Manager Due Diligence · Hedge Funds
Valuation converts positions into reported NAV. For assets without reliable market quotes, the assumptions and challenge process can materially affect performance and fees.
Ask how each asset is priced
Listed liquid shares may have observable market prices. Private loans, complex derivatives and thinly traded securities can require models, broker indications or other estimates. A broker indication may not be an executable price. Identify the inputs, valuation frequency and hierarchy used when sources disagree.
An independent administrator may calculate NAV while still relying on manager supplied values for some holdings. Ask who challenges those values, how overrides are approved and how uncertainty is communicated. Independence is a process with defined responsibilities, not just a provider name.
Measure the effect of a disputed mark
Suppose a fund reports $100 million NAV, including an illiquid position valued at $12 million. If a reasonable alternative estimate is $9 million, NAV would be $97 million before related adjustments. The $3 million difference equals 3% of reported NAV and could affect subscriptions, redemptions and performance compensation.
A valuation range does not by itself prove misconduct. It shows that a point estimate contains uncertainty. Review whether realized sale prices historically support the marks and whether downward revisions arrive more slowly than upward revisions.
Read the audit in context
Obtain the signed financial statements for the correct legal entity and period. Review the opinion, significant accounting policies, valuation disclosures, related parties and subsequent events. Understand any qualification or limitation rather than treating the existence of an audit as a complete answer.
An audit is a periodic examination under a defined framework, not a guarantee of every price or future solvency. Compare audited results with investor reports and ask about differences. Establish how errors are corrected, whether investors are notified and how fee calculations are adjusted when NAV is restated.
Try it yourself
A $40 million NAV includes a position marked at $5 million. A revised value is $3.8 million. What is the direct NAV change before other adjustments?
Show the worked answer
NAV falls by $1.2 million to $38.8 million, a 3% reduction from the original NAV. Related fees, taxes or other effects would need separate consideration.
Further reading
Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. Fund terms, investor eligibility and tax treatment vary by product, account and jurisdiction.
