Fund-OperationsEasy

3 min read · 573 words

What the seat actually does

Every fund publishes a price. Fund operations is the machinery that produces it, and the machinery that makes sure the fund actually owns what it says it owns.

A net asset value is a manufactured number, not an observed one. It is the sum of what everything is worth, minus what is owed, divided by the units in issue — and each of those three has judgement in it. What something is worth is a price source and a policy; what is owed includes fees accrued daily; the units change with every subscription.

• Valuation — a price for every holding, from a source agreed in advance, and a documented process for the ones that do not trade.
• Reconciliation — the fund's records against the custodian's, every day, because two systems drift.
• Settlement — making sure a trade actually completes, and chasing it when it does not.
• Reporting — to holders, to the depositary, to a regulator, each on its own clock.

A day, and where it goes

• Prices in — from the agreed sources, with the exceptions flagged: anything stale, anything that moved more than a threshold, anything that did not arrive.
• Breaks — the reconciliation differences, worked until they are explained rather than until they are small.
• Strike — the valuation point, which is a time of day written into the prospectus and not a convenience.
• Dealing — subscriptions and redemptions priced at that point, which is why late trading is a scandal rather than an inconvenience.

What it is measured on

• Whether the NAV was right, and on time. A restated NAV is an event with a compensation process attached.
• Fails — trades that did not settle, and how long they stayed open.
• Breaks outstanding, by age. A break that is a week old is not a difference, it is a question nobody answered.
• Clean audits and clean regulatory returns, which is a low bar that is expensive to clear.

What it touches on this site

• How a trade completes — clearing and settlement, and the "how a trade actually happens here" section of every asset class.
• What a fund publishes — reading a factsheet and a broker statement.
• Where valuation is a judgement — alternatives, where there is often no price at all.
• What goes wrong operationally — which risk decides: operational risk decides more instruments than liquidity and funding combined.

How it goes wrong

• A stale price treated as a price. An instrument that has not traded for a fortnight is marked at what it last traded at, and the fund looks calmer than it is.
• The administrator's number accepted without challenge. Outsourcing the calculation does not outsource the responsibility.
• Dealing and valuation points that do not match, which lets somebody trade on information the price does not yet contain.
• Fails that are tolerated. A settlement failure is a credit exposure that nobody signed up for.

Concepts to master

• A NAV is a policy plus arithmetic. Change the pricing source and you change the fund's published return.
• The valuation point is a legal fact, written in the prospectus and not adjustable for convenience.
• Reconciliation is the control, not the chore. Almost every operational loss on this site was visible as a break first.
• Swing pricing exists because dealing has a cost, and somebody has to bear it — the ones dealing or the ones staying.