EXCHANGE TRADING OF MUTUAL FUNDS OR OTHER PORTFOLIO BASKET PRODUCTS

• US 20100262565A1
• Filed: 06/25/2010
• Published: 10/14/2010
• Est. Priority Date: 03/27/2000
• Status: Active Grant

• Current Assignee: NYSE American LLC (Intercontinental Exchange, Inc.)
• Original Assignee: NYSE Amex LLC (Intercontinental Exchange, Inc.)
• Inventors: Gastineau, Gary L., Weber, Clifford
• Granted Patent: US 8,024,258 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

1. 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:

determining a first portfolio of financial instruments by a computer; and

determining a second portfolio of financial instruments comprising a supplemental hedging portfolio by a computer, 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 by a computer; 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.

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 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.

7. A method of intra-day trading in shares or derivative instruments of an actively managed fund comprising:

using a determined hedging basket of securities that track the actively managed fund or derivatives to manage investment risk taken in the shares or derivative instruments of the actively managed fund, wherein the hedging basket of securities do not reveal the fund assets; and

trading the fund shares or derivative instruments through negotiated pricing of the fund shares or derivative instruments as determined between buyers and sellers of shares in or derivative instruments of the actively managed fund.

8. The method of claim 7 wherein the value of the hedging basket of securities substantially tracks the value of the actively managed fund.

9. The method of claim 8 further comprising:

applying factor analysis to produce the hedging portfolio, wherein the hedging portfolio is used by an investor in the actively managed fund to hedge the position taken in the actively managed fund.

10. The method of claim 9 wherein the factors that are examined by factor analysis include factors related to economic activity or inflation rates.

11. The method of claim 7 wherein pricing of the fund shares or derivative instruments is based on a calculated intra-day net asset value proxy for the actively managed fund.

12. The method of claim 7 further comprising the step of determining an intra-day net asset value proxy for the fund by applying prices received from a quote feed to security positions in the fund portfolio as of the close of trading on the prior day.

13. The method of claim 12 wherein the step of determining the intra-day net asset value proxy occurs in a trusted computer system.

14. A method of intra-day trading of shares or derivative instruments of an actively managed fund, the method comprising:

calculating an intra-day net asset value proxy for the fund shares by applying prices received from a quote feed to security positions in the fund portfolio, wherein the intra-day net asset value proxy does not reveal the fund assets; and

trading the fund shares or derivative instruments based on negotiated pricing of the fund shares or derivative instruments as determined by the intra-day net asset value proxy for the actively managed fund.

15. The method of claim 14 wherein trading the shares or derivative instruments occurs on a securities exchange or market entity.

16. The method of claim 14 wherein trading the shares or derivative instruments occurs through a specialist or market maker and wherein the method further comprises:

using a determined hedging basket of securities that track the actively managed fund or derivatives to allow management of investment risk in shares of the actively managed fund, with the specialist or market maker hedging positions using the determined hedging basket of securities to offset a position taken by the specialist or market maker.

17. The method of claim 16 wherein trading occurs in shares through a specialist or market maker and wherein the method further comprises:

using a determined hedging basket of securities that track the actively managed fund to allow management of investment risk in shares of the actively managed fund with the specialist or market maker hedging positions using the determined hedging basket of securities to offset a position taken by the specialist or market maker.

18. The method of claim 16 wherein trading occurs in derivative instruments through a specialist or market maker and wherein the method further comprises:

using a determined hedging basket of securities to allow management of investment risk in derivatives with the specialist or market maker hedging positions using the determined hedging basket of securities to offset a position taken by the specialist or market maker.

19. The method of claim 14 wherein the step of calculating the intra-day net asset value is executed within a trusted system and the method further comprises the step of adjusting the fund portfolio to reflect any transactions made on the prior trading day to take into consideration dividend credits and expenses attributable to the current trading day.

20. The method of claim 19 wherein the trusted system is a physical hardware and operating system configuration in which domain configuration and trust relationships are established to control access to a decrypted portfolio file representing positions taken in the actively managed fund.

21. The method of claim 14 wherein the step of calculating the intra-day net asset value is executed within a trusted system, and the method further comprising disseminating the intra-day net asset value proxy for the actively managed fund on a periodic basis throughout a trading day.

22. A method of intra-day trading on an exchange or market in shares or derivative instruments of an actively managed fund, the method comprising:

referencing a calculated intra-day net asset value proxy for the actively managed fund, wherein the net asset value proxy for the actively managed fund does not reveal the assets of the actively managed fund; and

trading the fund shares or derivative instruments through negotiated pricing of the fund shares or derivative instruments by buyers and sellers of shares in or derivative instruments of the fund based on prices posted for the calculated intra-day net asset value proxy for the actively managed fund.

23. The method of claim 24 wherein trading the fund shares or derivative instruments occurs through a specialist or market maker that hedges positions using the determined hedging basket of securities.

24. The method of claim 22 further comprising:

applying factor analysis to produce a hedging portfolio that tracks the portfolio of financial instruments to hedge positions taken by participants that trade in shares or derivative instruments of the actively managed fund.

25. The method of claim 22 wherein the intra-day net asset value proxy is calculated by applying prices received from a quote feed to security positions in the fund portfolio as of the close of trading on the prior day.

26. The method of claim 22 wherein the step of determining the intra-day net asset value proxy occurs in a trusted computer system.