How to Calculate Net Asset Value for a Hedge Fund

You must be a millionaire to invest in a hedge fund.

You must be a millionaire to invest in a hedge fund.

Hedge funds actively manage pools of investments from "qualified investors," which the government defines as individuals with net worths of at least $1 million and annual income of at least $200,000. Restricting clientele to qualified wealthy individuals frees hedge funds from many financial reporting obligations, including public disclosure of assets or of the data underlying net asset value prices. While it entails a lot of work and, possibly, considerable expense, you can gather the asset information for some hedge funds and do the calculation yourself.

Identifying the Assets

Identify each asset held by the hedge fund. The net asset value, or NAV, of any portfolio of pooled securities, including a hedge fund portfolio, is the sum of its assets minus its liabilities, divided by the number of shares outstanding. For example, if a hedge fund has $1 billion in assets, $100 million in liabilities and 2 million shares outstanding, the NAV per share is $450. While the principle of determining NAV is simple, execution can be difficult for hedge funds because they often hold thinly-traded assets of uncertain value or other assets that aren't traded in the open market. If the fund doesn't make its holdings public, determining its NAV isn't possible at all. Some funds consider their holdings to be valuable trade or proprietary information.

Valuing Publicly Traded Securities

For each asset traded on a public exchange and for which a current market price is available, determine that price and multiply it by the number of shares or units held to find the asset's current value in the hedge fund's portfolio. For example, 300,000 shares of Google at 882.55 equals 264,765,000. Total the values of all publicly traded holdings.

Obtaining Data for Other Securities

List each asset held by the hedge fund for which there is no easily determined market price. This may be because the asset is thinly traded and there are no recent trades or because the asset isn't publicly traded. For each of these assets, find a source that is qualified to estimate its value. This may be a counter-party, such as an investment bank or securities dealer that trades in the asset, or it may be an information technology company that uses specialized analytics software to determine the asset's value. Once the value is determined, list each asset's current price and multiply that price by the number of shares or units held. Total the values of all these thinly-traded or non-publicly traded securities.

Hedge Fund's NAV

Total the values for all securities held by the hedge fund, and divide that total by the number of shares outstanding to find its NAV. Note that when the determination of value includes estimates from counter-parties and information technology companies using proprietary software, the rationale for the evaluations may not be publicly available. This makes the legitimacy or accuracy of the NAV determination uncertain. Hedge funds and information technology companies that evaluate hedge fund assets, such as Paladyne systems, are aware of this problem. As a result, they have called for fund administrators to take more responsibility for establishing industry-wide evaluation practices and standards. Because hedge funds aren't SEC-regulated like other pooled investment funds, they have no obligation to use a particular evaluation method to determine NAV.

About the Author

Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.

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