Shadow NAV: what it is, and what running one actually takes

Most explanations of shadow NAV are written by vendors selling enterprise software. This one is written by a fund manager who recomputes his own fund's NAV every day, and it covers what the textbook versions leave out.

What a shadow NAV is

A shadow NAV is an independent recomputation of the net asset value your administrator publishes. Not a copy of their calculation, and not a spot check of the output: a parallel build of the same number from the underlying inputs, so that when the two agree you know it, and when they disagree you know that too, on the day it happens rather than at the audit.

The distinction that matters is preparation versus review. Your administrator prepares the NAV. Reviewing it is a different job, and an administrator cannot review its own work any more than you can mark your own homework. The review layer is the manager's, whether the manager staffs it, outsources it or automates it.

Why funds run one

Because the errors that matter are quiet. We found one of ours by recomputing the NAV independently and asking why the two numbers differed by a rounding-sized amount every month. It was not rounding. On another occasion a month-end NAV was restated without notification, and the recomputation surfaced the discrepancy the same day. Neither of those shows up in a reasonableness check, because both numbers looked reasonable.

Allocators know this, which is why 'how is the administrator's NAV independently overseen' now appears in every serious operational due diligence questionnaire. An answer that describes a process is adequate. An answer that shows this morning's tie-out is better.

What it takes to run daily

• A verified fee schedule. The recomputation is only as good as the rates it accrues. Ours are verified against the offering documents and cross-checked to the administrator's own fee packs, because the most common source of NAV drift we see is a fee convention nobody ever wrote down.
• Class-level identities. Same-currency classes holding identical pro-rata slices of the pool must show identical gross returns once the fee accrual is added back. When one class deviates, the shape of the deviation names the suspect: one class out points at a class-specific cause, a whole currency out points at the hedge or pricing, everything out on one day points at the valuation file itself.
• Series accounting where it applies. For series-accounted vehicles the rebuild goes further, per investor account, in dollars, on the administrator's own conventions, including the write-back an administrator calls equalisation.
• A tolerance you can defend. Ours ties to the administrator within a fifth of a basis point daily. Wider than that and the check stops meaning anything. Tighter and you drown in noise from legitimate timing differences.

Build, hire or buy

The traditional options are an enterprise platform priced near six figures with a year of implementation, or a spreadsheet maintained by one person, which produces the right number and no audit trail. MOBO exists because we wanted a third option for our own fund: the recomputation, the reconciliations and the evidence trail, assembled automatically from the statements your providers already email, at a price an emerging manager can carry. It runs on our own $131m fund and on the funds of the clients who followed.