Why Funds need to calculate a NAV?
Open-ended investment funds allow investors invest, or withdraw, funds on a regular basis. Many hedge funds permit investments and withdrawals monthly. That is, they are monthly dealing funds.
Hedge funds are usually unitised. This means that the fund issues shares or units to investors. In order to ascertain the value of a share in the fund, the fund must complete a NAV calculation (net asset valuation). The NAV calculation is a core element in hedge fund accounting.
What is a NAV?
A NAV calculation ascertains the fund value as at a point in time. It is the total assets less total liabilities.
Assets are what the fund owns. This includes receivables.
Liabilities are what the fund owes. This includes payables.
The mathematical formula for NAV is:
Assets – Debits / Number of outstanding shares = Net asset value (NAV)
Let’s see what is behind each line item in the NAV calculation.
How is NAV prepared?
Now, let's dig into the precise process.
1. Trades Booking
Vauban will book on its accounting system all the securities bought and sold by the Fund Manager during the period.
2. Executing Fund Corporate Actions
We will then reflect all corporate actions (stock splits, dividends, mergers and acquisitions, rights issues, and spin-offs) on its accounting system.
3. Pricing Fund Portfolio
We will price the securities held on the Fund's portfolio using a variety of data in line with the Pricing Policy & Methodologies specified in the fund's offering document and, where retained, in collaboration with external valuation firms (Thomson Reuters, Bloomberg, Coinmarketcap...)
5. Booking of Investors' Subscription & Redemption
We will process the Investors' subscription & redemption and allocate the shares accordingly.
Note: The Contract Notes corresponding to the subscription & redemption will be sent to the Investors after the NAV has been published.
6. Booking, Calculating & Reconciling Fees
We will account for legal, audit, organisational expenses, and NAV-based fees such as administration fees, management fees and performance fees. If specified in the fund's offering document, equalisation can be utilised to adjust the fund manager's performance fees in order to ensure that all investors are treated equitably and to maintain the same NAV for all investors, irrespective of subscription date.
7. Reconciling the Cash Accounts of the Fund
Vauban will reconcile all the cash bank accounts that the fund holds.
8. Validating & Publishing the NAV
We will then validate the NAV by checking that all parts of the NAV accounting have been carried out appropriately. A NAV Package will be available on the Dashboard of the Fund Manager. Once the Fund Manager validate the NAV on the Dashboard, the NAV will be published for all investors to view and the Contract Notes will be sent to the investors.