Who pays the cost of deploying new money or selling private assets to meet redemptions: the investors who deal, or the ones who stay.
Swing pricing moves the dealing price away from NAV by the cost the flow imposes on the fund, so incoming or outgoing investors pay it instead of the investors who stay. On an illustrative fund of 1,000, redemptions of 50 met by selling assets at a 5 per cent discount cost the remaining investors 27.7 basis points without a swing; a 5 per cent swing factor, a redemption price of 95.00 instead of 100.00, leaves their NAV per unit exactly unchanged.
Worked in full in The Evergreen Fund Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
In a daily-dealing bond fund swing pricing is a refinement. In a semi-liquid private markets fund the costs are large enough to matter: new money has to be deployed into deals or secondaries that carry transaction costs, and once the liquidity sleeve is spent, redemptions are met by selling private assets below their marks. Whoever does not pay for that at the dealing price pays for it through the NAV.
| Input | Value |
|---|---|
| NAV before dealing | 1,000 |
| Units in issue | 10.0m |
| NAV per unit | 100.00 |
| Net subscriptions, month A (6% of NAV) | 60 |
| Cost of deploying new money | 1.5% |
| Net redemptions, month B (5% of NAV) | 50 |
| Discount to NAV on assets sold, sleeve exhausted | 5% |
Redeemers hand back 0.50m units at 100.00 and receive 50.00 in cash.
Assets sold = cash needed ÷ (1 − discount) = 50.00 ÷ 0.95 = 52.63 of NAV.
NAV after = 1,000 − 52.63 = 947.37, over 9.50m units = 99.72 per unit.
Dilution: 27.7 basis points, a loss of 2.63 borne entirely by the investors who stayed.
The redeemers left with full NAV; the cost of turning their share of private assets into cash was socialised. If this happens in every quarter that redemptions outrun the sleeve, the investors who never redeem pay for every one who does.
Redemption price = NAV per unit × (1 − swing factor) = 100.00 × 0.95 = 95.00
Cash paid: 0.50m × 95.00 = 47.50. Assets sold: 47.50 ÷ 0.95 = 50.00 of NAV.
NAV after = 950.00 over 9.50m units = 100.00 per unit. No dilution.
On the redemption side the swing factor equals the discount: the redeemer receives exactly what its share of assets fetches. Had the 50 come out of the liquidity sleeve at no cost, the right swing would be zero. The factor depends on how the flow is funded, not on its direction.
Month A runs the other way. New investors pay 60, the fund deploys it and spends 1.5 per cent, 0.90, on doing so. Without a swing, the 0.60m new units are issued at 100.00 and the NAV per unit falls to 99.915, a dilution of 8.5 basis points. Existing holders bear 0.849 of the 0.90 cost, 94.3 per cent of it, for money they did not bring.
Subscription swing factor = c ÷ (1 − c) = 0.015 ÷ 0.985 = 1.523%
Price 101.52, units issued 0.5910m, NAV after 1,059.10, NAV per unit 100.000.
Using the cost rate itself, 1.5%, leaves a residual dilution of 0.13 basis points: small, but the reason the formula is worth getting right in the prospectus.
The asymmetry comes from the base. On a redemption the cost is a percentage of what the fund sells. On a subscription the cost is a percentage of the money received, and the new units must be priced so that what remains after the cost buys them at NAV.
Many funds apply a partial swing: the price moves only when net flows exceed a threshold, here 2 per cent of NAV. Below it, dilution is accepted as the price of a stable dealing price.
| Net flow, % of NAV | Subscriptions, bp | Redemptions, bp | Swung at a 2% threshold? |
|---|---|---|---|
| 1% | 1.5 | 5.3 | No |
| 2% | 2.9 | 10.7 | No |
| 4% | 5.8 | 21.9 | Yes |
| 5% | 7.1 | 27.7 | Yes |
| 10% | 13.6 | 58.5 | Yes |
Redemption-side dilution is roughly four times subscription-side dilution at the same flow, because a forced sale costs more than a deployment. And small flows add up. A fund taking net subscriptions of 6 per cent of NAV every month for a year, without a swing, ends the year with a NAV per unit of 98.99: 101 basis points of cumulative dilution for its earliest investors, which is about the size of a management fee.
Measure performance on the unswung NAV. The swung price is a dealing price, not a valuation. A performance series or a performance fee computed on swung prices would show a jump in a heavy redemption month that has nothing to do with the assets.
The common mistake is to set one swing factor for both directions from the cost of buying, typically 1 to 2 per cent, and leave it there. When the sleeve runs out and redemptions are met by selling at a 5 per cent discount, a 1.5 per cent factor leaves most of the cost with the remaining investors, in exactly the quarter they are most likely to notice. The factor should be recalibrated to how the next redemption will actually be funded.
A swing factor is the cost of the flow, measured on the right base: the discount on assets sold for redemptions, c ÷ (1 − c) on subscriptions, zero when the sleeve pays. Set the threshold knowing what the unswung flows below it cost, and revisit both when the liquidity position changes. The liquidity plan and the fair-treatment page are among the free working documents for this book. For how long a gated exit takes once the cap binds, see how long it takes to exit a gated semi-liquid fund.
As the cost the net flow imposes on the fund, on the right base. For redemptions met by selling assets at a discount, the factor equals the discount: 5 per cent gives a price of 95.00 on a NAV of 100.00. For subscriptions with a deployment cost c, it is c / (1 - c), so 1.523 per cent for a 1.5 per cent cost.
In the illustrative case, net redemptions of 5 per cent of NAV met by selling at a 5 per cent discount cost remaining investors 27.7 basis points. Net subscriptions of 6 per cent with a 1.5 per cent deployment cost cost 8.5 basis points, and twelve such months cost 101 basis points.
A level of net flows below which the price is not swung. At a 2 per cent threshold in the worked case, flows of 2 per cent go unswung and dilute remaining investors by 2.9 basis points on subscriptions or 10.7 basis points on redemptions met by asset sales.
This article is one calculation from The Evergreen Fund 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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