A NAV error in a fund that deals is not one number but three: what redeeming investors were overpaid, what subscribing investors were short-changed, and the fees charged on value that was never there.
To cost a NAV error, recompute every transaction dealt at the wrong price against the true price, then add the fees charged on the error. In an illustrative 400 million open-ended fund whose NAV was overstated by 6.0 million, 1.50 per cent, for one dealing date, redeeming investors were overpaid 177,340, subscribers received 2,955.7 too few units worth 295,567, and 6,250 of management fee was overcharged. The responsible party pays the fund 183,590 and the subscribers receive the missing units.
Worked in full in The Private Markets COO by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
In a closed-ended fund a NAV error is mostly a reporting problem: restate the capital accounts and explain. In an evergreen or semi-liquid fund it moves money between investors, because people bought and sold at the wrong price. That is when a COO needs a calculation the board, the depositary or trustee and the auditor will accept, and an error policy that said in advance what would be compensated.
| Item | Value |
|---|---|
| True NAV | 400,000,000 |
| Units in issue | 4,000,000 |
| True price per unit | 100.00 |
| Valuation error (wrong FX rate on one holding) | 6,000,000 |
| Published price per unit | 101.50 |
| Subscriptions dealt at the published price | 20,000,000 |
| Redemptions dealt at the published price | 12,000,000 |
| Management fee on NAV, per year | 1.25% |
| Materiality threshold in the error policy | 0.5% of NAV |
The error is found before the next dealing date, so one month of fees and one dealing date of transactions are affected.
Redeemer overpayment = amount paid − units redeemed × true price
Subscriber shortfall = amount subscribed ÷ true price − amount subscribed ÷ published price (in units)
Fee overcharge = error × fee rate × months ÷ 12
In Excel, with the true price in B1, the published price in B2, redemptions in B3 and subscriptions in B4: =B3-B3/B2*B1, =B4/B1-B4/B2, and for the fee =B5*B6/12 with the error in B5 and the rate in B6.
Step 1: is it material? 6,000,000 ÷ 400,000,000 = 1.50 per cent, three times the 0.5 per cent threshold. Full correction and compensation apply.
Step 2: the redeemers. 12,000,000 at 101.50 redeemed 118,226.6 units. At the true 100.00 those units were worth 11,822,660. They were overpaid 177,340, which came out of the fund and so out of everyone who stayed.
Step 3: the subscribers. 20,000,000 at 101.50 bought 197,044.3 units; at 100.00 it should have bought 200,000.0. They are short 2,955.7 units, worth 295,567. That value did not disappear: it went to the investors who already held units.
Step 4: the fee. One month at 1.25 per cent on 6,000,000 of value that did not exist: 6,250.
| Party | Effect of the error | Correction |
|---|---|---|
| Subscribers | −295,567 | Issue 2,955.7 additional units |
| Redeemers | +177,340 | Not recovered; they have left |
| Holders who did not deal | +118,227 net, and paid 6,250 of fee | Diluted by the extra units, then compensated by the payment below |
| Responsible party pays the fund | 183,590 | 177,340 overpayment + 6,250 fee |
The holders who did not deal gained 295,567 from the subscribers and lost 177,340 to the redeemers. Issuing the missing units hands the 295,567 back; the payment of 177,340 replaces what the redeemers took; the 6,250 refunds the fee. Every group ends where it would have been at the true price. Whether the manager or the administrator bears the 183,590 is set by the fund's documents and the administration agreement, which is why error responsibility belongs on the administrator's scorecard as well as in the contract.
| Error | % of NAV | Status | Redeemers | Subscribers | Fee |
|---|---|---|---|---|---|
| 1,600,000 | 0.40 | Below threshold | +47,809 | +79,681 | +1,667 |
| 2,000,000 | 0.50 | Material | +59,701 | +99,502 | +2,083 |
| 6,000,000 | 1.50 | Material | +177,340 | +295,567 | +6,250 |
| −6,000,000 | −1.50 | Material | −182,741 | −304,569 | −6,250 |
Below the threshold the policy typically corrects the NAV going forward and compensates no one, so a 0.40 per cent error leaves 47,809 with the redeemers and 79,681 of subscriber value with the existing holders. The threshold is therefore a decision about who absorbs small errors, and should be set and disclosed as such. An understatement reverses the roles: redeemers are owed 182,741 and must be traced and paid, and subscribers hold units worth 304,569 more than they paid for.
Netting the flows. Subscriptions of 20,000,000 against redemptions of 12,000,000 net to 8,000,000, and 1.50 per cent of the net gives a single figure of about 120,000 that matches no one's loss. Subscribers and redeemers are different people harmed in opposite directions, and each must be corrected on their own transaction. The second mistake is forgetting the fee, small here but large when a NAV-based performance fee has crystallised on the overstated value.
All figures and the 0.5 per cent threshold are illustrative. Error thresholds, compensation rules and any regulatory notification are set by the fund's documents, its policy and the applicable rules.
The book's incident record and post-incident review, with the administrator scorecard behind them, are in the free workbooks for this case.
One at or above the threshold in the fund's error policy, commonly expressed as a percentage of NAV and often set between a few tenths of a per cent and one per cent depending on the asset class. With an illustrative 0.5 per cent threshold, a 6.0 million error on 400 million, 1.50 per cent, is material; a 1.6 million error, 0.40 per cent, is corrected going forward without compensation.
The party responsible under the fund's documents and service agreements, usually the manager, sometimes the administrator. Overpaid redeemers have left and cannot be recovered from, so the responsible party pays the fund their 177,340 overpayment and the 6,250 fee overcharge, 183,590 in total, while subscribers are made whole with 2,955.7 additional units.
No, the parties swap. A 6.0 million understatement means redeemers were underpaid 182,741, which must be paid to them, and subscribers received units worth 304,569 too many, which the fund is owed. The size is similar; what changes is who must be contacted and paid.
This article is one calculation from The Private Markets COO. 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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