The Evolving Role of Side Pockets in Modern Fund Structuring

Side pockets have become an increasingly prominent feature of open‑ended fund structures, reflecting a wider shift in how managers and investors approach liquidity, valuation and portfolio construction. In general, side pockets operate by designating illiquid or hard to value assets into a segregated class or series of interests, with each investor’s participation generally determined based on their pro rata interest at the time of designation. This structural separation allows the main portfolio to continue operating with standard redemption terms while the side pocketed assets are held to realisation, with proceeds distributed as and when liquidity events occur.

What was once an exceptional measure deployed during periods of market stress is now a recognised liquidity management tool often contemplated proactively at a fund’s inception.

Recent Maples Group data shows that more than a third of open‑ended funds launched by the Maples Group in 2025 incorporated side pocket powers at inception, and the use of side pockets was particularly common among Asia‑based managers. In 2025, approximately 74% of Asia based open ended fund launches included side pocket provisions from the outset, compared with approximately 33% of US-based launches. In 2024 these figures were approximately 65% and 31% respectively, demonstrative of the increasing popularity of side pockets as a liquidity management tool.

This change has been driven by a confluence of structural market forces. Investors are allocating more capital to strategies with private‑market components and other inherently illiquid assets. At the same time, managers face pressure to maintain fair treatment between incoming, redeeming and continuing investors.

Side pockets offer a transparent means of achieving these aims within open‑ended structures while preserving exposure to assets with longer realisation horizons. Critically, they address the fundamental tension in open ended vehicles between the need for periodic liquidity and the reality that certain positions cannot be sold at fair value on short notice. Side pockets are one means of avoiding a forced choice between realising illiquid positions at depressed prices to meet redemptions (diluting value for remaining investors) and suspending redemptions entirely (penalising all investors).

Evolving from reactive measure to planned portfolio mechanism

Traditionally, side pockets were activated only when an investment became distressed, impaired or extremely difficult to value. Their deployment often suggested that the asset had encountered significant issues or that wider market conditions had deteriorated and carried reputational implications for the manager.

Today, the rationale is very different. Managers are incorporating side pocket authority into new fund documents and defining with greater clarity the circumstances in which designations may occur. Strategies with structural exposure to illiquid assets such as private credit, real assets or structured products now treat side pockets as a structural portfolio management mechanism rather than a sign of distress. The use of side pockets is also more prevalent in directional and hybrid strategies that blend liquid market exposures with opportunistic private market allocations. This pattern is borne out by data on funds launched by the Maples Group in 2025 showing that side pocket provisions were particularly popular amongst growth equity/growth capital funds, private credit funds and multi-strategy funds/funds of funds, reflective of the fact that strategies involving illiquid, harder-to-value, or longer-dated investments have a greater operational need for side pockets to segregate such positions and protect both redeeming and remaining investors while strategies prioritising liquidity and active portfolio turnover are less likely to hold assets that would necessitate such mechanisms.

The impact of the economic environment

Strong institutional demand for yield has made liquid markets less attractive on a risk-adjusted basis. Though sustained elevated base rates have increased nominal yields, this demand has resulted in spread compression in liquid markets, reducing the marginal return available for taking credit risk in such markets.

In this environment, managers have sought exposure to less liquid opportunities where illiquidity premia can enhance performance. Side pockets allow funds to access these opportunities without maintaining larger liquidity buffers or restricting capital inflows.

This economic environment has also affected the exit landscape. Higher financing costs and slower transaction volumes in recent years have made certain assets harder to realise, meaning that positions which were liquid at acquisition can become illiquid during the holding period.

Side pockets offer a practical and pre agreed mechanism for managing these situations in a way that is fair to investors.

Greater sophistication in documentation and governance

As side pockets have become more widely used, the market has adopted more sophisticated approaches to their structuring. Fund documentation now addresses designation triggers in clearer and more prescriptive terms, balancing the need for manager discretion with investor expectations around transparency. While some managers have introduced caps on the percentage of assets that may be side pocketed, only 28% of funds launched in 2024 and 24% of funds launched in 2025 with side pocket authority implemented such limits, indicating a continued preference for flexibility.

Governance has also come to the forefront, with increased focus on investor communications, oversight procedures and valuation protocols. Fee terms are being drafted with more precision, particularly around whether management fees accrue on side pocketed assets and how performance fees are treated.

Participation rules for new investors have also matured. In 2025, participation was mandatory in 81% of funds with side pocket provisions, with relatively few funds permitting investor elections.

Positioning side pockets within a broader liquidity toolkit

Managers increasingly view side pockets as one element within a comprehensive liquidity management framework. Lock ups, redemption gates, suspension powers and in kind distribution rights continue to play important roles, with side pockets offering a targeted method of isolating specific assets without impeding liquidity across the wider portfolio.

Maples Group data shows that 55% of new funds launched by the Maples Group in 2025 included redemption gates and 51% incorporated lock ups (most often of one year duration), compared with 51% and 46% respectively in 2024. In addition, more than 80% of new funds maintained monthly or quarterly redemption cycles (compared with 78% in 2024), with 78% requiring between one and three months’ notice for redemptions (up from 62% in 2024). These measures all serve important purposes in the context of portfolio-wide liquidity management. Side pockets complement these tools by providing a structured solution for dealing with asset specific illiquidity without disrupting the fund’s broader redemption profile.

Parallels with the evolution of continuation funds

The evolution of side pockets parallels changes seen in the private equity industry through the growth of continuation funds. Initially perceived as mechanisms for managing underperforming assets, continuation vehicles are now widely used to extend ownership of high performing positions and pursue longer term value creation.

Both developments reflect the industry’s broader acceptance of liquidity flexibility, provided there is strong governance, transparent disclosure and clear economic alignment between managers and investors. In both contexts, the critical question is whether the mechanism serves investor interests or primarily benefits the manager. Side pockets deployed to avoid crystallising losses or to defer redemptions indefinitely attract scrutiny. Those used transparently to preserve value in genuinely illiquid situations are increasingly viewed as evidence of sound portfolio management. The governing bodies of Cayman funds play an important oversight role in ensuring that designation decisions are made appropriately and communicated clearly.

Outlook: implementation will define best practice

The global hedge fund industry ended 2025 with more than US$5 trillion in assets under management and its strongest year of net inflows since 2007.¹

Market conditions characterised by valuation dispersion, heightened volatility and divergent policy paths continue to create opportunities for managers capable of capturing illiquidity premiums.

The Maples Group’s Cayman Islands Open Ended Funds Trends & Insights Report’s 2026 outlook notes that allocator demand for strategies monetising dispersion and illiquidity remains strong, further reinforcing the relevance of side pocket powers within Cayman open ended fund structures.

As side pockets become more widely adopted, attention is shifting to the quality of their implementation. Clear triggers, rigorous governance, well defined fee treatment and effective communication will shape industry expectations and set the standard for best practice in 2026 and beyond.

This evolution also sits against the backdrop of the 2025 strategy mix, where credit and multi strategy funds, each with potential pockets of episodic illiquidity, featured prominently among new launches. So long as the boundary between liquid and illiquid alternative strategies continues to blur, side pockets will remain an essential structural tool for managers seeking to capture opportunities across the liquidity spectrum while maintaining the open ended format that many institutional allocators prefer.

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¹ “Global Hedge Fund Industry Capital Surges Past Historic $5 Trillion Milestone“, HFR Global Hedge Fund Industry Report, 22 January 2026.