Net Asset Value

Striking a NAV begins with valuing every position at fair value on the valuation date, adding cash, receivables and accrued income, then subtracting all liabilities: payables, borrowings, accrued expenses and, critically, accrued management and performance fees. The residual is the fund's net assets, divided by units outstanding at the close of the period to give NAV per unit. Where a fund runs multiple share classes with different fee schedules or currency hedges, expenses are allocated by class, so each class carries its own NAV per unit even though the underlying portfolio is common.

Two variants matter. Gross NAV is struck before performance fees crystallise; net NAV is what the investor actually redeems at. Subscriptions and redemptions are normally transacted at the next NAV struck after the dealing deadline (forward pricing), which prevents an investor from trading on a stale, already-published figure.

NAV is only as reliable as the inputs behind it. Listed equities mark to closing exchange prices with little discretion. Over-the-counter credit, structured products and derivatives rely on dealer quotes or models, and unlisted holdings in private equity, private credit and real estate rely on periodic appraisals, comparable-company multiples or discounted cash flow estimates prepared with a lag.

The consequence is systematic: appraisal-based and infrequently traded marks change slowly, so reported NAV series display lower volatility and lower measured correlation with public markets than the underlying economic exposure warrants. Candidates should recognise that Sharpe ratios computed from smoothed NAVs are flattered and that downside risk is understated. Side pockets, which segregate illiquid or disputed positions, remove those assets from the redeemable NAV entirely until they are realised.

Most fee arithmetic runs off NAV. A hedge fund management fee is typically a percentage of assets under management, applied to NAV at a stated frequency and accrued into the NAV itself. The incentive fee is a percentage of the increase in NAV over a reference point: the high-water mark, which is the highest previous NAV on which a performance fee was already paid, and often a hurdle rate that returns must clear first. Where a hard hurdle applies, only the return above the hurdle is fee-bearing; with a soft hurdle, clearing the threshold makes the full gain fee-bearing.

Private equity differs. Management fees are commonly charged on committed capital during the investment period and shift to invested or net invested capital afterwards, so NAV drives reported performance and carried interest calculations rather than the base fee. Unrealised carry accrued against NAV may later be clawed back if exits disappoint.

Traded price and NAV are separate quantities linked only by an arbitrage mechanism. Open-end mutual funds transact at NAV by construction. ETFs trade continuously on exchange, with authorised participants creating and redeeming baskets to compress premiums and discounts; when the underlying market is illiquid or its marks are stale, the arbitrage widens and price can diverge materially. Closed-end funds have no such mechanism and routinely trade at persistent discounts reflecting fees, leverage, liquidity and sentiment. Limited partnership interests in private funds change hands on the secondary market, frequently at negotiated discounts to the last reported NAV.

At exam level, be able to compute NAV per unit from a balance sheet, apply management and incentive fees with a high-water mark and hurdle to derive an investor's net return, express a premium or discount as the percentage deviation of price from NAV, and explain why reported NAV understates true risk in illiquid strategies.