Build the month-end NAV for Ovelle Partners from gross assets of Rs 1,050 crore, a prime broker loan, accrued fees and redemptions payable, with 9.9 crore units in issue. What is the NAV per unit?

Net assets are Rs 990 crore and the NAV is Rs 100.00 a unit. Start from gross assets of Rs 1,050 crore and subtract everything owed: the Rs 40 crore prime broker loan, Rs 1.5 crore of management fee, Rs 6 crore of accrued performance fee and Rs 12.5 crore of redemptions payable. The performance fee accrual is the line people miss; leaving it out overstates NAV by about 0.6% and overpays anyone who redeems.

A NAV works like a household's net worth on one date: everything it owns at today's price, less everything it owes, including bills that have arrived but not yet been paid. Net asset value is assets at market less every liability that exists on the valuation date, whether or not the cash has left yet. For a hedge fund the assets are long positions, cash and receivables; the liabilities are borrowing from the prime brokerThe bank that lends a hedge fund cash and stock, holds its positions and settles its trades., short positions at market, accrued fees and money owed to leaving investors. Divide by the units in issue and you have the price at which investors come in and go out.

The fee is paid once a year, so on most month ends no cash has moved. But the fee has already been earned on gains that sit inside the NAV. If the accrual is left out, NAV is overstated, and every investor who redeems that month is paid partly with money that belongs to the manager. The investors who stay then bear the whole fee when it is finally paid. At Ovelle the error is Rs 6 crore: NAV would read Rs 100.61 instead of Rs 100.00, and an investor redeeming Rs 50 crore of units would be overpaid by about Rs 30 lakh.

The accrual also passes a sense check. At a 20% fee, Rs 6 crore implies the fund has made about Rs 30 crore this year above its high-water markThe highest NAV on which a performance fee has already been paid; no new performance fee is due until the fund climbs back above it., around 3% on a fund of this size. If the fund is below its high-water mark, the performance fee accrual should be zero, and a non-zero number is a question for the administrator. The management fee checks the same way: Rs 1.5 crore a month on roughly Rs 1,000 crore is about 1.8% a year, which should match the fee in the offering documents.

Two things, both on the asset side or in the unit count. Prices: a fund holding thinly traded stocks or unlisted positions has to choose a price, and that choice moves NAV. The administrator, not the portfolio manager, should strike the NAV from independent prices, which is why allocators always ask who values the hard-to-price positions. Timing: redemptions payable must match the units already cancelled. Remove the Rs 12.5 crore liability without cancelling the 0.125 crore units it pays for, or the other way round, and the per-unit number is wrong even when the total is right.