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Template:NAV trigger capsule: Difference between revisions
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Amwelladmin (talk | contribs) (Created page with "A NAV trigger is 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 t...") |
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A [[NAV trigger]] is 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 | A [[NAV trigger]] is 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). | ||
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: | 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: | ||
*The value of [[Financial instrument|asset]]s (be they physical or derivative) declines | *The value of [[Financial instrument|asset]]s (be they physical or derivative) declines; | ||
*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? | ||