Two AIFMD II anti-dilution tools calibrated to the same cost of liquidity, compared on one-way and two-way dealing days.
Swing pricing and an anti-dilution levy both protect the investors who stay, and calibrated to the same cost they protect them equally. The difference is who pays. On an illustrative €500 million fund with €20 million in and €70 million out on the same day, a 1.21 per cent swing charges redeemers €0.84 million and hands €0.24 million of it to the day's subscribers; a levy charges redeemers only the €0.60 million that the net outflow actually costs. On a one-way day the two give exactly the same result.
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 →
Both tools are listed in Annex V of the AIFMD as amended by Directive (EU) 2024/927, and a manager of an open-ended AIF generally has to select at least two tools from points 2 to 8 of that annex. ESMA's guidelines on liquidity management tools treat both as anti-dilution tools. Choosing between them is therefore a live decision for many managers, and it is usually argued on operational grounds. The arithmetic of who bears the cost on a two-way dealing day is a better place to start.
| Input | Value |
|---|---|
| Net asset value before dealing | 500 |
| Units in issue, million | 5.0 |
| NAV per unit | 100.00 |
| Cost of liquidity on the net flow (discount on loans sold plus transaction costs) | 1.2% |
| Threshold below which the fund absorbs the cost | 2% of NAV = 10 |
Only the net flow costs money: the fund nets subscriptions against redemptions and sells loans for the difference. A net outflow of 50 therefore costs 1.2 per cent × 50 = 0.60, whether it arrives as 50 out and nothing in, or 70 out and 20 in.
Two-way day: 20 in, 0.70 million units redeemed at 100.00, net 50 out, cost 0.60.
NAV after = 500 + 20 − 70 − 0.60 = 449.4, on 4.50 million units = 99.867 per unit.
Dilution: 13.3 basis points, borne by everyone left in the fund, including the subscribers who came in that day.
The fund is in net outflow, so the dealing price swings down for everyone who deals: P = NAV per unit × (1 − swing factor).
Solve for the price that leaves NAV per unit at 100.00 after dealing: (500 + 20 − 0.70 × P − 0.60) ÷ (5.0 − 0.70 + 20 ÷ P) = 100.00. P = 98.79, a factor of 1.21 per cent.
Redeemers receive 1.21 per cent less on 70: they pay 0.84. Subscribers buy at 98.79 and hold units worth 100.00: they gain 0.24. Net to the fund: 0.60, exactly the cost.
The swing factor is approximately the cost rate on the net flow, whatever the gross flows are, because redeemers pay the factor on the gross outflow while subscribers receive it on the gross inflow, and the difference is the net flow. The small excess over 1.2 per cent comes from subscribers getting slightly more units at the lower price. In a spreadsheet the price is a one-cell Goal Seek on the NAV per unit after dealing.
Levy = cost of the net flow, charged to the investors on the side of the net flow, pro rata: 0.60 ÷ 70 = 0.86 per cent of each redemption.
Annex V describes the levy as compensating the fund for the cost of liquidity caused by the size of a transaction. Netting the day's flows before charging is a design choice, and the levy policy should state it.
Redeemers receive 69.40. Subscribers deal at 100.00. NAV after = 500 + 20 − 70 + 0.60 − 0.60 = 450.0 on 4.50 million units = 100.00.
Same protection for the investors who stay, with no transfer between the two groups who dealt. How the levy is sized for a single large redemption, with the threshold met from the liquidity buffer, is worked in how an anti-dilution levy is calculated under AIFMD II.
| Day | In | Out | Swing factor | Redeemers pay, swing | Subscribers gain, swing | Levy, % of redemption | Redeemers pay, levy |
|---|---|---|---|---|---|---|---|
| Redemptions only | 0 | 50 | 1.20% | 0.60 | 0.00 | 1.20% | 0.60 |
| Two-way day | 20 | 70 | 1.21% | 0.84 | 0.24 | 0.86% | 0.60 |
| Busy two-way day | 45 | 95 | 1.21% | 1.15 | 0.55 | 0.63% | 0.60 |
In every row the investors who stay end at 100.00 under both tools. Under swing pricing, the busier the two-way day, the more redeemers pay and the more of it goes to that day's subscribers: 0.55 on the busy day, nearly as much as the fund's whole cost. Under the levy, redeemers always pay 0.60 in total, spread over more of them. The swing rewards investors for subscribing on a day others leave, which some managers like and some investors call a lottery. The levy charges each side for the cost it actually causes.
The mistake is calibrating a levy to the gross flow, the way the swing factor is applied. Charging 1.2 per cent on the full 70 out on the two-way day would collect 0.84 for a cost of 0.60, and the 0.24 surplus would accrue to everyone holding units after dealing, an over-charge that is hard to reconcile with a levy meant to compensate the fund for the cost of liquidity a transaction causes. The opposite mistake on the swing side is setting the factor as the levy rate, 0.86 per cent, because "the cost is 0.60 on 70". Applied as a swing it would recover only about 0.43 net, leaving the remaining investors to absorb the rest.
Calibrated to the same cost, both tools leave the remaining investors whole. A levy makes the net side pay exactly the cost: 0.60 here, 0.86 per cent of each redemption. A swing makes every dealer pay or receive the factor, 1.21 per cent, so on two-way days redeemers pay more and subscribers are paid to come in. Fund IV's liquidity stress, line by line, is in the free workbook for this case.
No, although both are anti-dilution tools listed in Annex V of the amended AIFMD. A swing moves the dealing price for every investor who deals that day; a levy is a separate charge on the investors whose transactions cause the cost. On a day with redemptions only they give the same result: in the illustrative fund, 1.20 per cent and 0.60 million either way.
Because the price swings down for everyone dealing, subscribers buy units below their post-dealing value. In the illustrative two-way day they invest 20 million at 98.79 and hold units worth 100.00, a gain of 0.24 million paid by redeemers, who pay 0.84 million in total against a cost of 0.60 million.
Set the dealing price so that NAV per unit after dealing equals NAV per unit before. The factor comes out close to the cost rate on the net flow, not on the gross flows: for a 1.2 per cent cost it is 1.20 per cent on a day of 0 in and 50 out, and 1.21 per cent on days of 20 in and 70 out or 45 in and 95 out.
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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