P&L Calculation and Analysis
P&L Levels
At Northstar, we categorize P&L into three levels,
Net P&L is the P&L reported to investors, net of management and incentive fees.
Gross P&L includes everything in Net P&L, other than management and incentive fees.
Trading P&L includes P&L from price changes, dividends, and accrued interest. It includes most trading fees and commissions. It does not include other interest, borrowing cost, or other fees. Trading P&L is the P&L most closely associated with market risk.
P&L Sources
There are three primary P&L sources or methods for calculating daily P&L,
Client P&L is P&L supplied directly by the client. For most clients, we start wit the month-to-date P&L, and take the difference from the previous day to calculate the daily P&L.
Model P&L is P&L calculated directly by Northstar, with minimal client data (we will still take prices for some private securities, and P&L for cash positions). This P&L is important for reconciliation, as it is based on the sources used for historical data for risk calculations.
Northstar P&L is our default daily P&L, and is designated simply “P&L” or “Profit” in the application. This is a combination of model, client P&L, and P&L calculated by Northstar using client prices. The exact combination can be customized. For example, a client may wish to use model P&L for equities, calculated P&L based on client prices for corporate bonds, and client P&L for cash positions.
In addition to daily P&L, we can also store official monthly P&L. This can be either net or gross, and can be used in various reports.
Trading vs Non-Trading P&L
In addition to the P&L sources above, we also calculate P&L non-trading P&L (often designated “No Trades” in the application). This P&L is the P&L that would have occurred if the client had not traded during the day. In other words, what would have happened if you had stayed in the positions from the previous day’s close. For clients that actively trade, comparing trading and non-trading P&L can be used to gauge the impact of intraday trading. Non-trading P&L is also used in backtesting.
P&L and Reconciliation
As part of our import process, we run numerous checks, looking for unusual data, and comparing different data sources. One of the checks we perform is to compare Northstar P&L and Client P&L. Northstar P&L is trading P&L and Client P&L is typically gross P&L, and the two will typically be based on different pricing sources, so we would expect them to be slightly different, but they should be highly correlated. We look at this at both the fund and position level.
This is just one of the many checks we perform to ensure that the positions in our system accurately reflect the risk in your portfolio. You can read more about reconciliation here.