Redemption Window: When Investors May Actually Exit

A redemption window is the date on which units are actually cancelled, and it is only one of four dates that matter. Nilgiri Absolute Return Fund, invented, deals quarterly on the last business day, needs 45 days of written notice, pays within 30 days of the dealing date, and holds back 10.0 per cent until the annual audit. Miss the notice by a day and the whole request waits a quarter.

The newspaper vendor runs a redemption window and nobody calls it that. He delivers every morning and he bills every month. Told by the twenty fifth that the paper is to be stopped, he stops it on the first and nothing further is owed. Told on the twenty sixth, he keeps delivering for another whole month, and that month is paid for. The vendor is not being difficult and there is no negotiation available: he has already printed his own order for the coming month, and one day of lateness costs thirty days of newspapers. The twenty fifth is a notice deadline, the first is a dealing date, and the jump between them is a step. A fund's redemption window is that same shape, drawn larger and with money in it.

The fund in every worked example below is Nilgiri Absolute Return Fund. Its manager is Nilgiri Alternatives Advisors Private Limited, its trustee is Nilgiri Trusteeship Services Private Limited, and Kolar Fund Services Private Limited is the administrator that strikes its unit price. The fund is open-ended, and open-endedness is the structural fact that makes any of this necessary. An open-ended fund has no fixed life, no closing date and no final payout that everybody waits for together. Money is subscribed into it and money is redeemed out of it while it carries on running, so the fund needs a rule about when it will do that. The rule is the four dates worked to the day below.

The most common way this subject goes wrong in a reader's head is worth setting aside before the arithmetic begins. The four dates decide when. The four dates do not decide how much of a request is actually met, and on this fund the amount met is a separate arrangement with separate limbs, covered separately. Throughout what follows, a request is valid, it is met in full, and the only open question is the calendar.

Which of the four dates is the redemption window itself?

The second one. And the reason this question is worth a section rather than a sentence is that the phrase redemption windowThe recurring date on which a fund will cancel units, here the last business day of each quarter. is used loosely almost everywhere it appears, so a reader who meets it in a document usually cannot tell which of four different days is being described. In this fund's papers the window is one specific thing: the day the units are cancelled and the price for them is struck. The day of cancellation is the dealing dateThe day units are cancelled and the price for them is struck., and Nilgiri Absolute Return Fund has four of them a year, on the last business day of each quarter.

The other three dates are real, they are all fixed in the same documents, and none of them is the window. Working backwards from the dealing date there is a notice periodHow far in advance a written request must reach the fund, here 45 days. of 45 days. The notice period produces a deadline for written notice. Working forwards from the dealing date there is a payment obligation of within 30 days. The obligation produces a payment dateThe day cash actually reaches the investor, here within 30 days of the dealing date.. And sitting a long way further out there is the release of a holdbackA part of the redemption kept back until the annual audit confirms the value it was struck at.. The holdback waits for the annual audit and has nothing to do with the dealing calendar at all.

Numbering the days of the quarter from one, and taking a quarter as 91 days, turns every one of those four dates into a number. The count here starts from the first day of the fund's fourth quarter. The dealing date at day 91 is then also the fund's year end, and the audit of that year lands inside the same count. The dealing date is day 91, the notice deadline is day 46, the payment date is day 121 and the holdback is released on day 273. No calendar month appears anywhere here, because this fund runs on its own clock from its own launch rather than on anybody's financial year.

Look at the spacing rather than the dates. The gap from the notice deadline to the dealing date is 45 days by contract. The gap from the dealing date to payment is up to 30 days by contract. The gap from payment to the holdback release is 152 days, and that one is not a contracted period at all: it is however long the annual audit takes, expressed as a date. Three of those four gaps are written down. The fourth is an event.

How far back does the notice deadline sit, and what does the notice carry?

Forty five days back, and the direction of that measurement is the whole of the idea. A notice period is not a waiting time that starts when the letter is written. A notice period is a distance measured backwards from a date the fund has already fixed. The fund knows when its dealing dates are before anybody asks for anything, and the notice period simply says how much clear air it wants in front of one.

So the arithmetic runs the wrong way round from the way most people read it. The dealing date is day 91. The notice period is 45 days. Ninety one less forty five is forty six. Day 46 is therefore the last day on which written notice can reach the fund and still catch the dealing date at day 91. Notice that arrives on day 45, or day 30, or day 2, catches exactly the same dealing date. Notice that arrives on day 47 does not.

The reason a fund wants that clear air is that a redemption is not a transfer between two people, it is a cancellation. When an investor leaves an open-ended fund, nobody buys its position; the units stop existing and the fund pays the money out of its own assets. Before the fund can do that on a fixed day it has to know how much is leaving. Knowing that means closing the list of requests some time in advance. The 45 days is the fund giving itself a known number to work to. That clear air is the mechanism. Whether 45 days is long, short or usual is a separate question: on this invented fund 45 days is simply the number its documents carry.

Now look at the notice itself. Readers imagine it as a much bigger document than it is. A redemption notice from an investor of this fund carries three things: who is asking, how much of its holding it wants redeemed, and the date the fund received it. The date of receipt is not written by the investor at all. The fund stamps it on arrival. And the date of receipt is the only one of the three items that moves any of the four dates.

Two consequences follow from that, and both of them surprise people. The first is that the size of a request changes none of the four dates. A request for a small part of a holding and a request for the whole of it travel exactly the same calendar. The second is that being early buys nothing at all. Notice on day 2 and notice on day 46 catch the same dealing date at day 91, and the investor who wrote on day 2 has simply spent 44 more days waiting for a date that was never going to move. There is no queue and no priority. There is a cut-off and a date.

What actually happens on the dealing date?

Two things, and they happen together. The units named in the request are cancelled, and the price at which they are cancelled is struck. Nothing else about the redemption is decided on any other day. The documents therefore build everything around the dealing date rather than the payment date.

The price is the net asset valueWhat one unit is worth, struck by the administrator on the dealing date. of a unit on that day, and on this fund it is struck by Kolar Fund Services Private Limited, the administrator, and not by the manager. Take the fund's assets, subtract what it owes, divide by the units in issue, and that is the figure the departing investor is paid on. The net asset value is arrived at on day 91, recorded on day 91, and does not change afterwards because of anything the market does on day 92.

The fixing of the price on day 91 carries more weight than it looks. The fund goes on running between day 91 and day 121, so its assets go on moving. If they rise, the departing investor does not participate. If they fall, the departing investor does not suffer. The price was struck, the units are gone, and the investor waits for settlement of an amount already fixed rather than for an outcome still being decided. The 30 days between the dealing date and the payment date carry no exposure to the fund's assets whatsoever, and that is exactly what striking the price on the dealing date is for.

One thing can still change the amount, and it is not the market. The audit can, and the audit is the subject of everything below.

Two other liquidity arrangements of this fund also come into play on a dealing date. One of them limits how much may be redeemed at a single dealing date, both for one investor and for the fund as a whole, and it is covered separately. The other allows a holding that cannot be reliably valued to be moved into a separate class of units, and it is covered separately too. The order in which those arrangements and this one bite is covered separately as well. The request worked through here passes through all of that untouched. Only the calendar is in question.

Why is the payment date not the dealing date?

Because striking a price and settling a payment are different jobs, and the fund contracts for time on the second one. The documents of Nilgiri Absolute Return Fund say payment within 30 days of the dealing date. Day 91 plus 30 days is day 121, and that is the outside date by which cash reaches the investor.

Handing back a rented flat works the same way. On the day the keys are returned, the landlord and the tenant agree what is owed. The day the keys are returned is the dealing date: the number is fixed. The money does not appear in the tenant's account on the way down the stairs. There is a bank transfer to arrange, there may be a final reading to obtain, and the arrangement between them probably says the deposit comes back within a stated number of days. Nobody thinks the amount is still being negotiated during that gap. The amount is settled; the transfer is in progress.

A fund needs that gap for reasons that are mostly clerical and one that is not. The clerical part is that the administrator has to finish striking the unit price, a job that is not instantaneous, then confirm the units cancelled, then instruct payment. The part that is not clerical is that the fund may have to convert some of what it holds into cash to pay, and doing that on the same day it strikes the price would mean transacting before it knows the number it is transacting for. The word within matters here too: the contract sets an outside limit rather than a fixed day, so a payment can arrive earlier, and day 121 is the day by which it must be there.

What does one day of lateness actually cost?

Take two investors of Nilgiri Absolute Return Fund, invented, and give them the same intention and almost the same timing. Call them investor A and investor B. Neither is one of the numbered investors of any other vehicle this manager runs; they exist to carry a day count and nothing else.

Investor A writes on day 46. Day 46 is the last permitted day, and the notice reaches the fund on it. Its request catches the dealing date at day 91, its units are cancelled and priced there, and 90.0 per cent of what it is owed reaches it by day 121. From the day it gave notice to the day the cash landed is 121 less 46, or 75 days. The outcome is clean and unremarkable, and it is exactly what the fund's documents promise.

Investor B writes on day 47. One day later. In most arrangements a day is a day, so investor B has no reason to think one day matters. How much longer B waits does not follow from anything about the fund's assets, and it is the single number worth carrying away.

Ninety days. Investor A waited 75 days and investor B waited 165, and the difference has nothing to do with the fund's assets, its performance, its manager or its administrator. B missed a cut-off by one day, so its request went to the next dealing date at day 182 and was paid by day 212. Two subtractions produce the whole thing: 121 less 46 is 75, and 212 less 47 is 165.

The answer is 90 rather than 91, and the reason is worth naming. The dealing dates are 91 days apart, so B's request deals a full quarter later than A's. But B also started counting one day later than A did, and that one day comes off. The person who was late also began waiting later, so the step in the calendar is 91 days and the step in the wait is 90.

The magnified strip at the bottom of that figure is there for an honest reason. On a scale wide enough to show 212 days, one day is about three and a half units of drawing and the reader cannot see it. Widening it on the main scale would have misstated one day as something larger, so the main picture keeps the true scale and the strip below magnifies days 44 to 49 by 44 times. The cliff is real and it is one day wide.

Put every possible notice day on one picture and the shape stops being a rule and becomes a sawtooth. From day 1 to day 46 the wait falls steadily from 120 days to 75. Every one of those requests catches the same dealing date, and the later ones simply spend less time waiting for it. Between day 46 and day 47 the wait leaps from 75 to 165. From day 47 to day 91 it falls again, towards 121. Then the next quarter begins and the same shape runs again.

The left half of one tooth contains an idea people find genuinely counter-intuitive, and it is worth sitting with. Along that stretch, giving notice earlier makes the wait longer. Not the payment date. The payment date never moves. The wait lengthens, measured from the day the investor asked. An investor who decides in the first week of a quarter and writes immediately has committed itself to a dealing date 90 days away and will count 120 days before the cash arrives. An investor that reaches the same decision six weeks later, on day 46, counts 75. Same dealing date, same payment date, same money, and 45 fewer days of waiting, purely because it started the clock later. The sawtooth is arithmetic about a clock and not a suggestion about when to write a letter. No day of the quarter is a better day to give notice than any other, and the reason an investor wants its money is not something a dealing calendar knows anything about.

What is the holdback, and 10.0 per cent of what?

The rented flat has one more thing in it. The landlord agrees the deposit refund on the day the keys are handed over and transfers most of it within the week. He keeps a part of it back, and he keeps it for a specific and stateable reason: the electricity bill for the last month has not arrived yet. He is not doubting the tenant and he is not charging anything. He is holding an amount against a number that has not been confirmed. When the bill comes, he settles up and sends the rest.

The kept-back part of the deposit is a holdback, and Nilgiri Absolute Return Fund, invented, has one written into its documents. Of every redemption this fund pays, 10.0 per cent is held back and released after the annual audit. So a redemption is not one payment. A redemption is two payments, separated by a period that has nothing to do with the dealing calendar at all.

Name the denominator. A percentage without one has said nothing. The 10.0 per cent is 10.0 per cent of the redemption amount, meaning the rupee value of that investor's own cancelled units as struck on the dealing date. The holdback is not 10.0 per cent of the fund's net assets, not 10.0 per cent of the investor's remaining holding, and not 10.0 per cent of the fund's gain for the year. The holdback is a slice of the single number that redemption produced, and it is calculated once, on day 91, at the same moment the price is struck.

Work it on a round figure. Suppose the redemption comes to Rs 1,00,00,000. Ten per cent of Rs 1,00,00,000 is Rs 10,00,000. So Rs 90,00,000 is paid by day 121 and Rs 10,00,000 stays with the fund. The Rs 10,00,000 is not lost, not forfeited and not a fee. The Rs 10,00,000 is the investor's money, sitting where it was, waiting for one specific event.

The event is the annual audit. On this fund's own clock the annual audit is signed at the end of the second quarter of the following year. Because the dealing date at day 91 in this worked case is the fund's year end, the audit of that year is signed 182 days later, on day 273. So the second payment lands on day 273 and the first landed on day 121.

Look at the two waits measured from the same starting point, the only way to compare them honestly. Both amounts were struck on day 91. The larger amount waits 30 days from there. The smaller amount waits 182 days from there. One hundred and eighty two divided by thirty is 6.1, so the smaller amount sits with the fund 6.1 times as long as the larger one, on a number that was fixed on the same day for both.

One more thing about the second date that is easy to miss. The 45 days and the 30 days are contracted periods: they are lengths, and they attach to whatever dealing date the request catches. The 182 days is not a contracted period. The 182 days is the distance to an event, and the event is a signature on a set of accounts. The audit does not move to suit a redemption, so a request that dealt at a different point in the fund's year would sit a different distance from the same audit. That is why the holdback belongs to a different clock from the other three dates, and why it is drawn separately.

Who carries the difference when the audited value comes in lower?

Now the reason the holdback exists at all, and it is not what most readers guess. The holdback is not there because the fund is short of cash, and not there to discourage anybody from leaving. The holdback is there because of what the price on day 91 actually was.

On the dealing date the administrator struck a unit price. To do that it had to put a value on everything the fund held. Some of those values are simple. A quoted position has a closing price and there is nothing to decide. Others are not, and the manager's estimate is what goes in. So the number the departing investor was paid on is an unauditedEstimated by the manager and not yet confirmed by the auditor. figure: a careful, contracted, independently struck figure, and still an estimate until an auditor has been through it. How a private valuation is actually made is covered separately. The price was an estimate on day 91 and became a confirmed number on day 273.

So suppose the audit says the fund's net asset value at that year end was 1.0 per cent lower than the figure the redemption was struck at. The 1.0 per cent is a supposition made to work the mechanism, and not something this invented fund's record says happened. On that supposition, investor A's correct entitlement was never Rs 1,00,00,000. The correct entitlement was Rs 99,00,000.

Investor A has already received Rs 90,00,000. Its correct entitlement is Rs 99,00,000. So of the Rs 10,00,000 held back, Rs 9,00,000 is released to it on day 273 and Rs 1,00,000 is absorbed. Ninety lakh plus nine lakh is ninety nine lakh, and the investor ends up with exactly what the audited figure says it should have. The holdback was not a penalty and not a buffer for the fund: it was the mechanism that made a correction possible after the person it applied to had already left.

Now take the holdback away and run the same audit. The investor was paid the whole Rs 1,00,00,000 on day 121. On day 273 the auditor says the correct figure was Rs 99,00,000. The investor has gone. There is no balance sitting anywhere to adjust, and the fund is not going to chase a departed investor for Rs 1,00,000. So the Rs 1,00,000 stays where it went, and the fund is a lakh of rupees lighter than it should be. The lakh belongs to the people who did not redeem.

The point is the cleanest idea in the subject and it is worth restating plainly. In an open-ended fund, everybody who is still in it holds a share of one pot. Paying a departing investor a rupee more than the audited figure supports does not create that rupee; it moves it from the people who stayed to the person who left. The holdback keeps the correction available for long enough to make it. The correction works in the other direction too: if the audit had confirmed a higher figure, the released amount would have settled up the other way, and the investors who stayed would not have been carrying an amount belonging to somebody who had gone.

The mechanism claims less than it might appear to. The arithmetic does not say the manager's estimate was wrong: the 1.0 per cent audit difference is a supposition built to work the mechanism. Nor does it say audits usually move a value, in either direction. And it says nothing about whether a 10.0 per cent holdback is large or small relative to the size of correction it might have to absorb. The 10.0 per cent is the number this invented fund's documents carry, and the arithmetic above is what that number does.

Why does a fund described as quarterly take 227 days?

Add the whole thing up. Almost nobody performs that arithmetic. Investor A gave notice on day 46 and received its last rupee on day 273. Two hundred and seventy three less forty six is 227 days. The 227 days is the round tripThe whole span from giving notice to receiving the last rupee., and it is the number a reader actually wants when they ask how long money is tied up.

Now set it beside the number that was quoted. The fund is described as dealing quarterly with 45 days of notice. Forty five is the figure that gets repeated, remembered and planned against. Two hundred and twenty seven days is 5.0 times 45 days, and every one of the extra 182 days is written into the same set of documents that the 45 came from. Nothing was hidden and nothing went wrong. Four separate periods were quoted separately and never added together.

The three bars are worth reading as three different questions. Forty five days answers how much warning the fund requires. Seventy five days answers how long investor A waited for the bulk of its money. Two hundred and twenty seven days answers how long it waited to be finished with the fund entirely. All three are true at once, all three describe the same request, and a conversation in which one person means the first and the other means the third produces the confusion this guide exists to remove.

Notice which parts of the 227 are the fund's calendar and which are not. The 45 days of notice and the 30 days to pay are contracted lengths, and together they account for 75 of the 227. The remaining 152 days are the distance from the payment date to a signature on a set of accounts. So roughly a third of the round trip is the dealing machinery and roughly two thirds of it is waiting for an audit, on this worked case, on this fund's own dates.

The audit at day 273 is the same annual audit that confirms what a unit of this fund was worth at the year end, and the year end figure is what the fund's own performance fee is settled against. Exactly two years of that record are used here: the fund's unit stood at Rs 118.00 after the performance fee at the close of its Year 4 and at Rs 122.00 after the performance fee at the close of its Year 5. The full five year record of Nilgiri Absolute Return Fund, invented, and how a high-water mark works on it, are covered separately. The two figures serve only to show that a year end value is a number somebody has to sign.

How does somebody reading a factsheet use these four dates?

The practical end of the matter starts with who is doing the reading. Far more people read a fund's factsheet or offering document than ever put money into one: analysts building a picture of a manager, people who work in an operations team, students, journalists, and staff at an institution whose committee has to be told something. What they do with these four dates is a small, specific and rather unglamorous job, and it is the same job every time.

The first thing that happens is that the four dates get separated. A document will state a dealing frequency in one line, a notice period in another, a payment period in a third, and a holdback in a fourth, usually far apart in the text and often in different registers of language. Somebody who works with these documents pulls the four numbers onto one line before doing anything else. Until the four are on one line they cannot be added, and unadded they produce the error in the block above.

The periods arrive in mixed units, so the second thing is that they get turned into days. Quarterly is a frequency; 45 days is a length; within 30 days is a limit; after the annual audit is an event with no length at all until somebody says when the audit is signed. On the fund worked here that becomes 91, 45, 30 and 182, and only then does 227 exist as a number anybody can say out loud.

The third thing is that the holdback gets read for its denominator. A holdback expressed as a percentage of the redemption amount, the base this invented fund carries, produces a rupee figure the moment a redemption size is known. The same words attached to a different base would produce a different figure entirely. Anybody working with these documents therefore writes down the base rather than the percentage.

An analyst at an institution holding units of a fund like this one does one further thing, and it is worth naming because it explains why the dates matter operationally rather than theoretically. The institution has its own reporting to do, its own committee dates, and often its own obligations to pay out. Somebody has to be able to say when an amount will be cash and when it will still be a receivable. The four dates are what turn a holding in a fund into a line on somebody else's cash flow schedule, and that is the whole of their working use.

None of that is a recommendation. The work described happens in offices, and a reader meeting these four numbers in a document is looking at the inputs to it.