What is a Sidecar Investment?

A sidecar investment is an investment strategy in which one investor allows a second investor to control where and how to invest the capital. A sidecar investment usually occurs when one of the parties lacks the ability or confidence to invest for themselves. The strategy places trust in someone else's ability to gain profits.

Understanding Sidecar Investments

The word "sidecar" refers to a motorcycle sidecar; the person riding in the sidecar must place his or her trust in the driver's skills. This differs from coattail investing, where one investor mimics the moves of another. A variation of sidecar investment is the sidecar fund, which is an investment vehicle in which several groups with different interests are involved. For example, passive investors as well as institutional investors or LPs interested in more deal making opportunities can be a part of the same vehicle investing in companies and startups.

Key Takeaways

  • Sidecar investment refers to an investment strategy in which one investor among two or a group of investors controls the mechanics of investing.
  • A variation of sidecar investments are sidecar funds in which a group of investors with differing interests participate in investing.
  • Sidecar investments are not usually not considered an important tenet in portfolio management.

Sidecar Investment and Portfolio Management

Sidecar investments and coattail investments are usually not central tenets in portfolio management. Portfolio management is a complex art and science that incorporates several types of strategies, possibly including sidecar investment, under a large umbrella or investment policy. Portfolio managers must match their investments to the objectives of the client (individual or institutional). They have a fiduciary duty to do so.

Portfolio managers will determine a specific asset allocation, balancing risk against performance, by spreading out investments among stocks, bonds, cash, real estate, private equity and venture capital, and more. For each asset class, investment managers determine particular strengths, weaknesses, opportunities and threats. For example, if a client cannot take on significant risk, the manager might decide to place the majority of assets in domestic instead of international markets and focus on safety as opposed to growth. A myriad of trade-offs exist and require constant research and vigilance.

Example of Sidecar Investing

Suppose there are two individuals - Jessica, who is experienced in trading corporate bonds, and Barney, who has a background in real estate. Jessica and Barney decide to work together in a sidecar investing strategy. In this case, Jessica would give Barney money to invest in real estate on her behalf, and Barney would give Jessica funds to invest in company bonds. This setup allows both Jessica and Barney to diversify their portfolios and benefit from one another's expertise.

As an additional example of coattail investing: a money manager or institution purchases companies with a a buy-and-hold mentality (i.e. they make bets for the long term), and a retail investor, although he or she might not have access to the full breakdown of the manager’s portfolio, can access the manager’s top ten holdings in a public investment policy statement (IPS) and follow suit. If the manager buys securities with a short time horizon and frequently turns over their holdings, on the other hand, it can be difficult to keep track.