that becomes impossible for a manager to liquidate or value, the manager has the option of moving that investment into a side pocket. In the side pocket, it will not count toward the overall net asset value of the hedge fund.
When an investment moves into a side pocket, all the hedge fund investors at the time of the move maintain proportional ownership of the investment. If an investor pulls out of the hedge fund, it nevertheless maintains the ownership until the manager liquidates the side pocket investment.
Consider the potential consequences of IRS audit adjustments in the context of side pocket agreements. IRS audit adjustments happen many years after the fact – and possibly after many investors have redeemed out of the fund. Logical Formulas reviews the tax allocation process including allocations to side pockets.
We can point out potential risks to your investment – on a post-IRS audit scenario basis—an assist you in negotiations with the Hedge Fund to prevent the possible over-allocation of more than your share of IRS audit problems against the returns on your investment in the fund.
Contact us for a tax due diligence proposal.
Jeff Lonsdale
Logical Formulas
4516 Lovers Lane #122
Dallas, TX 75225
(214) 769-3322
jeff@logicalformulas.com