Asset Management Blog Development

How Fund Admins Calculate NAV for Investors

Deciphering Net Asset Value (NAV) for Hedge Fund Investors

Our goal in this blog is to keep things simple and straight forward so in discussing NAV or Net Asset Value or essentially the Book Value of the fund, we’ll start with the basics. First, a hedge fund appears similar to a mutual fund. Both organizations pool money from investors and use that money to generate the highest possible return on stocks, bonds, commodities, currencies, and other investment vehicles. Second, hedge funds and mutual funds earn money from management fees they charge. The managers of the funds get paid to choose money-making investments and to keep shareholders up to date on fund performance. Fund performance is communicated through the NAV calculation or again, Net Asset Value. NAV is the most critical and widely used figure used by the investors and investment community to assess the success or shortcomings of a fund.

Use the following formula as a reference for your calculations: Net Asset Value = Total Assets – Total Liabilities The larger the net asset value as a percentage of total assets, the more efficient the fund is at maximizing profit while keeping costs low.

Third, let’s take a shot at calculating NAV for a sample hedge fund so we can discuss how fund administrators arrive at the daily, weekly, and monthly total. Subtract the liabilities from the aggregate asset value – liabilities may include interest and principal payments on loans, pending fees to management, dividends declared but not yet paid to investors, and accounts payable for securities transactions.

Deciphering Net Asset Value (NAV) for Hedge Fund Investors

Calculate net asset value by adding the current value of all investments, subtracting liabilities, and dividing the result by the number of shares outstanding. A fund with investments worth $10 million and liabilities of $1 million, and which has issued 1 million shares would, therefore, have a net asset value of $9 per share. Simple enough right? Not so fast…


Calculating NAV for Fund Administrators is Arduous and Time-Consuming

Calculation of the net asset value for a hedge fund, including the calculation of the fund’s income and expense accruals and the pricing of securities at current market value, is a core fund administrator task because it is the price at which investors buy and sell shares in the fund. The accurate and timely calculation of NAV by the administrator is vital and accuracy and timeliness are critical.

There are five main steps in the calculation of NAV:

a. Trade Capture
b. Security Valuation
c. Reconciliations
d. Expense Calculation
e. Holding Current Authorized Signatory Lists of Investors

Fund administrators must calculate the aggregate value of the securities and/or contracts by applying the most reliable and current information on their value from the exchanges. Many hedge funds hold illiquid securities, which unlike stocks and most bonds, do not have a widely published daily opening and closing price. An example would be a real estate investment, certain bonds, or other assets that are not bought and sold frequently on the open market for where there is a known price. For these securities, administrators need to obtain price quotes from brokers or counterparties.


Pricing Hedge Fund Assets is NOT an Exact Science

Let’s start here with an example of why mutual funds end the trading day with a NAV that is easy to calculate because it only invests in equities and bonds while hedge fund NAV’s are more difficult. We discussed in a previous blog post named Investor Fee Calculator for Private Equity and Hedge Funds, hedge funds that trade illiquid assets often utilize “side pockets,” an accounting mechanism that segregates illiquid investments from each other and from the fund’s liquid securities. Side pockets are designed to treat investors equitably, by allocating the side-pocketed investment to investors on a pro-rata basis on the day the investment is made.

Side pockets prevent later investors from receiving a stake in illiquid investments that are difficult to value. Likewise, because withdrawals from side pockets are restricted, side pockets prevent withdrawing investors from depleting a fund’s liquid assets to the detriment of the remaining investors.

One of the most critical issues fund administrators have to deal with in calculating NAV is when to value the assets. That is, complexity arises for fund administrators concerning when to calculate asset values in a hedge fund and this has caused immense confusion because timing will also determine the method of calculation.

For example, if a fund trades assets on multiple exchanges around the world, one exchange may be closed while two or three others are open. Because of this, asset values in some parts of the fund’s portfolio will always be in flux. Fund administrators could use the final asset values at the end of each region’s respective trading day for the calculation or use the values from all holdings at a chosen moment in time. However, on volatile days, volatile asset prices could cause significant changes in the NAV of a fund. We gave an example of the GameStop Short Squeeze in a previous blog post which caused massive daily changes in hedge fund NAV’s daily for weeks. Typically, a complex process of “Sign-offs” occurs and a hedge fund will have a “Pricing Committee”. RyanEyes excels at serving up the results of these firms and then obtaining “Sign-offs” at all levels of the Pricing Committee.

The SEC also provides pricing guidance here in determining fair value and requires extensive record-keeping on the process as well as the underlying documents that support prices. RBTS can help with both. Whether capture Bloomberg quotes or in documenting the sign-off details.


How Fund Administrators Finalize the Pricing Process and Calculate NAV

There are two main aspects to the valuation process, price collection, and price governance. Price collection covers the mechanical process of collecting prices from agreed sources at agreed times.

Price governance covers the process by which the pricing policy, controls, responsibilities, disputes, and issues are escalated and resolved. The accepted international sound practice provides for the establishment of a pricing committee and the creation of a pricing policy document. We won’t get into collecting asset prices and trading documentation any further in the blog post, but we can refer you to AIMA Guide to Sound Practices for Hedge Fund Valuation for more detailed information.

The final step in calculating the NAV of the fund is to calculate the NAV per share of each class in the issue. In order to do this, the administrator will typically do the following:

1. Calculate the allocation ratio for each class in issue (many funds do have different classes of equity it issues to investors)
2. Allocate the income, expenses, gains, and losses for the fund based on the above allocation ratio
3. Adjust for any share class-specific items, such as any hedging gain/loss, new issue profits, differing management and performance fees
4. Calculate the NAV per share
5. The fund administrator and the fund manager must agree on the NAV
6. Distribute the NAV


Fund Administrators and Fraud, Mis-marking and the SEC

Unlike most mutual funds, hedge fund portfolios are not typically available to the public; as a matter of fact, hedge funds do not have to disclose their investments to the SEC for a variety of reasons; most very reasonable. The portfolio may include stocks, bonds, options, currency positions, futures contracts, and derivatives – fund managers want to keep their investing strategies and formula a secret. However, the fund should make its roster available on an ongoing basis to all investors.

Hedge funds do not have to reveal their investments, but fund administrators must still price those investments to properly calculate the NAV of the fund. Mis-marking or the intentional mispricing of fund investments has cost many investors their fortunes. Bernie Madoff’s $65 billion fraud scheme is certainly a significant example of how a hedge fund manager, with little oversight, can provide fraudulent investments and prices to their investors and regulatory bodies and go undetected for years. There are countless examples and as long as asset prices are rising and new money is coming into the fund without significant redemptions, the fund can exist for years.

Just two years ago Abraaj founder and Chief Executive Arif Naqvi were arrested in the United Kingdom for mis-marketing asset values, comingling assets across funds, and using his investors’ money, including the Gates Foundation, for different purposes than were intended.



I know we made calculating NAV for fund administrators sound complex and that is simply because it is! Pricing, accounting, auditing, maintaining records, fee management, anti-money laundering review… the list of critical responsibilities is comprehensive for fund administrators.
Let’s wrap this up with a bit of a summary; fund administrators need to collect accounting data for onshore and offshore funds including almost any security type which often includes equities, derivatives, currencies, swaps, and fixed income.

Fund administrators must account for the following:

  • Strike NAVs by funds, classes, side pockets, partners, and series
  • Automatically calculate management and investment fee structures across any number of partnership investment vehicles
  • Automate Profit and Loss as well as cash flows between entities in complex master-feeder structures
Figure 1 – RyanEyes NAV Calculation Module


In our 15 years working with fund administrators, we followed their painstaking, manual process of collecting prices and data, calculating asset values, handling pricing and verification checks as well as all of the other inputs that make up the Net Asset Value of the fund. In most instances, fund administrators managed this process through spreadsheets and fragmented software solutions while each of the dozens of jobs and processes was handled proactively. The result in many cases was missed deadlines, overlooked tasks, and inaccurate calculations.


We wanted to empower fund administrators with an integrated solution that extracted data from accounting solutions like Geneva, verified pricing, calculated critical metrics, created checklists, and automated reporting. What our clients tell us is that critical benefits like transparency to the NAV process, data control, data verification, and a streamlined solution and transformed an arduous, manual process into a streamlined, automated process. The value to our clients is improved accuracy, increased productivity, more focus on performance and investor relations, and an improved bottom line.


To Learn More About How to Calculate NAV simply and accurately – Contact Us, We Are Happy to Help – 1 (833) 352-7111.

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