Timing inconsistencies in the calculation of Funds of funds Net Asset Value

The purpose of this paper is to analyze the impact upon tracking errors of timing inconsistencies in the calculation of Funds of Funds (FoF) Net Asset Value (NAV). When the NAV of a FoF is calculated, the NAVs of underlying funds are not always available at the same market date. This can be due to the time of publication of the underlying funds NAVs and also due to the fact that the funds relate to different markets with different closing times. The NAV of the FoF are therefore calculated using diverse market days. Benchmarks of FoF are usually composed of indices. The level of these benchmarks are calculated using underlying prices at the same market day. If we compare the return series of a FoF with the return series of its benchmark, a problem occurs due to the timing inconsistencies in the calculation. We examine how these timing inconsistencies produce noise in the NAV of FoF and therefore noise in the tracking error. We construct Funds of Funds and calculate NAVs of these FoF using underlying NAVs at different dates. We then compare series of tracking errors to analyze the impact of the timing inconsistencies and formalize a relation including a systematic error term generated by these timing inconsistencies.