Hedging exchange traded mutual funds or other portfolio basket products

• US 20030233302A1
• Filed: 06/17/2002
• Published: 12/18/2003
• Est. Priority Date: 06/17/2002
• Status: Active Grant

• Current Assignee: NYSE American LLC (Intercontinental Exchange, Inc.)
• Original Assignee: NYSE Amex LLC (Intercontinental Exchange, Inc.)
• Inventors: Alexander, Carol, Baker, Charles A., Weber, Clifford
• Granted Patent: US 7,571,130 B2
• Time in Patent Office: Days
• US Class Current: 705/36.00R
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/08 Insurance

Abstract

A system for pricing and/or determining a basket of financial instruments for hedging investment risk in actively managed traded funds is described. The system uses a trusted computer system and includes a computer storage medium storing a computer program product. The product determines a basket of hedging instruments by applying statistical or economic based factor analysis to estimate the NAV or provide a hedging basket to track actual NAV of an actively managed traded fund.

Claims

1. A method of pricing and/or hedging investment risk in traded actively managed funds, comprises:

using multi-factor risk models to construct a hedging portfolio for the actively managed traded fund.

2. The method of claim 1 wherein the multi-factor risk models are based on statistical factors.

3. The method of claim 1 wherein using a statistical modeling approach further comprises:

analyzing security price movements over a large group of securities over a period of time.

4. The method of claim 1 further comprising:

using a list of securities from which to produce factors, the list being based on a list of the securities that the fund would contemplate holding.

5. The method of claim 1 wherein the list for the particular actively managed fund is limited to holding securities from a “

followed list”

of securities.

6. The method of claim 5 wherein the list for the particular actively managed fund is derived from actual holdings of the fund over time.

7. The method of claim 5 wherein the list for the particular actively managed fund is derived from actual holdings of the fund over time combined with stocks from a market index, e.g., the Russell 1000 Index®

.

8. The method of claim 3 wherein analyzing further comprises:

identifying groups of securities from the larger group of securities that have pricing characteristics that systematically tend to move together; and

for each group,

performing a principal component analysis over some percentage of variation (y %) to provide a subset of the principal components of the group to use as factors for the particular group.

9. The method of claim 3 wherein analyzing further comprises:

estimating factor sensitivities for a particular actively managed fund.

10. The method of claim 3 wherein estimating further comprises:

using the factor sensitivities for estimating the intraday approximation of NAV of the particular actively managed fund on a particular day.

11. The method of claim 10 wherein estimating further comprises:

calculating a returns time series using the actively managed fund prices at the end of the previous trading day for holdings in each stock expressed as a proportion of the current NAV price on the current trading day; and

using the returns time series on each stock to form an historic ‘

current weighted’

time series of synthetic fund returns.

12. A method of hedging investment risk in actively managed traded funds, comprises:

grouping securities into groups of securities for which there is some basis to believe that their prices might move together; and

for each group

performing a principal component analysis (PCA) over some percentage of variation (y %) to arrive at a subset of the principal components as the factors for the particular group;

estimating factor sensitivities of the subset of factors in each of the groups for a particular actively managed fund in order to estimate an intraday approximation of NAV of the actively managed fund on a particular day.

13. The method of claim 12 wherein the variation is in a range of about 40-95% of the variation in each group.

14. The method of claim 13 wherein principal component analysis involves computing eigenvectors and eigenvalues of a correlation matrix of the returns.

15. The method of claim 12 further comprising:

performing a further principal component analysis on the factors to arrive at some number of final factors to estimate the NAV price during the following trading day.

16. A computer program product residing on a computer readable medium for pricing and/or hedging investment risk in actively traded funds, which are traded intra-day, comprises instructions to cause a computer to:

construct a hedging portfolio for the actively managed traded fund using principal component analysis to analyze security price movements of a large group of securities over a period of time to discern correlations between such price movements of the analyzed group and price movements of the actively managed fund.

17. The computer program product of claim 16 further comprising instructions to:

construct a list of securities from which to produce factors, the list being based on a list of the securities that the fund would contemplate holding.

18. The computer program product of claim 17 wherein the list for the particular actively managed fund is limited to holding securities from a “

followed list”

of securities.

19. The computer program product of claim 17 wherein the list for the particular actively managed fund is derived from actual holdings of the fund over time.

20. The computer program product of claim 17 wherein the list for the particular actively managed fund is derived from actual holdings of the fund over time combined with stocks from a market index.

21. The computer program product of claim 16 wherein instructions to analyze further comprises instructions to:

identify groups of securities from the large group of securities that have pricing characteristics that systematically tend to move together; and

for each group,

perform a principal component analysis over some percentage of variation (y %) to provide a subset of the principal components of the group to use as factors for the particular group.

22. The computer program product of claim 16 wherein instructions to analyze further comprises instructions to:

estimate factor sensitivities for a particular actively managed fund; and

apply the factor sensitivities for estimating the intraday approximation of NAV of the particular actively managed fund on a particular day.

23. The computer program product of claim 16 wherein instructions to analyze further comprises instructions to:

calculate a returns time series using the actively managed fund prices at the end of previous trading day for holdings in each stock expressed as a proportion of the current NAV price on the trading day; and

apply the returns time series on each stock to form an historic ‘

current weighted’

time series of synthetic fund returns.

24. A computer program product residing on a computer readable medium for pricing and/or hedging investment risk in actively traded funds, which are traded intra-day, comprises instructions to cause a computer to:

group securities into groups of securities for which there is some basis to believe that their prices might move together; and

for each group

perform a principal component analysis (PCA) over some percentage of variation (y %) to arrive at a subset of the principal components as the factors for the particular group;

estimate factor sensitivities of the subset of factors in each of the groups for a particular actively managed fund in order to estimate the NAV of the actively managed fund on a particular day.

25. The computer program product of claim 24 wherein the variation is in a range of about 40-95% of the variation in each group.

26. The computer program product of claim 24 wherein principal component analysis involves computing eigenvectors and eigenvalues of a correlation matrix of the returns.

27. The computer program product of claim 24 further comprising instructions to:

perform a further principal component analysis on the factors to arrive at some number of final factors to estimate the intraday NAV proxy during the following trading day.

28. An apparatus, comprises:

a processor;

a computer readable medium storing a computer program product for pricing and/or hedging investment risk in actively traded funds, which are traded intra-day, with the computer program product comprising instructions to cause the processor to;

group securities into groups of securities for which there is some basis to believe that their prices might move together; and

for each group

perform a principal component analysis (PCA) over some percentage of variation (y %) to arrive at a subset of the principal components as the factors for the particular group;

estimate factor sensitivities of the subset of factors in each of the groups for a particular actively managed fund in order to estimate the intraday approximation of NAV of the actively managed fund on a particular day.

29. The apparatus of claim 28 wherein the computer program product accounts for variation in a range of about 40-95% of the variation in each group.

30. The apparatus of claim 28 wherein the computer program product uses principal component analysis that involves computing eigenvectors and eigenvalues of a correlation matrix of the returns.

31. The apparatus of claim 28 wherein the computer program product further comprises instructions to:

perform a further principal component analysis on the factors to arrive at some number of final factors to estimate the intraday NAV proxy during the following trading day.

32. An actively managed fund that is traded intra-day between buyers and sellers, comprises:

shares or derivative instruments corresponding to an interest in the actively managed fund, with the shares or derivative instruments being traded based on a hedging basket of securities derived by applying a principal component analysis to a group of securities to select a subset of the group and weightings for the subset to account for a percentage of variation (y %) of actively managed fund.

33. The actively managed fund of claim 32 further comprises:

the shares or derivative instruments corresponding to an interest in the actively managed fund further traded based on;

pricing of the shares or derivative instruments as determined between buyers and sellers of shares in or derivative instruments of the fund.

34. The actively managed fund of claim 32 wherein the shares or derivative instruments corresponding to an interest in the actively managed fund are further traded based on:

a determined intra-day net asset value proxy for the fund that is derived based on modeled returns on the actively managed fund calculated using the equation;

$R_{\mathrm{\tau <br><br>}}=\underset{j=1,\text{\hspace{1em}<br><br>}<br><br>\mathrm{\dots <br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>K}{\sum <br><br>}<br><br>{\mathrm{\beta <br><br>}}_j<br><br>P_{j,\mathrm{\tau <br><br>}}$

where P_j,τ

is the return on factor j to time τ

.

35. The actively managed fund of claim 32 wherein the hedging basket is derived based on modeled returns on the actively managed fund calculated using the equation: