GAV vs NAV: Where the Fees Are Calculated

For a fund administrator, the management and performance fee sits between GAV and NAV when performing a roll forward NAV report to investors.

Why it matters: it is computed on GAV, on a base the LPA defines in great detail, potentially separately for every share class if defined under the LPA. Compute it off the wrong line and every investor capital account becomes wrong and a nightmare.

The roll-forward runs in two steps, not one.

GAV is not gross assets. For a fund administrator it is already net of liabilities. It is only before the two liabilities the manager creates: the management fee and the performance fee accrual. That is why the same number is called NAV before fees.

Everything the LPA attaches to the management fee and the performance fee accrual resolves in the same gap:

• The hurdle the fund has to clear before any performance fee accrues at all

• The high water mark each investor carries into the period

• The clawback that hands carry back when later losses undo earlier gains

• Any catch-up that lets the manager draw at an accelerated rate once the hurdle is met

None of it is calculated somewhere else and dropped in. It all happens between GAV and NAV, on the way to the numbers the investor is shown: the fund level NAV, and their own investor level NAV struck after the fee terms and high water mark attached to their share class. Both land on the statement, and only the fund level number is the same for everybody.

Pre-fee net income is the income statement in one line. Everything that moved during the period lands there:

• Realized gain/(loss) on investments

• Change in unrealized gain/(loss) on investments

• Realized and unrealized FX gain/(loss)

• Less operating expenses: admin, custody, audit, legal, directors, regulatory

The management fee base is an LPA question, not a market convention. I have written out a few I have seen:

Performance fee methodology sits in the LPA too. A fund can run the standard structure, a bespoke one, or anything in between. Managers get creative here.

Management fee is paid. Performance fee is accrued. That is why the second formula says accrual.

Reality check: it is no longer one calculation the moment there is more than one share class. Share classes carry different fee terms, and investors subscribe on different dates. There is a high water mark at fund level, at share class level, and at investor level.

So the fee calculations become their own spreadsheet. Management fee by class, performance fee by class, high water marks held per investor and stepped up each time the accrual crystallizes above them. Computing it, reconciling it, and reporting it is the fund administrator's job.

The bottom line: the fee lives between GAV and NAV. Beginning NAV, plus pre-fee net income, plus subscriptions, less redemptions gets you to GAV. Fees come off GAV. What is left is the NAV the investor sees.

This is the mechanic a fund administrator becomes unconsciously competent at, after a few reporting cycles.