Allocating Investment Returns Across Fund Partners
Summary
The document considers how to allocate portfolio gains when investors contribute capital at different times and one partner later withdraws. Its example uses ETF purchases at different prices, raising the question of whether an early investor’s redemption should reflect that investor’s own period of exposure or the portfolio’s blended average cost. The accepted response describes a fund accounting process based on periodically striking net asset value (NAV).
At each accounting date, the manager values the pool before processing redemptions and subscriptions. Gains and losses accrued during each investor’s time in the fund are allocated to their account; new capital then participates in subsequent returns, while a redemption removes capital after its share of performance has been recognized. The explanation emphasizes repeating this sequence at each dealing period. It gives a conceptual accounting method, not a full treatment of fees, high-water marks, tax, or legal fund terms, which would need to be specified separately.
Key ideas
- A fund should calculate NAV before processing subscriptions or redemptions.
- Each partner’s gains and losses should reflect the periods when their capital was invested.
- New contributions enter the allocation after existing investors’ accrued performance is accounted for.
- A redemption follows the NAV calculation and removes the investor’s capital from later allocations.
- Dealing frequency and other fund terms affect how this process is implemented.
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Full text
# How to calculate the net return of each "partner" at different times? # How to calculate the net return of each "partner" at different times? Let's suppose I am starting to manage some money. The money is invested in ETFs, particular de VOO. Let's suppose I have partner one with 1,000 USD, and with this, I can buy 10 shares of VOO at 100 USD price per share. (not real price). My average price per share would be 100 USD. Then, another partner 2 gives me 2,400 USD, and I buy more shares of the same ETF, but this time at 120 USD per share. This would update my average price from 100 to 113 per share. In 3 months, the price of the ETFs will gain 5%, (again, fictional), and the "partner 1" wants to subtract his money at a price of 126 per share. This means a 5% gain at the price of the partner 2 and 26% gain at the price of the partner one. And more importantly, it means 11.50% gain over the average price of the portafolio. How should I return (or how much) to the partner one? Over his 26% percent or over 11.5% of the total portfolio? ## Answer by amdopt (score 6, accepted) https://quant.stackexchange.com/a/55473 Generally, managers take subscriptions and redemptions periodically, the frequency of which is defined in their offering documents. At the end of each period (daily, monthly, quarterly, etc), a NAV is struck, redemptions are processed, and subscriptions are processed, in that order. Striking a NAV is something that has to be done before any subscriptions or redemptions are completed so that each partner gets the proper return. Using your numbers from above, the partner accounts should look as follows: Since Partner 1 is the only investor they have 100% allocation of all gains and losses Before the addition of Partner 2, Partner 1's gain/loss is crystallized before adding Partner 2's capital to the pool, notice Partner 1's beginning balance for period 2 is the same as the ending balance for period 1. At this point, while the Allocation % changes, the percentage gain/loss that is attributed to each partner account is equivalent to the change in the underlying assets over the period of time each partner was invested and each partner gets a pro-rated share of it. You have to repeat the process of crystallizing gains/losses (striking a NAV if you were running a fund) before processing subscriptions and redemptions. So, after Partner 1 redeems, you are left with Partner 2 receiving 100% of the allocation for Period 3
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