U.S. patent application number 09/843278 was filed with the patent office on 2003-01-02 for open end mutual fund securitization process.
Invention is credited to Bander , Kevin S., Kiron , Kenneth.
Application Number | 20030004851 09/843278 |
Document ID | / |
Family ID | 26838546 |
Filed Date | 2003-01-02 |
United States Patent
Application |
20030004851 |
Kind Code |
A2 |
Kiron , Kenneth ; et
al. |
January 2, 2003 |
Open end mutual fund securitization process
Abstract
A mutual fund securitization process permitting the trading of
open end mutual funds and linked derivative securities on or off
the floor of a National Securities Exchange. The targeted
individual open end mutual fund or group of open end mutual funds,
selected through a screening process is securitized through the
creation of a new, separate security. This new security is
preferably a "closed end fund of funds" and linked derivative
securities, which synthetically replicate the statistical
relationship of the defined individual or group of open end mutual
funds. The maintenance of financial records for the new security is
maintained by electronically storing dividend, capital gains and
income received from the open end funds which have been invested
in, and calculating pro-forma financial statements to disseminate
to shareholders and all relevant parties.
Inventors: |
Kiron , Kenneth; ( New York,
NY) ; Bander , Kevin S.; ( New York, NY) |
Correspondence
Address: |
Edward L. Bishop
Wallenstein & Wagner, Ltd.
53rd Floor
311 S. Wacker Drive
Chicago
IL
60606-6630
US
ebishop@wwfirm.com
312-554-3300
312-554-3301
|
Prior
Publication: |
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Document Identifier |
Publication Date |
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US 0128951 A1 |
September 12, 2002 |
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Family ID: |
26838546 |
Appl. No.: |
09/843278 |
Filed: |
April 24, 2001 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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09843278 |
Apr 24, 2001 |
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09/579,801 |
200 |
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09/579,801 |
200 |
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09/140,868 |
82, 199 |
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6,088,685 |
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09/140,868 |
82, 199 |
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08/542,431 |
1, 199 |
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5,806,048 |
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Current U.S.
Class: |
705/37 ; 705/35;
705/36R |
Current CPC
Class: |
G06Q 40/00 20130101;
G06Q 40/04 20130101; G06Q 40/06 20130101 |
Class at
Publication: |
705/37 ; 705/36;
705/35 |
International
Class: |
G06F 017/60 |
Claims
Claims
1. 53. A method comprising the steps of:creating a derivative based
on a unit investment trust having a number of shares and having a
portfolio comprising of securities within a subgroup of a group of
securities and satisfying an investment objective;trading the
derivative on an exchange at a price related to the securities
within the portfolio; andoutputting an indication of the price in a
humanly readable format.
2. 90. The method of claim 53 wherein the investment objective
includes an index of the group of securities.
3. 91. The method of claim 53 wherein the investment objective
includes aggressive growth.
4. 92. The method of claim 53 wherein the investment objective
includes growth and income.
5. 93. The method of claim 53 wherein the investment objective
includes growth.
6. 94. The method of claim 53 wherein the investment objective
includes income.
7. 95. The method of claim 53 wherein the investment objective
includes investing in a sector.
8. 96. The method of claim 53 wherein the investment objective
includes equity.
9. 97. The method of claim 53 wherein the investment objective is
small companies.
10. 98. The method of claim 53 wherein the investment objective is
government bonds.
11. 99. The method of claim 53 wherein the investment objective is
bonds.
12. 100. The method of claim 53 further comprising the step of
listing the derivative on anexchange.
13. 101. A method comprising the steps of:listing a derivative
based on a unit investment trust having a plurality of shares and a
portfolio comprising of securities that satisfy an investment
objective, the securities within the portfolio being
weighted;trading the derivative on an exchange at a price related
to the securities within the portfolio; anddisplaying in real time
the price that the derivative was traded on the exchange.
14. 102. The method of claim 101 further comprising the step of
electronically trading thederivative.
15. 103. The method of claim 101 wherein the investment objective
includes providing an index.
16. 104. The method of claim 101 wherein the investment objective
includes aggressive growth.
17. 105. The method of claim 101 wherein the investment objective
includes growth and income.
18. 106. The method of claim 101 wherein the investment objective
includes growth.
19. 107. The method of claim 101 wherein the investment objective
includes income.
20. 108. The method of claim 101 wherein the investment objective
includes investing in a sector.
21. 109. The method of claim 101 wherein the investment objective
includes equity.
22. 110. The method of claim 101 wherein the investment objective
is small companies.
23. 111. The method of claim 101 wherein the investment objective
includes government bonds.
24. 112. The method of claim 101 wherein the investment objective
includes bonds.
25. 113. A derivative comprising:an underlying financial asset
comprising a unit investment trust having a portfolio of
securities, the securities within the portfolio being weighted and
the portfolio being changeable to maintain an investment objective;
anda plurality of outstanding shares of the underlying financial
asset listed and tradable on an exchange at a price related to the
price of the securities within the portfolio.
26. 114. The derivative of claim 113 wherein the investment
objective includes providing an index.
27. 115. The derivative of claim 113 wherein the investment
objective includes aggressive growth.
28. 116. The derivative of claim 113 wherein the investment
objective includes growth and income.
29. 117. The derivative of claim 113 wherein the investment
objective includes growth.
30. 118. The derivative of claim 113 wherein the investment
objective includes income.
31. 119. The derivative of claim 113 wherein the investment
objective includes investing in a sector.
32. 120. The derivative of claim 113 wherein the investment
objective includes equity.
33. 121. The derivative of claim 113 wherein the investment
objective is small companies.
34. 122. The derivative of claim 113 wherein the investment
objective is bonds.
35. 123. The derivative of claim 113 wherein the investment
objective is government bonds.
36. 124. A method comprising the steps of:buying a derivative based
on outstanding shares of a unit investment trust having a portfolio
comprising of securities, the securities within the portfolio being
weighted and the portfolio being changeable to maintain an
investment objective;selling the derivative on an exchange at a
price related to the price of the securities within the portfolio;
anddisplaying in real time the price that the derivative was traded
on the exchange.
37. 125. The method of claim 124 wherein the investment objective
includes providing an index.
38. 126. The method of claim 124 wherein the investment objective
includes aggressive growth.
39. 127. The method of claim 124 wherein the investment objective
includes growth and income.
40. 128. The method of claim 124 wherein the investment objective
includes growth.
41. 129. The method of claim 124 wherein the investment objective
includes income.
42. 130. The method of claim 124 wherein the investment objective
includes investing in a sector .
43. 131. The method of claim 124 wherein the investment objective
includes equity.
44. 132. The method of claim 124 wherein the investment objective
is small companies.
45. 133. The method of claim 124 wherein the investment objective
is government bonds.
46. 134. The method of claim 124 wherein the investment objective
is bonds.
47. 135. A method comprising the steps of:listing on an exchange a
derivative based on outstanding shares of a unit investment trust
having a portfolio comprising of securities, the securities being
changeable to maintain an investment objective;providing an
exchange for trading the derivative at a price related to the price
of the securities within the portfolio; anddisplaying in real time
the price that the derivative was traded on the exchange.
48. 136. The method of claim 135 wherein the investment objective
includes providing an index.
49. 137. The method of claim 135 wherein the investment objective
includes aggressive growth.
50. 138. The method of claim 135 wherein the investment objective
includes growth and income.
51. 139. The method of claim 135 wherein the investment objective
includes growth.
52. 140. The method of claim 135 wherein the investment objective
includes income.
53. 141. The method of claim 135 wherein the investment objective
includes investing in a sector.
54. 142. The method of claim 135 wherein the investment objective
includes equity.
55. 143. The method of claim 135 wherein the investment objective
is small companies.
56. 144. The method of claim 135 wherein the investment objective
is bonds.
57. 145. The method of claim 135 wherein the investment objective
is government bonds.
58. 146. A method comprising the steps of:listing a derivative
based on an open end fund having a plurality of shares and a
portfolio comprising of securities that satisfy an investment
objective, the securities within the portfolio being
weighted;trading the derivative on an exchange at a price related
to the securities within the portfolio; anddisplaying in real time
the price that the derivative was traded on the exchange.
59. 147. The method of claim 146 further comprising the step of
electronically trading thederivative.
60. 148. The method of claim 146 wherein the investment objective
includes providing an index.
61. 149. The method of claim 146 wherein the investment objective
includes aggressive growth.
62. 150. The method of claim 146 wherein the investment objective
includes growth and income.
63. 151. The method of claim 146 wherein the investment objective
includes growth.
64. 152. The method of claim 146 wherein the investment objective
includes income.
65. 153. The method of claim 146 wherein the investment objective
includes investing in a sector.
66. 154. The method of claim 146 wherein the investment objective
includes equity.
67. 155. The method of claim 146 wherein the investment objective
is small companies.
68. 156. The method of claim 146 wherein the investment objective
includes government bonds.
69. 157. The method of claim 146 wherein the investment objective
includes bonds.
70. 158. A derivative comprising:an underlying financial asset
comprising an open end fund having a portfolio of securities, the
securities within the portfolio being weighted and the portfolio
being changeable to maintain an investment objective; anda
plurality of outstanding shares of the underlying financial asset
listed and tradable on an exchange at a price related to the price
of the securities within the portfolio.
71. 159. The derivative of claim 158 wherein the investment
objective includes providing an index.
72. 160. The derivative of claim 158 wherein the investment
objective includes aggressive growth.
73. 161. The derivative of claim 158 wherein the investment
objective includes growth and income.
74. 162. The derivative of claim 158 wherein the investment
objective includes growth.
75. 163. The derivative of claim 158 wherein the investment
objective includes income.
76. 164. The derivative of claim 158 wherein the investment
objective includes investing in a sector.
77. 165. The derivative of claim 158 wherein the investment
objective includes equity.
78. 166. The derivative of claim 158 wherein the investment
objective is small companies.
79. 167. The derivative of claim 158 wherein the investment
objective is bonds.
80. 168. The derivative of claim 158 wherein the investment
objective is government bonds.
81. 169. A method comprising the steps of:buying a derivative based
on outstanding shares of an open end fund having a portfolio
comprising of securities, the securities within the portfolio being
weighted and the portfolio being changeable to maintain an
investment objective;selling the derivative on an exchange at a
price related to the price of the securities within the portfolio;
anddisplaying in real time the price that the derivative was traded
on the exchange.
82. 170. The method of claim 169 wherein the investment objective
includes providing an index.
83. 171. The method of claim 169 wherein the investment objective
includes aggressive growth.
84. 172. The method of claim 169 wherein the investment objective
includes growth and income.
85. 173. The method of claim 169 wherein the investment objective
includes growth.
86. 174. The method of claim 169 wherein the investment objective
includes income.
87. 175. The method of claim 169 wherein the investment objective
includes investing in a sector .
88. 176. The method of claim 169 wherein the investment objective
includes equity.
89. 177. The method of claim 169 wherein the investment objective
is small companies.
90. 178. The method of claim 169 wherein the investment objective
is government bonds.
91. 179. The method of claim 169 wherein the investment objective
is bonds.
92. 180. A method comprising the steps of:listing on an exchange a
derivative based on outstanding shares of an open end fund having a
portfolio comprising of securities, the securities being changeable
to maintain an investment objective;providing an exchange for
trading the derivative at a price related to the price of the
securities within the portfolio; anddisplaying in real time the
price that the derivative was traded on the exchange.
93. 181. The method of claim 180 wherein the investment objective
includes providing an index.
94. 182. The method of claim 180 wherein the investment objective
includes aggressive growth.
95. 183. The method of claim 180 wherein the investment objective
includes growth and income.
96. 184. The method of claim 180 wherein the investment objective
includes growth.
97. 185. The method of claim 180 wherein the investment objective
includes income.
98. 186. The method of claim 180 wherein the investment objective
includes investing in a sector.
99. 187. The method of claim 180 wherein the investment objective
includes equity.
100. 188. The method of claim 180 wherein the investment objective
is small companies.
101. 189. The method of claim 180 wherein the investment objective
is bonds.
102. 190. The method of claim 180 wherein the investment objective
is government bonds.
Description
Cross Reference to Related Applications
[0001] This Application is a continuation of co-pending U.S.
Application No. 09/579,801 filed May 26, 2000, which is a
continuation of U.S. Application No. 09/140,868 filed August 27,
1998, now U.S. Patent No. 6,088,685, which is a continuation of
U.S. Application No. 08/542,431 filed October 12, 1995 now U.S.
Patent No. 5,806,048.
Background of Invention
[0002] This application relates to a new financial process which
securitizes open end mutual funds to facilitate intra-day trading
of the funds and linked derivative securities.
[0003] There are currently over 7,000 open end mutual funds
registered with the Securities and Exchange Commission. None of
these open end mutual funds, or any index of open end mutual funds,
or any linked derivative, are traded on a National Securities
Exchange. The reason for this phenomenon lies in the way that open
end mutual funds sell their shares, and subsequently buy back their
shares from the public.
[0004] Open end funds are required by law to sell their shares at
the net asset value (N.A.V.), which represents the total assets
owned by the fund, less the total liabilities, divided by the
number of shares outstanding, plus a sales charge (also known as a
sales load). When buying back their shares, open end funds must, by
law, buy back their shares at their fund's N.A.V.
[0005] Many mutual funds make hundreds (if not thousands) of trades
during the day, purchasing and selling a wide range of financial
securities, some of which are difficult to value. Thus, it is time
consuming, tedious, expensive and otherwise difficult to determine
an exact N.A.V. during the day. Consequently, over 99% of all open
end funds allow investors to purchase and sell their funds only at
the end of the day. The remaining 1% of open end funds, commonly
known as sector funds, calculate their N.A.V. every hour, allowing
a more frequent ability to buy or sell their shares. In either
case, however, the investor does not know what price will be paid
for the open end fund shares until after the order has been placed,
and the fund has calculated its N.A.V.
[0006] Recently, mutual fund portfolio managers have developed a
new type of mutual fund called an open end fund of funds. A fund of
funds is an open end fund that invests in other open end mutual
funds. But like all the other open end funds created in the past,
they can only be bought and sold at the end of the day.
[0007] Another new product developed is called the SPDR.TM., which
is short for Standard and Poors Depository Receipt. This security,
which is traded on the American Stock Exchange, represents a
fractional share of a basket of stocks known as the Standard and
Poors 500 index (S&P500). While many mutual funds invest in the
S&P500, the SPDR is not a mutual fund; it is a basket of stocks
set up as unit investment trust, where the total amount of shares
outstanding within the trust fluctuates daily.
[0008] In 1992, a large investment banking house created and became
the market maker for a basket of stocks which attempted to
replicate the performance of a few select open end sector funds, a
basket that was traded intra-day on the Over the Counter Market
(OTC). Unfortunately, because the net asset value of the open end
sector funds was unknown during the 59 minutes of each hour that
the basket was traded, the spread between the price that the firm
was willing to buy the funds and sell the funds for was large.
Further, the correlation between the performance of the basket of
stocks to the performance of the open end sector funds was neither
reliable nor consistent. This problem existed because the open end
fund managers were constantly buying and selling securities during
the day, and the investment banking house did not know exactly
which securities the open end funds held.
[0009] Another recent development within the mutual fund industry
is a service that allows investors to buy and sell open end funds
during the day. The Jack White & Co., a regional brokerage
firm, maintains a screen-based computer system which provides a
private market place for investors to buy and sell a small number
(less than six percent) of all open end mutual funds at a price
other than net asset value, provided buyer and seller can agree on
a price. This service has failed to generate significant trading
volume, however, because only the public can buy or sell fund
shares. Institutional investors, pension funds, portfolio managers,
and other professional investors, which traditionally represent 70
to 80% of trading volume, are prevented by law from buying or
selling open end mutual funds at a price other than N.A.V. The Jack
White program also allows short selling, but shares must be
"found," which can take days, weeks, or months to complete the
transaction. As a result of these restrictions, it is very
difficult, if not impossible, for either the public or the
professional investor to purchase or sell open end mutual funds
during the day.
[0010] Because of the lack of liquidity and the legal obstacles
involved in trading open end funds at prices other than N.A.V., up
to now, those skilled in developing new products for stock
exchanges thought that there was no workable way to trade open end
funds, an index of open end funds, or linked derivative securities.
The obstacles appeared insolvable.
[0011] All of the open end funds and products presently available
suffer a number of disadvantages:
[0012] A) Open end funds cannot sell or buy back their shares at a
price other than N.A.V. (plus sales load, if any).
[0013] B) Open end funds are unable to let their customers know
what price they will receive when they place their order.
[0014] C) Open end funds are not traded on an exchange so investors
cannot leverage their investments through the trading of derivative
securities.
[0015] D) Open end funds do not allow investors to place orders
including: good "til cancelled (GTC), open, market, limit, stop
loss, or stop limit, which would allow an investor to purchase or
sell shares at a specific price or time.
[0016] E) Open end funds impose fees for purchases and sales of
their shares if they occur frequently.
[0017] F) Open end funds impose fees for investors who do not own a
minimum amount of shares.
[0018] G) Open end shares cannot be easily sold short. Shares must
be found, which could take days, weeks or even years.
[0019] H) All shares of open end mutual funds and unit investment
trusts theoretically could be redeemed in one day, meaning a fund
may have its assets drop to zero at any time.
[0020] I) Open end fund shares cannot be sold or purchased except
through written notification, which may take several days to mail
or process.
Summary of Invention
[0021] The present invention's open end fund securitization process
will allow for the first time: (a) intra-day trading of an
unlimited number of mutual fund indexes comprised of open end
funds; (b) intra-day trading of an unlimited number of open end
mutual funds with a greater degree of liquidity; and (c) intra-day
trading of derivative securities linked to open end funds and
indexes of open end funds.
[0022] This process is made possible by the creation of a second
type of security, which will invest substantially all of its assets
in the targeted open end mutual fund shares. The preferred
embodiment for this new security is a "closed end fund of funds",
which has a fixed number of shares outstanding, and a constant
portfolio which is invested exclusively in the shares of the
targeted open end fund(s). The result is a new security which will
synthetically replicate the performance of those shares purchased,
and do so with a high degree of correlation and consistency. This
new security can then be listed on a National Securities Exchange
and traded without restriction. After trading begins, linked
derivative securities can then be listed and traded.
[0023] Other objects and advantages of the present invention
include:
[0024] A) Any open end fund, when securitized, can be listed on a
stock exchange and traded at any second, minute or hour, regardless
of the open end fund N.A.V
[0025] B) Investors can determine what price will be paid before an
order is placed.
[0026] C) A National Securities Exchange (N.S.E.) will be able to
list derivatives on the securitized open end funds, because of the
greater price transparency generated through the trading of the
securitized open end funds. The invention will act as a hedge for
market makers who wish to lay off their risk of making markets in
options on the underlying security.
[0027] D) Investors will be able to leverage their investments.
[0028] E) Investors will be able to place GTC, open, stop loss,
market, limit orders when buying or selling their funds.
[0029] F) Investors can buy or sell the securitized funds as often
as they wish with no penalty.
[0030] G) Investors will be able to purchase or sell their shares
immediately by making a phone call to their broker, or by
electronic trading.
[0031] H) Investors will not be charged arbitrary fees for frequent
purchases or selling of the securitized open end funds.
[0032] I) Investors will not be charged additional fees for owning
small quantities of shares.
[0033] J) The securitized funds have fixed number of shares which
provides stability of asset levels.
[0034] K) Investors will be able to sell shares short quicker, and
with greater liquidity.
[0035] L) Open end fund management will benefit from reduced
volatility in their cash levels and in their frequently traded
customer account assets, resulting in lower fund expense
ratios.
[0036] M) Investors purchasing a securitized fund will pay a
reduced sales load in many cases than they would otherwise have to
pay because of the bulk purchasing power the securitized fund will
have when investing in specific open end funds.
[0037] Further objects and advantages include the ability to trade
a futures contract on both a securitized fund share and an index of
securitized fund shares with linked derivative securities. In
addition, the present invention solves a long existing but unsolved
and unrecognized need. Many investors, both professional and
non-professional own multiple mutual funds in an effort to
diversify their investment portfolio's. An index of open end mutual
funds would allow greater diversification, lower transaction costs,
expanded investment choices and the ability to measure their fund
performance against a relevant benchmark index. The index could be
calculated many different ways with a great deal of flexibility:
equal price weighted, capitalization weighted, or geometrically
weighted, depending upon the need. Still further objects and
advantages will become apparent from a consideration of the ensuing
description and drawings.
Brief Description of Drawings
[0038] The present invention will be more fully understood by
reference to the following detailed description thereof when read
in conjunction with the attached drawings, and wherein: Figures lA
and lB represent how an open-end mutual fund index is created in a
general data processing computer. These figures represent computer
requirements and also comprise a schematic flowchart of process
operating therewithin.
[0039] Figure 2 illustrates how the preferred embodiment of an
open-end mutual fund index is synthetically replicated through the
creation of a new security. The preferred embodiment for this new
security is a "closed end fund" and linked derivative
securities.
Detailed Description
[0040] Referring to Figure lA, the box designated 10 represents an
electronic database (a "master database") of extensive statistical
information stored in a computer containing the entire universe of
open end mutual fund statistics in existence registered in the
defined country or geographic area. The preferred embodiment
database includes extensive statistics for each open end fund. This
information includes fund net asset value (N.A.V.) for each year,
portfolio composition, investment objective, load adjusted and
unadjusted return, maximum sales charge, median market
capitalization, daily, monthly, quarterly, yearly, multi-year
returns, mpt, beta, sharpe, R squared, standard deviation,
historical risk/reward ratios, N.A.V. distribution adjusted
earning, payout ratio, potential capital gains exposure, price/book
ratio, price/earnings ratio, prospectus, purchase constraints,
redemption fees, sector weighting, shareholder fees, total return,
total return percentile, turnover ratio, deferred fees, debt %
total capitalization, dividends, distributor, telephone number,
manager name, manager tenure, class of shares, and brokerage
availability. It will be understood that not all of this
information is required to practice the claimed invention.
[0041] As also reflected in box 10, the computer itself has a
preferred specification of at least 420 megabytes of internal
memory (hard drive), eight megabytes of RAM (random access memory),
a CD ROM player operating at 4x speed (at least), a Pentium CPU,
VGA monitor, and a keyboard.
[0042] The box designated 12 represents a computer program
algorithm or step that eliminates those funds not available for
purchase and puts these funds into a new database where these funds
are stored in memory. This function acts as a filter eliminating
from the search all open end mutual funds that are not available
for purchase. The algorithm creates a new memory storage area
containing those funds that fit within the criteria and stores
those funds within a new section of the computer memory. This new
memory location can be accessed by its new name: DATABASE #1. The
history of open end mutual funds makes this algorithm very
important. Because funds frequently close their doors to new money
(as their popularity increases), keeping track of which funds can
be purchased at the initial screening stage reduces the waste of
memory that would occur by repeatedly saving large amounts of
information redundantly to the hard drive.
[0043] The box designated 14 represents the step where a minimum
asset size of the fund is selected; the time period(s) through
which statistics will be retrieved (time t) is chosen and the
computer is directed to create a new database where these funds are
stored in memory. There are hundreds of funds that have assets of
less than $5,000,000. The ability to buy and eventually sell a
large amount of shares in a thinly capitalized fund could be
problematic. In addition, the smaller funds tend to be the most
volatile and tend to have shorter track records to measure their
past performance. The minimum asset size selection will direct the
computer to select only those funds that have a pre-selected asset
level, mitigating some of these potential problems.
[0044] The time period (t) for which statistics will be chosen is
very important. More so than many other types of security, an open
end mutual fund is "ranked" for its performance based upon how well
it does over specific time periods. The ability to segregate fund
statistics information over various time horizons provide a unique
tool to evaluate a funds performance.
[0045] The box designated 16 represents a computer program
algorithm which separates the group of funds stored in a database
created by the step set forth in box 14. This new group of funds is
stored in a new memory location defined by its specific investment
criteria. This criteria may include a subgroup including the fund
investment objective or the sector weightings of its portfolio.
Currently, the major fund investment objective subgroups include
Aggressive Growth, Growth and Income, Growth, Income, Bond, Sector,
Asset Allocation, Specialty, Equity Income, Europe Stock, Foreign
Stock, Government Bond, Hybrid Income, Small Company, World Stock
and World Bond.
[0046] The box designated 18 represents a computer program
algorithm which searches and identifies all the funds where the
statistical performance is greater than the aggregate subgroup over
time periods (t) and puts these funds into a new database where
these funds are stored in a new memory location. The performance of
a fund can be measured in many ways. It could be based upon total
return, load adjusted return, unadjusted load return, or a return
with dividends reinvested. Once the specified performance criteria
have been selected, the computer can average all of the funds in
that subgroup before retrieving those funds that have above average
returns. All funds, for example, that have returns better than 50%
of the funds in the universe would be selected as being above the
"average" subgroup return. These funds would then be stored in a
new memory location, to be analyzed at a later time.
[0047] The box designated 20 represents an algorithm where the
computer searches and retrieves all funds where the risk is smaller
than the aggregate subgroup over time periods (t) and stores these
funds in a new database. Funds, for example that have a smaller
risk profile than 50% (the exact average) of the funds in the
subgroup would be selected as beating the "average" subgroup
return. These funds would then be stored in a new memory location,
to be analyzed at a later time.
[0048] Referring to Figure 1B, the box designated 22 represents an
algorithm where the computer combines the funds identified by the
steps taken as set forth in boxes 18 and 20 to create a new group
of open end mutual funds that have the lowest combined risk to
return ratio over time periods (t) and puts these funds into a new
database where the information on these funds is stored in a new
memory location. Generally, this type of function is called a
Relationship Search routine because it allows for linking together
user defined criteria to produce one result. It is a very powerful
tool for linking large amounts of information together.
[0049] The box designated 24 represents a step where the number of
funds that the index will contain is chosen. This number could
range from 1 to the number of funds in the database. Depending upon
the investment objective or how much money is available to invest
in the index, this number will fluctuate.
[0050] The box designated 26 represents the step where the index
calculation method is selected. An index generally is calculated
one of three ways; "Equally Priced", meaning all of the price are
added up and divided by the total number of securities;
"Capitalization Weighted", which is based upon the amount of price
of the security times the number of shares outstanding; or
"Geometrically Weighted", which involves a more complicated
averaging of share prices. The index value can dramatically shift
depending upon what weighting is used.
[0051] The box designated 28 represents a step that uses a formula
which sequentially analyzes each risk/reward ratio of each
permutation of funds selected by the computer in step represented
in the box designated 30.
[0052] Box 30 is an algorithm wherein the general data processor
eliminates the large risk/reward combinations found in "database
index" using the formula determined by box 28, and sequentially
stores in memory the smallest risk/reward combinations, stopping
only when the smallest risk/reward ratio is found. This results in
the selection of the final index. When all of the funds with
superior returns have been identified and stored, and all the funds
with lower than average risk have been identified and stored, the
computer can then match up all of the different combinations of
funds to determine which group contains the optimally lowest
risk/highest return ratio. This ratio can be calculated over
multiple time period to provide for example, the lowest ratio over
1, 3, 5, and 10 years. In the final group of funds, the number
selected by the user pursuant to the step of box 24 will determine
how many funds the index ultimately will contain.
[0053] The box designated 32 represents the step of displaying a
graph of the combined funds over time periods (t), showing their
combined statistical performance based upon the calculation method
selected set forth in box 26. The computer is instructed to return
to box 10 so the program may repeat itself.
[0054] Referring to Figure 2, the box designated 40 represents the
group of open end mutual funds selected pursuant to the steps set
forth in Figures 1A and lB. These funds own financial securities
including stock securities (box 42), bonds and money market
instruments (box 44) and or hybrid, illiquid securities (box 46).
The N.A.V. is calculated by the open end funds at the end of the
day and disseminated to the closed end fund of funds.
[0055] The box designated 48 represents the closed end fund of
funds which synthetically replicates the performance of those open
end funds contained within box 40. By investing all available
assets in box 40, the closed end fund of funds statistical
performance correlates strongly and consistently with the open end
funds located in box 40. A computerized accounting and reporting
system, located within the closed end fund of funds, receives
overall position reports of changes in fund share ownership through
an electronic data link with an exchange clearing computer
represented by box 50. Box 48 is the National Securities Exchange
("N.S.E.") clearing computer electronically calculating the overall
positions of shareholders at the end of the day and then
transferring all shareholder information to the closed end fund.
Upon receipt of this information, the accounting and reporting
system generates information regarding tax liabilities, financial
reports and other relevant documentation to shareholders,
government agencies and other relevant parties.
[0056] Box 52 represents an electronic data link between the N.S.E.
computer and the closed end fund of funds. The closed end fund of
funds calculates its net asset value and disseminates that
information to the N.S.E. on a daily basis. The N.S.E. then
publishes that information to market participants including
broker/dealers and institutional investors (box 54), market makers
(box 56), brokerage firms (box 58) and public investors (box 60)
who then buy and sell the synthetic fund shares intra-day at any
mutually agreed upon price (which is used by market participants to
derive the price of linked derivative securities). Linked
derivative security valuations on the closed end fund of funds are
generated, as represented by box 62, the valuation of which is
based upon the market prices generated through real-time trading of
the relevant closed end fund of funds by market participants
located in box 54, box 56, box 58, and box 60. Box 62 is the N.S.E.
computer calculating an index of various closed end fund of funds
traded.
[0057] Box 64 represents the electronic data link between the
N.S.E. clearing computer, which keeps track of the exchange trades
that occur during the day, and the closed end synthetic fund.
[0058] While the inventors believe that an index of open end mutual
funds comprised of those funds that have the largest return on
investment and the lowest risk combination may outperform those
funds that, in contrast, have demonstrated lower returns and higher
risk, it must be noted that past performance does not guarantee
similar performance in the future.
[0059] Thus, the reader will see that the index of mutual funds
described herein provides a means for identifying superior
historical performance within each subgroup obtainable through a
screening process which minimizes the selection of high risk/low
return open end mutual funds and maximizes the selection of those
funds with low risk/high return statistical data. The hope is that
by identifying and investing within an index of funds that have
demonstrated superior risk/return ratios within a particular
sector, these funds will continue to produce superior returns with
low risk in the future than their peers.
[0060] The creation of a separate security, the preferred
embodiment being a "closed end fund of funds", provides the means
for investing intra-day in the desired open end funds, and enables
market participants to derive a real-time valuation for linked
derivative securities.
[0061] While the above description contains many specific examples,
these should not be construed as limitations on the scope of the
invention, but rather as an exemplification of one preferred
embodiment thereof. Many variations are possible. For example,
instead of creating a closed end fund of funds, a unit investment
trust could be created to replicate the performance of an open end
fund or group of funds. While this security could have large swings
in its capitalization level, it nevertheless may be able to
replicate the performance of an open end fund or group of funds,
and act as a hedge for listed derivative securities.
[0062] In addition, an index could be created based upon such
strict requirements that the index would be limited to just one
fund. Another index variation might be one that selects only those
funds that beat an external index such as the S&P500 or Dow
Jones Industrial Average. In addition, an index of securitized
funds, as well as linked derivative securities including puts and
calls, futures, caps and floors, total return swaps, collars,
warrants, equity swaps, swaptions, knock-out options and variation
thereof could be traded through the Over the Counter Market, which
is located off the exchange floor. Accordingly, the scope of the
invention should be determined not by the embodiments illustrated,
but by the appended claims and their legal equivalents.
* * * * *