Asset under Management (AUM), portfolio liquidity and investor liquidity are critical yardsticks to measure the fund’s performance. Regulators require fund managers to disclose these information in their regulatory report in order to ensure more transparency in the market and to check market abuse. While AuM is the market value of assets managed by a fund manager, portfolio liquidity refers to how quickly an instrument can be converted into cash at fair value, and investor liquidity refers to how quickly the investors are able to redeem their holding from the fund.
Asset under Management (or AuM):
While regulators require the fund manager to compute and disclose AuM as part of regulatory reports, the manner in which they are calculated differs for each regulator. For example, there is a difference in how the AuM is calculated for Form Private Fund (or Form PF) regulation and Alternative Investment Fund Management Directive (or AIFMD) regulation.
Form PF requires the AuM to be calculated by taking the value of all the Assets and adding ‘Uncalled Capital’ to it. Whereas, AuM as per AIFMD follows the same approach as Form PF and in addition includes conversion of ‘Value of Position’ as per ‘Article 3, level 2 validation’.
|Regulatory AuM under Form PF||AuM under AIFMD|
|Value of all AssetsAdd: Uncalled Capital (if any)||Value of all AssetsAdd: Uncalled Capital (if any)Less: Actual value of positionAdd: Converted Value of position|
Since AIFMD regulation requires converted value of position, calculated AuM reflects more reliable and accurate information compared to Form PF.
AuM is used to answer Q32 & Q33 in AIFM 24 (1) template and Q48 for AIF 24 (1) template. Similarly Regulatory Assets under Management (or RAuM) has to be disclosed under Q3 of section 1(a) at aggregate level and Q8 of section 1(b) at individual fund level.
Portfolio liquidity depends upon the market depth of the instrument as well as the fund’s percentage of holding of the instrument on its total portfolio holdings. Different formulas are used to arrive at liquidity of the instrument held in the portfolio. Instruments can be divided based on Listed & Unlisted instruments, further breaking into equities, bonds, commodities and other derivatives.
|Market Depth of the instrument||% of holding on total portfolio||Liquidity impact|
|Low||High||High||Less number of buyers since the market depth is low. Bid-Ask spread will be high resulting in sale of security at discount. Also, more time involved in unwinding the High holding.|
|High||High||Low||More number of buyers. High holding will not impact selling at a fair value.|
|High||Low||Low||Less holding percentage. Hence no impact selling at a fair value.|
|Low||Low||High||Less number of buyers. Bid-Ask spread will be high resulting in sale of security at discount.|
Portfolio liquidity is reported under Q178 to Q185 in AIF 24 (2) template for AIFMD and under Q32 in section 2(b) for Form POF.
Normally alternative investment schemes come with specific lock-in period, and funds may also impose “Gates” on their investors, to make sure the redemption pressure is limited or evenly spread. Typically any closed ended fund may have a minimum lock-in of 1 year to 3 Years, and “Gates” of 20%.
Investor liquidity is reported under Q186 to Q192 in AIF 24 (2) template and under Q50 in section 2 (b) for Form PF.
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