Dual pricing charges every dealing investor the full cost of trading, whether or not the fund trades. That makes it the most protective tool for the investors who stay, and the dearest for those who deal.
Under dual pricing an open-ended fund publishes two NAVs: a bid price for redemptions, with its non-cash assets valued at bid less selling costs, and an offer price for subscriptions, valued at offer plus buying costs. On an illustrative 300 million fund the prices are 99.46 and 100.63 around a mid NAV of 100.00. On a day with crossing flows the fund keeps 137,700 from dealing investors against a trading cost of 32,400, which is why dual pricing protects remaining investors more than any other pricing tool.
Worked in full in The AIFMD II Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Dual pricing is one of the liquidity management tools listed in Annex V of AIFMD II, next to swing pricing and the anti-dilution levy. All three aim at the same thing: the cost of buying and selling assets for dealing investors should fall on those investors, not on the ones who stay. They differ in how much they charge and when, and the difference is a calculation.
| Input | Value |
|---|---|
| NAV at mid prices | 300,000,000 |
| Units in issue | 3,000,000 |
| Cash, valued at par in every price | 30,000,000 |
| Non-cash assets at mid | 270,000,000 |
| Half bid-offer spread on non-cash assets | 0.50% |
| Selling costs (commissions, fees) | 0.10% |
| Buying costs (commissions, fees, transfer taxes) | 0.20% |
| Units redeemed | 150,000 |
| Units subscribed | 90,000 |
Bid NAV = [cash + non-cash at mid × (1 − half spread − selling costs)] ÷ units
Offer NAV = [cash + non-cash at mid × (1 + half spread + buying costs)] ÷ units
In Excel: =(Cash+Other*(1-HalfSpread-SellCost))/Units and =(Cash+Other*(1+HalfSpread+BuyCost))/Units.
Step 1: the bid NAV. The non-cash assets lose 0.60 per cent: 270.0 million becomes 268.38 million. Add the 30.0 million of cash and divide by 3,000,000 units: 99.46, a discount of 0.54 per cent to mid. The discount is smaller than 0.60 because cash costs nothing to pay out.
Step 2: the offer NAV. The non-cash assets gain 0.70 per cent: 271.89 million. With the cash, 100.63, a premium of 0.63 per cent. The two sides are not symmetric because buying carries transfer costs that selling does not. The full spread between the two prices is 1.17 per cent of mid.
Step 3: what the dealing investors pay.
| Investor | Value at mid | Cash paid or received | Kept by the fund |
|---|---|---|---|
| Redeemers, 150,000 units at 99.46 | 15,000,000 | 14,919,000 | 81,000 |
| Subscribers, 90,000 units at 100.63 | 9,000,000 | 9,056,700 | 56,700 |
| Total | 137,700 |
Step 4: what the fund actually spends. The flows partly cancel. Net, 6.0 million leaves at mid, so the fund sells a vertical slice of its portfolio: 5,400,000 of non-cash assets, the rest coming from cash. At 0.60 per cent that sale costs 32,400.
The fund collects 137,700 and spends 32,400. The excess, 105,300, stays in the fund: its mid assets fall to 294,105,300 on 2,940,000 units, a mid NAV of 100.0358, so every unit holder after the dealing day gains 3.6 basis points. The collection is 4.25 times the cost.
Swing pricing on the same day would publish a single price swung to bid, because the net flow is out. Redeemers would still receive 14,919,000, but subscribers would buy at 99.46 and receive a discount of 48,600. The fund would keep 32,400, exactly the cost of the net trade. That is the design difference in one line: swing pricing charges the net flow, dual pricing charges the gross flows.
| Units subscribed | Net flow at mid, m | Trading cost | Dual pricing keeps | Swing pricing keeps |
|---|---|---|---|---|
| 0 | 15.0 | 81,000 | 81,000 | 81,000 |
| 90,000 | 6.0 | 32,400 | 137,700 | 32,400 |
| 150,000 | 0.0 | 0 | 175,500 | 0 |
| 200,000 | −5.0 | 31,500 | 207,000 | 31,500 |
When all the flow runs one way, the two tools coincide. When flows match, dual pricing charges 175,500 for trades the fund never makes. That is a transfer from dealing investors to holding investors, and it should be presented as such in the fund documents rather than as cost recovery.
| Half spread | Bid NAV | Offer NAV | Redeemer loses |
|---|---|---|---|
| 0.5% | 99.46 | 100.63 | 81,000 |
| 1.0% | 99.01 | 101.08 | 148,500 |
| 1.5% | 98.56 | 101.53 | 216,000 |
| 2.5% | 97.66 | 102.43 | 351,000 |
In a stressed market the spread on loans or small-cap holdings can widen several times. If the bid NAV is set from normal-market spreads, the redeemers in a run leave at a price the fund cannot sell at, and the shortfall lands on the investors who stay, exactly as if there were no tool at all.
Dual pricing values the fund twice, at bid for leavers and at offer for joiners, and charges every dealing investor the full round trip whatever the fund does that day. On these figures the prices are 99.46 and 100.63, and crossing flows leave the fund 105,300 better off than its trading cost. It is the strongest protection for remaining investors and the hardest to justify to frequent dealers. The anti-dilution levy charges only the part a liquidity buffer cannot absorb, and the other tools of the directive are set against a computed stress in the free workbook for this case.
Swing pricing publishes one price, moved towards bid or offer depending on the day's net flow, so the fund recovers the cost of the net trade and no more. Dual pricing publishes two prices and charges both sides the full spread every day. On the illustrative day with 15.0 million out and 9.0 million in, swing pricing recovers 32,400, the cost, while dual pricing collects 137,700.
Yes. Dual pricing is one of the liquidity management tools listed in Annex V of AIFMD II, alongside gates, notice periods, redemption fees, swing pricing, anti-dilution levies and redemptions in kind. The manager of an open-ended AIF selects at least two tools from points 2 to 8 of the list and calibrates them, which for dual pricing means setting the bid and offer adjustments, here 0.54 and 0.63 per cent of the mid NAV.
It scales with the spread on the non-cash assets. On the illustrative fund a 15.0 million redemption loses 81,000 to the bid price at a 0.50 per cent half spread, 148,500 at 1.0 per cent, 216,000 at 1.5 per cent and 351,000 at 2.5 per cent. The investor pays for the market it leaves in, which is the purpose of the tool.
This article is one calculation from The AIFMD II Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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