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| {{a|pb|[[File:Trigger.jpg|450px|thumb|center|A [[NAV trigger]] yesterday.]]}}The right to terminate a {{tag|master agreement}} as a result of the decline in [[net asset value]] of a [[hedge fund]] counterparty (other counterparty types generally won't have a “[[net asset value]]” ''to'' trigger). | | {{a|pb|{{image|Trigger|jpg|A [[NAV trigger]] yesterday.}} }}{{NAV trigger capsule}} |
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| Like most [[events of default]], [[NAV trigger]]s are a second-order derivative for the only really important type of default: a [[failure to pay]]. A significant decline in [[NAV]] makes a payment default ''more likely''. [[NAV]] declines in three main ways:
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| *The value of [[Financial instrument|asset]]s (be they physical or derivative) declines
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| *The cost of financing those assets - the [[leverage]] - increases
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| *Investors withdraw money from the fund.
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| [[Prime broker]]s hold [[initial margin]] to protect against the first, control the second in any weather, and one would expect the third to result in overall proportionate de-risking anyway. <ref>Not always precisely, of course: thanks to Mr. Woodford for reminding us all that a manager handling redemptions will tend to nix [[liquid]] positions first.</ref> In any case, the benefit to a second order derivative close-out right is that it might allow you to get ahead of the game. If I know the default is coming (because [[NAV trigger]], right?) why wait until a payment is due to see if I get hosed?
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| Because, in this age of high-frequency trading, multiple payments are due every day, and even if one isn’t, in many cases you can force one by raising [[initial margin]].<ref>Assuming you have under-cooked your [[IM]] calculations in the first place, that is. [[IM]] is designed to tide you over between payment periods after all.</ref> All told, an ''actual'' [[failure to pay]] is deterministic. There is no argument. A NAV trigger breach — not so much.
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| Especially since an official [[NAV]] is only “cut” once for every “[[liquidity period]]” — monthly or quarterly in most cases — and it is hard to see how a [[credit officer]], however enthusiastic, could determine what the [[net asset value]] of the fund was at any other time, not having knowledge of those positions held with other counterparties. On the other hand, [[credit officer]]s don’t usually monitor NAV triggers anyway, so what do they care?
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| All rather tiresome, and quite unnecessary if you have the right, as most [[prime broker]]s do, to hike up [[initial margin]] at your discretion.<ref>I know, I know, there may be a [[margin lockup]]. That’s really the best place for the [[NAV trigger]], as you may come to agree if you read on.</ref> | | All rather tiresome, and quite unnecessary if you have the right, as most [[prime broker]]s do, to hike up [[initial margin]] at your discretion.<ref>I know, I know, there may be a [[margin lockup]]. That’s really the best place for the [[NAV trigger]], as you may come to agree if you read on.</ref> |