Equalization

In an open-ended fund with one share class and one NAV, investors who subscribe at different times would otherwise share a single performance fee accrual, leading to over- or under-charging. Equalization corrects this at investor level. Common methods include the equalization credit and depreciation deposit approach, often used for offshore corporate funds, and the equalization factor approach used in some UCITS funds.

When an investor subscribes while the fund carries an accrued performance fee, they pay an equalization credit on top of the net NAV. If the fund keeps its gains, that credit is returned to the investor, typically in additional shares, at crystallization. The mechanics depend on the fund documents.

Equalization is operationally demanding. Pitfalls include incorrect tracking after partial redemptions, errors when the NAV falls below an investor’s entry price, and inadequate investor-level records. Alternatives include series accounting.

Example

Investor A subscribes at $100. NAV rises to $120 gross; the 20% fee accrual of $4 gives a published NAV of $116. Investor B subscribes at $116 plus a $4 equalization credit ($120 in total). At year-end NAV is $130 gross and a $6 fee per share crystallizes. A’s fee of $6 is correct (20% of $30). B’s $4 credit is returned in shares, so B’s net fee is $2, which is 20% of B’s $10 gain.