Palisades Fund Nears Cliff

Right around the time that Palisades' investment in OneTravel was imploding, the fund was forced to write off an $8 million investment in World Health Alternatives, a small health care staffing firm that got ensnarled in an accounting scandal last August and subsequently filed for bankruptcy in February.

Last October, the fund's managers sought to separate the investment in World Health by putting it into something called a side pocket -- a separate account that hedge funds sometimes use for hard-to-value assets. But by this summer, it became clear that the $8 million investment in World Health was all but worthless, and Palisades' managers were forced to include it in the funds' overall losses this year.

Palisades isn't the only firm to use side-pocket agreements for some investments. It has become a fad with some hedge funds who invest in PIPE deals--a financing deal in which a small company raises money quickly by selling discounted shares or bonds that convert into discounted shares.

But regulators recently have started to question the legitimacy of some side-pocket arrangements. The main criticism is that hedge-fund managers can use the accounts to hide risky or less promising investments; this could ultimately enable hedge funds to boost the appearance of the return of the fund.

Paul Mannion said he his partner, Andrew Reckles, who jointly manage Palisades, are suffering along with their investors. Mannion says the pair have sunk significant sums of their own money into Palisades and are "sacrificing'' more than most managers would in a similar situation.

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