Hedging exchange traded mutual funds or other portfolio basket products

• US 7,574,399 B2
• Filed: 10/12/2007
• Issued: 08/11/2009
• Est. Priority Date: 06/17/2002
• Status: Active Grant

• Current Assignee: NYSE American LLC (Intercontinental Exchange, Inc.)
• Original Assignee: NYSE American LLC (Intercontinental Exchange, Inc.)
• Inventors: Norman, Terry, Gastineau, Gary L., Alexander, Carol, Weber, Clifford J., Baker, Charles A., MacQueen, Jason
• Primary Examiner(s): Kazimi; Hani
• Assistant Examiner(s): Shrestha; Bijendra K
• Application Number:
  US11/974,468
• Publication Number:
  US 20080040258A1
• Time in Patent Office: 669 Days
• Field of Search: 705/37
• US Class Current: 705/37
• 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 estimating an intra-day approximation of the net asset value (NAV) of actively managed exchange traded funds comprising the steps:

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 using a computer;

estimating an intra-day approximation of NAV of the actively managed fund of a particular day by estimating factor sensitivities of the subset of factors in each of the groups for a particular actively managed fund using a computer, wherein the intra-day approximation of NAV of the actively managed fund does not reveal the assets of the actively managed fund portfolio to an investor who trades shares of the actively managed fund.

2. The method of claim 1 wherein the variation is in a range of about 40-95% of the variation in each group.

3. The method of claim 2 wherein principal component analysis involves computing eigenvectors and eigenvalues of a correlation matrix of the returns.

4. The method of claim 1 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.

5. A computer readable medium storing a computer program product for estimating the net asset value (NAV) of actively managed exchange traded funds, which are traded intra-day comprising instructions, which are executed by a computer and cause the 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 the NAV of the actively managed fund on a particular day by estimating factor sensitivities of the subset of factors in each of the groups for a particular actively managed fund, wherein the factor sensitivities of the subset of factors in each of the groups for the particular actively managed fund do not reveal the assets of the actively managed fund portfolio to an investor who trades shares of the actively managed fund.

6. The computer readable medium storing a computer program product of claim 5 wherein the variation is in a range of about 40-95% of the variation in each group.

7. The computer readable medium storing a computer program product of claim 5 wherein principal component analysis involves computing eigenvectors and eigenvalues of a correlation matrix of the returns.

8. The computer readable medium storing a computer program product of claim 5 further comprising instructions to:

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

9. An apparatus comprising:

a processor;

a computer readable medium storing a computer program product for estimating an intra-day approximation of the net asset value (NAV) of actively managed funds, which are traded intra-day, with the computer program product comprising instructions causing 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 the intra-day approximation of NAV of the actively managed fund on a particular day by estimating factor sensitivities of the subset of factors in each of the groups for a particular actively managed fund in order to estimate the intra-day approximation of NAV of the actively managed fund on a particular day, wherein the factor sensitivities of the subset of factors in each of the groups for the actively managed fund do not reveal the assets of the actively managed fund portfolio to an investor who trades shares of the actively managed fund.

10. The apparatus of claim 9 wherein the computer program product accounts for variation in a range of about 40-95% of the variation in each group.

11. The apparatus of claim 9 wherein the computer program product uses principal component analysis that involves computing eigenvectors and eigenvalues of a correlation matrix of the returns.

12. The apparatus of claim 9 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 intra-day NAV proxy during the following trading day.

13. An actively managed fund that is traded intra-day between buyers and sellers comprising:

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, wherein the hedging basket does not reveal the assets of the actively managed fund portfolio.

14. The actively managed fund of claim 13 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.

15. The actively managed fund of claim 13 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;

16. The actively managed fund of claim 13 wherein the hedging basket is derived based on modeled returns on the actively managed fund calculated using the equation: