ILS side pocket
A compartment where a fund isolates positions of uncertain value, so neither entering nor exiting investors are harmed.
A side pocket is the compartment where an insurance-linked securities fund isolates positions hit by an event whose final cost is unknown. The corresponding shares are frozen. Investors present at the event date keep ownership, new subscribers get no access, and redeeming investors cannot cash them out before settlement. It solves a fairness problem between successive holders. Without ring-fencing, an investor redeeming just after an event would be paid on a still-optimistic net asset value, at the expense of those who stay, and a new subscriber would cheaply acquire exposure to possible good news it never carried. The side pocket freezes the allocation at the moment uncertainty arises. The downside is immobilization: an investor can hold ring-fenced shares for years that it can neither sell nor value. The size of these pockets has become a selection criterion for funds in the sector.
A 1.2 billion euro fund ring-fences positions representing 9.4 percent of assets in 2026, hit by two events whose estimates range threefold. The year's subscriptions enter on the remaining 90.6 percent. Thirty months later the pocket settles at 62 percent of its original value, an outcome borne solely by the holders present at the event dates.
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