Products, systems and methods for scale-in principal protection

• US 7,689,492 B2
• Filed: 08/03/2005
• Issued: 03/30/2010
• Est. Priority Date: 08/03/2005
• Status: Active Grant

• Current Assignee: Morgan Stanley Services Group Inc. (Morgan Stanley)
• Original Assignee: Morgan Stanley
• Inventors: Coates, John S.
• Primary Examiner(s): Kazimi; Hani
• Assistant Examiner(s): Shrestha; Bijendra K
• Application Number:
  US11/196,358
• Publication Number:
  US 20070033121A1
• Time in Patent Office: 1,700 Days
• Field of Search: 705/35, 705/36
• US Class Current: 705/36.00R
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A financial product. The financial product includes an underlying portfolio component, a fixed income component, and a scale-in component. The underlying portfolio component includes an initial investment allocation into an alpha-generating portfolio. The fixed income component is structured and arranged to generate a predictable rate of return and includes an initial investment allocation into a fixed income portfolio. The scale-in component is structured and arranged to increase the investment allocation into the underlying portfolio component when a cumulative return of the alpha-generating portfolio exceeds a threshold amount.

Claims

1. A method of substantially protecting the principal of assets over an investment time period, wherein the investment time period comprises a plurality of consecutive scale-in sub-time periods, the method comprising:

(a) conducting, by a computer system, a number of computer-implemented simulations to determine expected return scenarios for an investment of the assets in a first portfolio comprising a first portion of the assets and a second portfolio comprising a second portion of the assets, wherein the second portfolio is less risky than the first portfolio, wherein the first portfolio comprises an alpha-generating portfolio, wherein the second portfolio comprises at least one fixed income instrument, and wherein the computer system comprises a processor and a computer readable medium and is programmed to perform the computer-implemented simulations;

(b) based in part on the expected return scenarios of the simulations of step (a), prior to the a start of the investment time period, selecting a scale-in amount that is to be allocated from the second portfolio to the first portfolio following each scale-in sub-time period of the investment time period when an actual return of the first portfolio over an evaluation time period for each scale-in sub-time period exceeds a threshold return amount for the first portfolio for the scale-in sub-time period;

(c) prior to the start of the investment time period, selecting a scale-in frequency, wherein a duration of the scale-in sub-time periods is determined by the selected scale-in frequency; and

(d) after a conclusion of each scale-in sub-time period, (i) determining the threshold return amount for the first portfolio for the scale-in sub-time period based on a return of the second portfolio over the evaluation time period for the scale-in sub-time period, and (ii) allocating the scale-in amount from the second portfolio to the first portfolio when the actual return of the first portfolio exceeds the threshold return amount for the first portfolio over the evaluation time period for the scale-in sub-time period, and not allocating the scale-in amount from the second portfolio to the first portfolio when the actual return of the first portfolio over the evaluation time period does not exceed the threshold return amount for the first portfolio for the scale-in sub-time period.

2. The method of claim 1, further comprising repeating step (d) after a second, successive scale-in sub-time period.

3. The method of claim 1, wherein allocating the scale-in amount from the second portfolio to the first portfolio comprises adding direct exposure to the first portfolio.

4. The method of claim 1, wherein allocating the scale-in amount from the second portfolio to the first portfolio comprises adding indirect exposure to the first portfolio.

5. The method of claim 1, wherein the scale-in frequency is once per month

6. The method of claim 1, wherein the scale-in amount is a percentage of the value of the second portfolio.

7. The method of claim 1, wherein the scale-in amount is comprises a fixed dollar amount.

8. The method of claim 1, wherein the computer-implemented simulations comprise computer-implemented Monte Carlo simulations.

9. The method of claim 1, further comprising adjusting the scale-in amount during the investment time period based on the performance of the first portfolio.

10. The method of claim 1, further comprising recursively repeating step (d)

11. The method of claim 1, wherein the evaluation time period for a scale-in sub-time period is related to the scale-in sub-time period.

12. The method of claim 2, wherein the evaluation time period for the second scale-in sub-time period is related to the cumulative first and second scale-in sub-time periods.

13. The method of claim 1, further comprising adjusting the scale-in amount based on the performance of the first portfolio and the second portfolio.

14. The method of claim 1, wherein the alpha-generating portfolio comprises a fund of hedge funds.

15. The method of claim 1, wherein the at least one fixed income instrument of the second portfolio comprises at least one fixed income instrument selected from the group consisting of a corporate bond, a municipal bond, a treasury bond, a treasury note, a treasury bill, a zero-coupon bond, a money market instrument, a short-term debt security, commercial paper, and a negotiable certificate of deposit.

16. The method of claim 1, wherein determining the threshold return amount for the first portfolio for the scale-in sub-time period comprises determining, by the computer system, the threshold return amount for the first portfolio.

17. The method of claim 1, wherein the computer system comprises a computer device selected from the group consisting of a server, a personal computer, a laptop computer, and a workstation.