Net asset value is a measure of a fund’s net worth. It’s what’s left after subtracting all of a fund’s liabilities from its assets. It’s similar to shareholders’ equity, which you’ll find on a public company’s balance sheet.
Hedge funds are only slightly more complicated than mutual funds in that they can use more leverage and buy more obscure investments. Even still, calculating a hedge fund’s net asset value should be relatively easy to do if you have access to the hedge fund’s financial data.
To show you how to calculate the net asset value of a hedge fund, we will look at the financial statements of Pershing Square Holdings, a publicly traded “hedge fund” managed by Bill Ackman. Because Pershing Square Holdings is publicly traded, all investors have access to its balance sheet.
Calculation of net asset values of hedge funds
The balance sheet below shows the value of the assets and liabilities of Pershing Square Holding at the end of 2014. We will start by defining the various assets and liabilities and then calculate the net asset value of the fund based on the data available. .
Using the above balance sheet as a reference, let’s begin to digest Pershing Square Holdings’ balance sheet, starting with the assets.
The most obvious asset is the fund’s cash and monies owed by brokers. Money is, well, money. Cash owed by brokers is essentially an account receivable – a payment that a fund expects from the sale of securities, or cash that the fund has pledged against a transaction, among other things. Trade and other receivables are similar, related to dividends the company expects to receive in the near future and interest earned on investments.
Finally, the last remaining assets are the value of specific investments. Pershing Square Holdings primarily owns stocks, so the total value of all stocks it owns is added together and added to the value of its derivative investments. All of these assets combined total approximately $7.17 billion.
Passives are simpler, in a way. Liabilities represent all amounts owed to other parties, including debt that the hedge fund uses to leverage its returns and fees payable to the manager (suppliers and other payables and financial liabilities), amounts required to close a short sale of a stock (securities sold, not yet purchased) and payments due to brokers for the purchase of investments (due to brokers). Pershing Square Holdings’ liabilities stood at $833 million at the end of 2014.
When you add all of Pershing Square Holdings’ assets (approximately $7.17 billion) and subtract all liabilities (approximately $833.3 million), you get the fund’s net asset value of $6.33 billion. If Pershing Square were to be liquidated at the end of 2014, its investors would split $6.33 billion between them.
Liquidation is unlikely, and it certainly didn’t happen in 2014. But knowing its net asset value tells us exactly how much the fund is worth to the people who own the shares – investors who want to invest in Bill Ackman’s ability to choose stocks.
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