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NAV trigger: Difference between revisions
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*The cost of financing those assets - the [[leverage]] - increases | *The cost of financing those assets - the [[leverage]] - increases | ||
*Investors withdraw money from the fund. | *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? | [[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 | 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. | ||
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? | 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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===Types of [[NAV trigger]]=== | ===Types of [[NAV trigger]]=== | ||
Often there are three levels of trigger: '''Monthly'''; '''Quarterly''' and '''Annually'''. | Often there are three levels of trigger: '''Monthly'''; '''Quarterly''' and '''Annually'''. There is also an “absolute” NAV trigger, judged from the inception of the relationship to the current point in time, though the sense this one presumably makes to the [[Worshipful Company of Credit Officers]], has for many years eluded the [[JC]]. In any case you may find yourself in a [[tedious]] argument about whether your periodic NAV triggers should be “rolling” (that is, judged for the period from any day, even one on which there wasn’t an official NAV) or “point-to-point” (that is, judged between NAV calculation periods — more observable ass it is based on official NAV, but still quite arbitrary, as it gives you a once-a-month opportunity to raise merry hell<ref>Then again, you could make the point that cutting an official NAV once a month also gives one a somewhat arbitrary sense of the fund’s performance, as it does not track intra-month volatility.</ref>). | ||
===The exhilarating process of waiving a NAV trigger breach=== | ===The exhilarating process of waiving a NAV trigger breach=== | ||
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'''[[Credit]]''': “Help! Help! It’s a legal agreement! I am not qualified to do this! I cannot opine!”<br> | '''[[Credit]]''': “Help! Help! It’s a legal agreement! I am not qualified to do this! I cannot opine!”<br> | ||
You’ll never guess where the [[JC]]’s sympathies lie. By the way, waiving a breach of contract is | You’ll never guess where the [[JC]]’s sympathies lie. By the way, [[Waiver by estoppel|waiving]] a [[breach of contract]] under [[English law]], without [[consideration]], is unlikely to permanently change your contractual terms for the worse<ref>See [[estoppel by waiver]] and [[no oral modification]] for a more developed discussion.</ref> — a mnotivating fear of all [[legal eagles]] and [[credit officers]] — but may well do, if you are not careful, under the [[New York law|laws of the State of New York]]<ref>See [[course of dealing]].<./ref> as it may create a [[course of dealing]]. | ||
===So, put the NAV trigger in a [[margin lockup]]=== | ===So, put the NAV trigger in a [[margin lockup]]=== | ||