NAV trigger: Difference between revisions

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Often there are three levels of trigger: '''Monthly'''; '''Quarterly''' and '''Annually'''. You may find yourself embraced in a tedious argument about whether these should be “rolling” (that is, judged for the period from any day) or “point-to-point” (that is, judged from a defined day to the end of the period following that day).
Often there are three levels of trigger: '''Monthly'''; '''Quarterly''' and '''Annually'''. You may find yourself embraced in a tedious argument about whether these should be “rolling” (that is, judged for the period from any day) or “point-to-point” (that is, judged from a defined day to the end of the period following that day).


As are most [[events of default]], breaching [[NAV trigger]] is 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''. Except that it doesn't, unless the fund is refusing to de-risk its derivative positions commensurately. [[NAV]] declines in two main ways:
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:
*[[Financial instrument|Asset]]s (be they physical or derivative) decline in value
*The value of [[Financial instrument|asset]]s (be they physical or derivative) declines
*Investors withdraw investments from the fund.  
*The cost of financing those assets - the [[leverage]] - increases
*Investors withdraw money from the fund.  
[[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?


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 undercooked 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.


 
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]] was at any other time. On the other hand, [[credit officer]]s don’t usually monitor NAV triggers anyway, so what do they care?
In practice an official [[NAV]] is only “cut” once for every “[[liquidity period]]”, and it is hard to see how a [[credit officer]], however enthusiastic, could determine what the [[net asset value]] was at any other time. On the other hand, [[credit officer]]s don’t usually monitor NAV triggers anyway, so what do they care?


All rather tiresome, and quite unnecessary if you have the right, as most [[prime broker]]s do, to jack up [[initial margin]] at your discretion<ref>I know, I know, there may be a [[margin lockup]].</ref>.
All rather tiresome, and quite unnecessary if you have the right, as most [[prime broker]]s do, to jack up [[initial margin]] at your discretion<ref>I know, I know, there may be a [[margin lockup]].</ref>.
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