Exchange trading of mutual funds or other portfolio basket products

• US 20070027790A1
• Filed: 09/29/2006
• Published: 02/01/2007
• Est. Priority Date: 03/27/2000
• Status: Active Grant

• Current Assignee: NYSE American LLC (Intercontinental Exchange, Inc.)
• Original Assignee: American Stock Exchange, LLC (Intercontinental Exchange, Inc.)
• Inventors: Weber, Clifford, Gastineau, Gary
• Granted Patent: US 7,747,512 B2
• Time in Patent Office: Days
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 30/08 Auctions
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• 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: Y10S 707/99932 Access augmentation or optimizing
• CPC Class Codes: Y10S 707/99933 Query processing, i.e. searching

Abstract

A system for determining a basket of financial instruments for hedging investment risk in actively managed exchange 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 the basket of hedging instruments by extracting factor information from a portfolio of the actively managed exchange traded fund and determining factors that affect the price of the exchange traded fund. The program can select a portfolio of instruments with similar behavior with respect to the determined factors to produce a hedging portfolio that tracks the price of the exchange traded fund.

Claims

9. A financial instrument comprising shares of an actively managed exchange traded fund, wherein an entity who trades shares of the actively managed exchange traded fund:

receives or determines a first portfolio of financial instruments; and

receives or determines a second portfolio of financial instruments comprising a supplemental hedging portfolio, wherein the supplemental hedging portfolio combined with the first portfolio of financial instruments results in a hedging portfolio with substantially the same sensitivities to the factors that affect the value of the actively managed exchange traded fund holdings as the actively managed exchange traded fund holdings, and wherein the hedging portfolio does not reveal the fund holdings;

wherein the specific securities in the actively managed exchange traded fund are unknown to the entity.

1. A method of hedging investment risk in an actively managed exchange traded fund, comprising:

receiving or determining factor information about the actively managed exchange traded fund holdings, which measures sensitivities of a basket of securities containing at least a portion of the actively managed exchange traded fund holdings to factors that affect the value of the fund holdings;

receiving or determining a first portfolio of financial instruments; and

receiving or determining a second portfolio of financial instruments comprising a supplemental hedging portfolio, wherein the second portfolio of financial instruments combined with the first portfolio of financial instruments results in a hedging portfolio with substantially the same sensitivities to the factors that affect the value of the actively managed exchange traded fund holdings as the actively managed exchange traded fund holdings, and wherein the hedging portfolio does not reveal the fund holdings;

wherein the specific securities in the actively managed exchange traded fund are unknown to an entity who uses the hedging portfolio as a basis for determining a hedge against an investment in one or more shares of the actively managed exchange traded fund.

2. The method of claim 1, wherein the first portfolio of financial instruments is a creation basket.

3. The method of claim 2, wherein the first portfolio of financial instruments is an in-kind creation basket.

4. The method of claim 1, wherein the first portfolio of financial instruments is a redemption basket.

5. The method of claim 4, wherein the first portfolio of financial instruments is an in-kind redemption basket.

6. The method of claim 1, further comprising using one or more computers programmed with factor analysis software to determine the factor information about the basket of securities containing at least a portion of the actively managed exchange traded fund holdings and to select a portfolio of financial instruments to produce the supplemental hedging portfolio.

7. The method of claim 1, wherein the factor information about the actively managed exchange traded fund holdings comprises factor information that measures sensitivities of the basket of securities containing at least a portion of the actively managed exchange traded fund holdings.

8. The method of claim 1, wherein the factor information about the actively managed exchange traded fund holdings comprises factor information that measures sensitivities of the entire set of actively managed exchange traded fund holdings.

10. The financial instrument of claim 9, wherein the entity who trades shares of the actively managed exchange traded fund uses the hedging portfolio as a basis for determining a hedge against an investment in one or more shares of the actively managed exchange traded fund.

11. The financial instrument of claim 10, wherein the first portfolio of financial instruments is a creation basket.

12. The financial instrument of claim 11, wherein the first portfolio of financial instruments is an in-kind creation basket.

13. The financial instrument of claim 10, wherein the first portfolio of financial instruments is a redemption basket.

14. The financial instrument of claim 13, wherein the first portfolio of financial instruments is an in-kind redemption basket.

15. The financial instrument of claim 10, wherein one or more computers programmed with factor analysis software are used to determine factor information about the actively managed exchange traded fund holdings and to select a portfolio of financial instruments to produce the supplemental hedging portfolio.

16. The financial instrument of claim 9, wherein the entity who trades shares of the actively managed exchange traded fund uses the hedging portfolio to estimate a current value of shares of the actively managed exchange traded fund by applying a current value of the holdings of the hedging portfolio to generate a current value of the hedging portfolio and using the current value of the hedging portfolio as the estimate of the current value of shares of the actively managed exchange traded fund.

17. The financial instrument of claim 16, wherein the first portfolio of financial instruments is a creation basket.

18. The financial instrument of claim 17, wherein the first portfolio of financial instruments is an in-kind creation basket.

19. The financial instrument of claim 16, wherein the first portfolio of financial instruments is a redemption basket.

18-1. The financial instrument of claim 17, wherein the first portfolio of financial instruments is an in-kind redemption basket.

21. A method of estimating a current value of shares of an actively managed exchange traded fund without revealing the holdings of the actively managed exchange traded fund, comprising:

receiving or determining a first portfolio of financial instruments; and

receiving or determining a second portfolio of financial instruments comprising a supplemental hedging portfolio, wherein the second portfolio of financial instruments combined with the first portfolio of financial instruments results in a hedging portfolio with substantially the same sensitivities to factors that affect the value of the actively managed exchange traded fund holdings as the actively managed exchange traded fund holdings, and wherein the hedging portfolio does not reveal the fund holdings;

applying a current value of the holdings of the hedging portfolio to generate a current value of the hedging portfolio; and

using the current value of the hedging portfolio as the estimate of the current value of shares of the actively managed exchange traded fund;

wherein the specific securities in the actively managed exchange traded fund are unknown to an entity who uses the hedging portfolio to estimate the current value of shares of the actively managed exchange traded fund.

22. The method of claim 21, wherein the first portfolio of financial instruments is a creation basket.

23. The method of claim 22, wherein the first portfolio of financial instruments is an in-kind creation basket.

24. The method of claim 21, wherein the first portfolio of financial instruments is a redemption basket.

25. The method of claim 24, wherein the first portfolio of financial instruments is an in-kind redemption basket.

26. The method of claim 21, further comprising using one or more computers programmed with factor analysis software to determine factor information about the actively managed exchange traded fund holdings, which measures sensitivities of a basket of securities containing at least a portion of the actively managed exchange traded fund holdings to factors that affect the value of the fund holdings, and to select a portfolio of financial instruments to produce the supplemental hedging portfolio.

27. A method of hedging investment risk in an actively managed exchange traded fund, comprising:

receiving or determining a first portfolio of financial instruments;

receiving or determining factor information about a set of securities consisting of the actively managed exchange traded fund holdings minus the first portfolio of financial instruments, wherein the factor information measures sensitivities of the set of securities to factors that affect the value of the fund holdings; and

receiving or determining a second portfolio of financial instruments comprising a supplemental hedging portfolio, wherein the second portfolio of financial instruments has substantially the same sensitivities to the factors that affect the value of the set of securities as the set of securities, and wherein the hedging portfolio does not reveal the set of securities;

wherein the specific securities in the set of securities consisting of the actively managed exchange traded fund holdings minus the first portfolio of financial instruments are unknown to an entity who uses the supplemental hedging portfolio as a basis for determining a hedge against an investment in one or more shares of the actively managed exchange traded fund.

28. The method of claim 27, wherein the first portfolio of financial instruments is a creation basket.

29. The method of claim 28, wherein the first portfolio of financial instruments is an in-kind creation basket.

30. The method of claim 27, wherein the first portfolio of financial instruments is a redemption basket.

31. The method of claim 30, wherein the first portfolio of financial instruments is an in-kind redemption basket.

32. The method of claim 27, further comprising using one or more computers programmed with factor analysis software to determine the factor information about the basket of securities containing at least a portion of the actively managed exchange traded fund holdings and to select a portfolio of financial instruments to produce the supplemental hedging portfolio.

33. The method of claim 27, wherein the factor information about the actively managed exchange traded fund holdings comprises factor information that measures sensitivities of the basket of securities containing at least a portion of the actively managed exchange traded fund holdings.

34. The method of claim 27, wherein the factor information about the actively managed exchange traded fund holdings comprises factor information that measures sensitivities of the entire set of actively managed exchange traded fund holdings.