A modified calculation of Net Asset Value (NAV) that accounts for the inherent risks associated with a fund’s or portfolio’s holdings, typically by applying discounts or adjustments to asset values based on their liquidity, volatility, and credit risk. In crypto investing, especially for institutional funds holding a mix of liquid tokens, illiquid venture investments, and derivatives, Risk-Adjusted NAV provides a more conservative and realistic appraisal of a portfolio’s true worth, reflecting potential losses under adverse market scenarios. This offers a prudent valuation.
Mechanism
Standard NAV is calculated by subtracting liabilities from assets. Risk-Adjusted NAV applies additional haircuts to less liquid or more volatile assets, incorporates potential future liabilities from derivatives, and may discount values based on specific counterparty credit assessments. Real-time market prices for liquid assets, internal valuations for illiquid holdings, and risk parameters (e.g., volatility, liquidity premiums, credit spreads) feed into a valuation engine. This engine computes both standard and risk-adjusted asset values, which are then aggregated. It requires a comprehensive asset valuation system, a risk parameter database, a portfolio aggregation module, and reporting tools.
Methodology
The strategic approach aims to provide a more prudent and transparent measure of portfolio value, assisting fund managers and investors in understanding true risk exposure and capital adequacy, particularly in volatile and less regulated markets. Governing principles emphasize conservatism, accurate risk quantification, and the reflection of potential loss in asset valuations, moving beyond nominal market prices to account for real-world liquidation costs and market stress. This draws from accounting standards and financial risk management principles, adapting methodologies for asset valuation and liability assessment to the unique risk characteristics of digital assets.
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