NAV Calculation is the mathematical process of determining a fund's Net Asset Value per share by subtracting all liabilities from total assets and dividing by the number of outstanding shares.
What Is NAV Calculation?
NAV Calculation (Net Asset Value) is the fundamental process determining a fund's value on any given date. The formula is: NAV = (Total Assets – Total Liabilities) / Total Outstanding Shares. Total Assets include all securities holdings (marked-to-market at current prices), cash, accrued income, and receivables. Total Liabilities include all fund expenses (accrued management fees, performance fees, operating costs) and payables. NAV per share indicates the value of a single share or unit, the price at which new investors subscribe and existing investors redeem. NAV is typically calculated monthly for hedge funds, though some strategies require daily calculation.
How Does NAV Calculation Work?
On a NAV calculation date (typically month-end), the fund's holdings are valued using current market prices. Securities exchange-traded on liquid markets are marked-to-market using closing prices. Illiquid or private holdings are valued using documented methodologies (comparable multiples, recent transactions, DCF models) established in advance. Cash and receivables are recorded at face value. All accrued fees and expenses are deducted. The resulting net figure is divided by outstanding shares. If the portfolio appreciated, NAV per share increases; if depreciated, NAV per share decreases. Investors subscribing are charged the current NAV per share; investors redeeming receive the current NAV per share (less any redemption fees).
Why Is NAV Calculation Accuracy Critical?
NAV calculation errors directly misallocate wealth between investors. Overstatement of NAV enriches ongoing investors at new investors' expense; understatement has the opposite effect. Allocators scrutinize NAV calculation methodology extensively during operational due diligence. Errors or manipulation have been central to major fraud cases. Independent verification of NAV calculation (by fund administrator and auditor) is essential.
Example: NAV Calculation in Practice
A fund has: $50M in equity holdings (current market value), $5M in bonds, $2M cash, $300K in accrued management fees (liability), $200K in accrued performance fees (liability), $100K in operating expenses (liability). Total Assets = $57.3M; Total Liabilities = $600K; Net Assets = $56.7M. With 1M shares outstanding: NAV per share = $56.70. A new investor subscribing is charged $56.70/share. An investor redeeming receives $56.70/share.
When Is NAV Calculation Required?
NAV Calculation is required:
At regular intervals (monthly standard, some daily) for all regulated funds
For every subscription and redemption of fund shares
For performance fee calculations and management fee accrual
For investor reporting and regulatory compliance
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