U.S. patent application number 11/474579 was filed with the patent office on 2007-12-27 for multi-level leverage account structure.
Invention is credited to Henry Bregstein, Renatus Rolandus Adrianus Paulus Van Kesteren, Mark Willis.
Application Number | 20070299786 11/474579 |
Document ID | / |
Family ID | 38874613 |
Filed Date | 2007-12-27 |
United States Patent
Application |
20070299786 |
Kind Code |
A1 |
Bregstein; Henry ; et
al. |
December 27, 2007 |
Multi-level leverage account structure
Abstract
An investment structure for multiple classes of investors that
combines the advantages of both the master feeder structure and the
reverse master feeder structure with segregated accounts. In
particular, an investment structure is formed in which investors
invest in a common fund. The common fund, in turn, opens a common
prime brokerage account, having at least three sub-accounts, for
example: an unlevered account; one or more levered accounts and a
general trading account. The prime broker provides class loans to
the levered account and margin loans to the general trading
account. To the extent class loans are provided to the levered
account, levered investors will participate in the returns on the
general account as if the levered investors invested capital plus
the amount of any class loans to that levered account. The
unlevered investors will participate in the returns on the general
trading account on the basis of their capital contributions alone.
The prime broker will have no recourse against any assets of any
account other than the levered account as a result of a default or
margin call of the levered account. In an alternative embodiment of
the invention, the investment structure is structured as a fund of
funds, in which multiple classes of investors invest, which, in
turn, invests in multiple investment funds, or a fund that employs
alternative investment strategies that overlay the basic trading
strategies. In this embodiment, a credit facility is established
with the equivalent of three sub-accounts as discussed above.
Inventors: |
Bregstein; Henry; (Tenafly,
NJ) ; Rolandus Adrianus Paulus Van Kesteren; Renatus;
(New York, NY) ; Willis; Mark; (Staten Island,
NY) |
Correspondence
Address: |
PATENT ADMINISTRATOR;KATTEN MUCHIN ROSENMAN LLP
1025 THOMAS JEFFERSON STREET, N.W., EAST LOBBY: SUITE 700
WASHINGTON
DC
20007-5201
US
|
Family ID: |
38874613 |
Appl. No.: |
11/474579 |
Filed: |
June 26, 2006 |
Current U.S.
Class: |
705/36R |
Current CPC
Class: |
G06Q 40/00 20130101;
G06Q 40/06 20130101; G06Q 40/04 20130101 |
Class at
Publication: |
705/36.R |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. A structure for an investment fund, the structure comprising: a
fund for receiving contributed capital from at least two classes of
investors; and a prime brokerage account opened by said fund for
receiving said investment capital from said fund, said prime
brokerage account formed with at least three sub-accounts including
an unlevered account (if there is a class of unlevered investors),
one or more levered accounts and a general trading account, said
prime brokerage account configured to receive two levels of
leverage from a prime broker in the form of class loans to said
levered account and margin loans to said general trading
account.
2. The investment structure as recited in claim 1, wherein said
account is further configured to receive contributed capital from
at least one class of unlevered investors.
3. The investment structure as recited in claim 2, wherein said
prime brokerage account is further configured with an unlevered
account for said unlevered investors.
4. The investment structure as recited in claim 3, wherein said
prime brokerage account is configured so that said levered
investors share in the returns of the general trading account on a
pro rata basis, as determined by including in such calculation any
class loans made to said levered account.
5. The investment structure as recited in claim 4, wherein said
investment structure is configured by way of a single prime
brokerage agreement.
6. The investment structure as recited in claim 1, wherein said at
least two classes of investors includes one class of levered
investors and one class of unlevered investors and said prime
brokerage account is configured with one or more levered accounts
and an unlevered account.
7. The investment structure as recited in claim 1, wherein at least
two classes of investors includes two classes of levered investors
and said prime brokerage account is configured with a levered
account for each class of levered investors.
8. A fund with multiple levels of leverage comprising: a master
fund configured to receive investment capital from at least one
class of unlevered investors and one class of levered investors; a
prime brokerage account formed with at least three sub-accounts; an
unlevered account; a levered investor account and a general trading
account, said prime brokerage account configured to automatically
provide class loans to said levered account as a function of the
investment capital invested by said levered investors; said general
trading account further configured to provide a second level of
leverage to said general trading account as a function of the
contributed capital in said levered account and said unlevered
accounts.
9. The investment structure as recited in claim 8, wherein said
investment structure is configured by way of a single prime
brokerage agreement.
10. The investment structure as recited in claim 9, wherein said
prime brokerage account is configured so that said levered
investors share in the returns of the general trading account on a
pro rata basis, as determined by including in such calculation any
class loans made to said levered account.
11. A method for forming an investment fund comprising the steps
of: (a) establishing a master fund for receiving at least two
classes of investors; (b) enabling said master fund to open a prime
brokerage account; and (c) forming said prime brokerage account
with at least three sub-accounts--an unlevered account, a levered
account and a general trading account; and (d) configuring said
prime brokerage account so that said levered account receives class
loans from a prime broker as a function of the contributed capital
in said levered account and margin loans from said prime broker as
a function of the total capital in said general trading
account.
12. The method as recited in claim 11, wherein said investment
structure is created with a single prime brokerage agreement.
13. 1. A structure for an investment fund, the structure
comprising: a fund of funds for receiving contributed capital from
at least two classes of investors, said fund of funds investing in
one or more investment funds; or a fund that employs alternative
investment strategies that overlay the basic trading strategies and
a credit facility opened by said fund formed with the equivalent of
at least three sub-accounts including an unlevered account (if
there is a class of unlevered investors), one or more levered
accounts and a general account, said credit facility configured to
provide two levels of leverage in the form of loans to said levered
account and loans to said general account.
Description
BACKGROUND OF THE INVENTION
[0001] 1. Field of the Invention
[0002] The present invention relates to an investment fund
structure and more particularly to an investment fund structure for
multiple classes of investors based upon a managed level of
leverage applicable to each class, in which the investment fund
opens a prime brokerage account with a prime broker having at least
three sub-accounts, for example: one or more Levered Accounts, each
of which may provide for a different level of leverage; an
Unlevered Account; and a General Trading Account; through which the
prime broker provides margin financing through cash advances to the
General Trading Account and additional financing by way of class
loans to the Leveraged Account and the classes of investors share
in the returns on the General Trading Account based on different
levels of leverage. The present invention is also applicable to a
investment structure in which multiple classes of investors invest
in a fund of funds, which, in turn, invests in multiple investment
funds, or a fund that employs alternative investment strategies
that overlay the basic trading strategies. In such a structure, a
credit facility is established with a lender with at least three
sub-accounts, as discussed above.
[0003] 2. Description of the Prior Art
[0004] Various investment fund structures providing for levered and
unlevered accounts are known. In order to manage assets in a single
portfolio while increasing the pool of investment assets,
master-feeder investment structures are known. In general, master
feeder investment structures include multiple feeder funds which
invest in a master fund. The master fund, in turn, undertakes
trading activity and provides a return to the feeder funds.
[0005] In order to increase potential gains on investments, private
investment funds may invest on margin. In particular, Federal
Reserve Regulations allow such funds to invest their own capital,
as well as a certain percentage of borrowed capital typically
provided by a prime broker. The prime broker determines the maximum
amount of leverage to be provided. This leverage flows through in
the return available to an investor in the fund. For example, an
unlevered investor investing $100 in a fund with a 10% return would
realize a gain of $10. However, an investor investing $100 in fund
realizing the same 10% return, but also utilizing an additional
$100 of borrowed funds, will realize a gain of $20, less the cost
of funds borrowed (i.e., interest charges, fees, legal costs and
similar amounts) for a net return that could be significantly
greater than 10%. Similarly, losses in a leveraged fund will be
greater than those in an unleveraged fund and will be further
increased by the cost of funds borrowed.
[0006] In order to provide enhanced leverage, investment structures
with multiple levels of leverage are known. Such investment
structures utilize leverage at two levels: (a) the investor level
(i.e., the level at which investors purchase interests in a fund)
and (b) the portfolio level (i.e., margin lending). FIGS. 1 and 2
illustrate such investment structures, configured in either a
master-feeder structure or as segregated accounts, respectively.
Referring first to FIG. 1, a known master-feeder investment
structure is illustrated with multiple levels of leverage and
generally identified with the reference numeral 20. As shown, the
investment structure includes two classes of investors: unlevered
investors 22 and levered investors 24 (although this structure also
could accommodate multiple classes of levered investors). The
investors 22 and 24 invest in separate feeder funds 26 and 28,
respectively. The feeder fund 26 is an unlevered feeder fund. For
every dollar invested by the unlevered investor 22 in the unlevered
feeder fund 26, one dollar is invested into a master fund 30 and
the unlevered investor receives one dollar in interests of the
master fund 30. On the other hand, the levered investor 28 invests
in a levered feeder fund 28, and for every dollar the levered
investor 24 invests in the levered feeder fund 28, the levered
feeder fund 28 borrows one dollar in the form of a class loan from
a lender 32. Thus, for every dollar invested by the levered
investor 24, two dollars are invested into the master fund 30,
providing leverage at the investor level. In this case, the levered
investor receives two dollars in interests or shares of the master
fund 30, which are pledged as collateral for the class loan. The
collateral is held by a custodian 31. Based on the above scenario,
the unlevered investor 22 and the levered investor 24 invest a
total of three dollars into the master fund. The funds from the
master fund 30 are used to open and maintain a prime brokerage
account 34.
[0007] In this structure, a second level of leverage is provided at
the portfolio level in the form of a margin loan provided by the
prime broker to the master fund through the prime brokerage account
34.
[0008] There are disadvantages of such an investment structure. In
particular, because the only collateral for the class loan is the
levered feeder fund's 28 interest in the master fund 30 and such
interests are subject to redemption, the lender, such as the lender
32, often requires relatively high interest rates and higher asset
coverage (i.e., lower loan to value ratio). The lender 32 also may
require a guarantee from the master fund 30 on a pro rata basis
based on the ratio of the levered funds to the total funds.
Although it may be prudent to require a guarantee, lenders may
forego such requirement because of the legal complexity and
expense. In addition, the documentation required for this structure
is extensive and typically includes (a) a credit agreement between
the levered feeder fund 28 and the lender 32, (b) a security
agreement between the levered feeder fund 28 and the lender 32, (c)
a custody agreement between the levered feeder fund 28 and the
custodian, (d) a control agreement between the lender 32, the
levered feeder fund 28 and the custodian, (e) a promissory note
issued by the levered feeder fund 28 to the lender 32 and the
custodian, (f) a guaranty and security agreement between the master
fund 30 and the lender 32, (g) an acknowledgment and consent
between the master fund 30, the levered feeder fund 28 and the
lender 32, (h) a prime brokerage agreement between the master fund
30 and the lender 32, as prime broker and margin leverage provider,
and (i) various ancillary agreements between the leveraged feeder
fund 28, the lender 32 and various service providers. This
extensive documentation results in significant legal expenses that
must be incurred to implement the structure.
[0009] A second known approach uses a reverse master-feeder
investment structure with segregated accounts, for example, as
shown in FIG. 2. In this investment structure, both unlevered
investors 38 and levered investors 40 invest directly into a common
master fund 42. In this example, no leverage is applied at the
master fund 42 level. The master fund 42 then invests in segregated
reverse feeder funds 44 and 46. One feeder fund 44 is strictly for
unlevered funds from the master fund 42 while the second feeder
fund 46 is for levered funds from the master fund 46. Each of the
feeder funds 44 and 46 opens a separate prime brokerage account 48
and 50. The prime brokerage accounts 48 and 50 are segregated with
only one account obtaining additional margin lending. In
particular, the prime brokerage account 48 is used for unlevered
investors 36 while the prime brokerage account 50 is used for
levered investor 40.
[0010] In this case, leverage is provided only at the level of the
prime brokerage accounts 48 and 50 and thus no collateral is
required from the levered investors 40. For each dollar in the
prime brokerage account 48, a one dollar margin loan is obtained
from the prime broker 52. For each dollar maintained in the prime
brokerage account 50, a three dollar margin loan is obtained from
the Prime Broker 52.
[0011] Although the reverse master-feeder investment structure
reduces the costs to the levered investors, there are several
disadvantages to such an investment structure. In particular, the
portfolio manager must execute two trades for every investment
strategy to segregate the levered trading from the unlevered
trading. This results in a cumbersome, inefficient means of
trading, and more complicated trade reconciliation processes.
[0012] In both structures described above, there are ongoing
administrative and operational expenses resulting from the need to
create and maintain multiple entities to achieve the desired
leverage at the investor level. Thus, there is a need for an
investment fund that solves the various problems discussed above by
providing an investment fund structure with legal, operational and
cost efficiency.
SUMMARY OF THE INVENTION
[0013] The present invention relates to an investment structure
that enables an investment fund to provide leverage at the investor
level in addition to leverage at the portfolio level and does so
with greater administrative, legal, operational and cost efficiency
than known structures. In addition, this structure may offer
potentially lower costs of borrowing due to the greater legal
certainty related to the structure. In one embodiment of the
invention, an investment structure is formed in which investors
invest in a common fund having multiple classes. The common fund,
in turn, opens a common prime brokerage account, having at least
three sub-accounts, for example: one or more Levered Accounts, an
Unlevered Account and a General Trading Account. The prime broker
provides class loans to the Levered Account and margin loans to the
General Trading Account. To the extent class loans are provided to
the Levered Account, levered investors will participate in the
returns on the General Trading Account as if the levered investors
contributed capital plus any class loans made to that Levered
Account. The unlevered investors will participate in the returns on
the General Trading Account on the basis of their capital
contributions alone. The prime broker will contractually agree that
it will have no recourse against any assets of any account other
than the Levered Account as a result of a default by or margin call
against the Levered Account.
[0014] In an alternative embodiment of the invention, the
investment structure is structured as a fund of funds, in which
multiple classes of investors invest, that in turn invests in
multiple investment funds, or a fund that employs alternative
investment strategies that overlay the basic trading strategies. In
this embodiment, a credit facility is established with the
equivalent of three sub-accounts as discussed above.
[0015] The present invention offers significant advantages over the
structures described above. In particular, the present invention
requires a single document, a prime brokerage agreement, rather
than the numerous documents that are required in the other
structures. This results in a significant reduction in
implementation time and lower legal fees. Because this structure
does not require the creation of multiple levels of entities, there
are reduced administrative and operational expenses. Further,
because the leverage provider will have a direct security interest
in the General Trading Account, there is greater legal certainty
for the leverage provider. Finally, the investment structure allows
for multiple classes of leverage for the Levered Accounts, which
facilitates management of the account.
DESCRIPTION OF THE DRAWING
[0016] These and other advantages of the present invention will be
readily understood with reference to the following specification
and attached drawing wherein:
[0017] FIG. 1 is block diagram of a prior art master-feeder
investment structure with multiple levels of leverage.
[0018] FIG. 2 is block diagram of another prior art investment
structure formed as a reverse master feeder configuration with
segregated prime brokerage accounts with multiple levels of
leverage.
[0019] FIG. 3 is a block diagram of an investment structure with
multiple levels of leverage in accordance with the present
invention.
[0020] FIG. 4 is an exemplary spread sheet illustrating the
operation of the investment structure outlined in FIG. 3.
[0021] FIG. 5 is a block diagram of an alternative embodiment of an
investment structure with multiple levels of leverage in accordance
with the present invention.
DETAILED DESCRIPTION
[0022] The present invention relates to an investment structure for
an investment fund for multiple classes of investors for the
purpose of buying, selling and investing in securities,
commodities, and/or other investment products. The fund may borrow
amounts in the normal course of its investing. Leverage may be used
to enable the fund to enhance its returns, but also may result in
greater losses, as profits and losses will increase in proportion
to the degree of leverage used.
[0023] In addition to amounts borrowed at the fund level, the fund
will employ a second class of leverage on an investor by investor
(or class by class) basis, offering varying amounts of leverage to
the different investors or investor classes.
[0024] As used herein, investors are classified as either "levered
investors" or "unlevered investors." Levered investors are further
classified based upon the amount of additional leverage the
investor would like the fund to utilize. For example, the fund may
be formed with multiple classes of leverage at the investor level,
such as 2.times., 3.times., 4.times., etc. Where multiple classes
of leverage are provided at the investor level, a separate Levered
Account is opened for each leveraged class. Where all investors are
leveraged at the class level and there are multiple classes of
levered investors, there may be no unlevered investors. In
accordance with an important aspect of the invention, leverage at
the account level can be actively managed and can be set an any
level that is acceptable to the prime broker.
[0025] The investment fund in accordance with one embodiment of the
present invention is used to open one or more customer accounts
with a prime broker (i.e., a prime brokerage account). The prime
broker will establish at least three sub-accounts within the prime
brokerage account, for example: a General Trading Account, an
Unlevered Account and one or more Levered Accounts, in which
levered investors may be further classified by the amount of
additional leverage utilized and each such classification will
result in an additional Levered Account. Alternatively, the prime
brokerage account can be established with at least three
sub-accounts which include multiple Levered Accounts, no Unlevered
Accounts and a General Trading Account. The prime broker will
provide margin financing to the fund through advances to the
General Trading Account. The prime broker will also provide
additional financing through class loans to the Levered Account.
This additional leverage may be in the form of additional margin
financing, but such additional financing may be secured only by the
assets in the Levered Account. The assets of the General Trading
Account initially are allocated between the Levered Account and the
Unlevered Account and among multiple Levered Accounts as follows:
[0026] The Levered Account Pro Rata Percentage for each Levered
Account will equal (a) the sum of (i) the aggregate initial capital
contributions of the particular class of levered investors, plus
(ii) the aggregate amount of any class loans to such Levered
Account, divided by (b) the sum of (i) the aggregate initial
capital contributions of all investors plus (ii) the aggregate
amount of any class loans. [0027] The Unlevered Account Pro Rata
Percentage will equal (a) 100% minus (b) the Levered Account Pro
Rata Percentage for all Levered Accounts.
[0028] The Pro Rata Percentages may be adjusted at any time and
from time to time to reflect any profits and losses to the General
Account and at any time additional capital contributions are made
to the fund or capital contributions are withdrawn from the
fund.
[0029] On a daily basis or more frequently upon the happening of
certain events, such as significant market moves, the prime broker
will calculate the value of the assets in the prime brokerage
account to determine whether additional margin is required to be
contributed to the General Trading Account. If the equity in the
General Trading Account is less than the sum of (i) total assets in
the account multiplied by the minimum equity requirement as
determined by the prime broker's risk and margin policies, plus
(ii) the largest amount of any outstanding class loans divided by
the Levered Account Pro Rata Percentage of the equity in the
account, the prime broker will require the fund to contribute
additional capital to or sell securities in the prime brokerage
account (a margin call).
[0030] If the prime broker makes such a margin call, the margin
requirement will be allocated between the Levered Accounts and the
Unlevered Account based upon a calculation of the net equity in
each account and the Pro Rata Percentage of the net equity in the
General Account. If the ratio of equity to total assets in an
account is less than the minimum required by the prime broker, that
account will be required to post additional equity or sell
securities in an amount sufficient to cause the ratio to equal or
exceed the minimum required by the prime broker. However, the prime
broker will not look to the Unlevered Account to cover any
shortfall in the Levered Account(s) or one Levered Account to cover
any shortfall in another Levered Account. The foregoing
determination as to whether additional margin is required will be
made as follows: [0031] First, the prime broker will allocate the
total assets in the General Trading Account among the Levered
Account(s) and the Unlevered Account (if any) based on the Pro Rata
Percentage. [0032] Second, the prime broker will allocate the
margin loan among the Levered Account(s) and the Unlevered Account
(if any) based on the Pro Rata Percentage. [0033] Third, the prime
broker will allocate the class loan to the Levered Account(s).
[0034] Fourth, the prime broker will calculate the net equity in
each Levered Account(s) as follows: (a) the Levered Account Pro
Rata Percentage of such Levered Account multiplied by total assets
minus (b) the Levered Account Pro Rata Percentage of such Levered
Account multiplied by the margin loan minus (c) the class loan to
such Levered Account. The prime broker will then determine the
ratio of net equity in the Levered Account to total assets in the
Levered Account. If such ratio is less than the minimum required by
the prime broker, additional margin will be required. [0035] Fifth,
the prime broker will calculate the net equity in the Unlevered
Account (if any) as follows: (a) Unlevered Account Pro Rata
Percentage of total assets minus (b) Unlevered Account Pro Rata
Percentage of the margin loan. The prime broker will then determine
the ratio of net equity in the Unlevered Account to total assets in
the Unlevered Account. If such ratio is less than the minimum
required by the prime broker, additional margin will be
required.
[0036] Levered and unlevered investors (if any) will participate in
returns on the assets in the General Trading Account on the basis
of their respective Pro Rata Percentages. As a result, to the
extent that any class loans are provided to the Levered Accounts,
levered investors will participate in the returns on the General
Trading Account as if the levered investors had invested their
capital contributions plus any class loans made to that Levered
Account, while the unlevered investors will participate in the
returns on the General Account on the basis of their capital
contributions alone.
[0037] The prime broker will contractually agree that it (a) will
have no recourse against the assets of any account other than the
Levered Account to which a class loan was made with respect to an
event of default or margin call or the like with respect to the
Levered Account or any other obligation solely related to any
borrowing on behalf of that Levered Account (a "Levered Account
Obligation"); and (b) will have no recourse against the assets of
any account other than the Unlevered Account with respect to an
event of default or margin call or the like with respect to the
Unlevered Account or any other obligation solely related to the
unlevered account (an "Unlevered Account Obligation"). The prime
broker will solely look to the assets of a Levered Account,
including the Levered Account Pro Rata Percentage of the assets of
the General Account, to satisfy any Levered Account Obligation
applicable to that Levered Account, and the prime broker will
solely look to the assets of the Unlevered Account, including the
Unlevered Account Pro Rata Percentage of the assets of the General
Account, to satisfy any Unlevered Account Obligation
[0038] A block diagram of the investment structure in accordance
with the present invention is illustrated in FIG. 3. As shown,
unlevered investors 54 as well as levered investors 56 invest in a
common Master Fund 58. This example assumes that there are
unlevered investors and a single class of levered investors. The
common Master Fund 58 will open a Prime Brokerage Account with a
prime broker 62. The Prime Brokerage Account 60 is formed with
three sub-accounts: an Unlevered Account 64, a Levered Account 66
and a General Trading Account 68. For purposes of this example, a
single Levered Account is shown, although as noted above, the
structure could accommodate multiple Levered Accounts, each
providing differing levels of leverage. The Prime Broker 62
provides two levels of leverage to the Prime Brokerage Account.
First, the Prime Broker 62 provides class loan financing to the
Levered Account 66. Second, the Prime Broker 62 provides margin
financing to the General Trading Account 68.
[0039] In this example, the unlevered investors 54 and the levered
investors 56 invest directly into the Master Fund 58. In this
example, the levered investor class is assumed to be leveraged at
twice the investor's capital contribution. The Master Fund 58 opens
a Prime Brokerage Account with three sub-accounts: an Unlevered
Account 64, a Levered Account 66 and a General Trading Account 68.
The unlevered investors 54 invest $100, all of which is allocated
to the Unlevered Account 64. The levered investors 56 invest $25,
all of which is allocated to the Levered Account 66. For each
dollar allocated to the Levered Account 66, a class loan is
obtained from the prime broker for an equal amount, providing a
first level of leverage. In this example, a $25 class loan is made
to the Levered Account. In addition, a $200 margin loan is provided
by the prime broker, providing a second level of leverage. Thus,
the General Trading Account is comprised of $100 in unlevered
equity, $25 in levered equity, a $25 class loan, and a $200 margin
loan, resulting in a total of $350 for investment.
[0040] As mentioned above, the levered and unlevered investors
share in the returns from the General Trading Account on a pro rata
basis. Thus, in this case, the levered investors will share in 1/3
(e.g. [$25+$25]/[$125+$25]) of the returns on the General Trading
Account while the unlevered investors would be entitled to 2/3 of
the returns on the General Trading Account.
[0041] FIG. 4 is an exemplary spread sheet that illustrates the
investment structure in accordance with the present invention. In
this example, unlevered investors make a capital contribution to
the Master Fund in the amount of $100. Levered investors make a
capital contribution to the Master Fund in the amount of $25. The
prime broker makes a class loan to the Levered Account of $25 and a
margin loan to the General Trading Account of $200. Thus, total
assets in the account are $350 and the levered investors' Pro Rata
Percentage is 33.33%, while the unlevered investors' Pro Rata
Percentage is 66.66%. The initial margin requirement will be the
sum of (i) the assets in the account multiplied by the minimum
equity requirement (for purposes of this example, $350.times.10% or
$35) plus (ii) the amount of any outstanding class loans divided by
the Levered Account Pro Rata Percentage of the equity in the
account ($25/33.33% or $75). Thus, the margin requirement will be
$110, but the equity in the General Trading Account is $150, so no
additional margin is required.
[0042] In an exemplary scenario, it is assumed that the master fund
then loses 15% in value and its total assets will thus be reduced
to $297.50 and the margin requirement will be recalculated. The
adjusted margin requirement will be the sum of (i)
$297.50.times.10% or $29.75 plus (ii) $25/33.33% or $75. Thus, the
margin requirement will be $104.75. Because the equity in the
account is only $97.50, additional margin of $7.25 will be
required.
[0043] To determine the allocation of the margin call, the prime
broker will allocate the total assets in the General Trading
Account between the Levered Account and the Unlevered Account based
on the Pro Rata Percentage. Thus, the Levered Account will be
allocated $99.17 of the total assets and the Unlevered Account will
be allocated $198.33. Then the prime broker will allocate the
margin loan between the Levered Account and the Unlevered Account
based on the Pro Rata Percentage, resulting in an allocation of
$66.67 to the Levered Account and $133.33 to the Unlevered Account.
The prime broker will then allocate the $25 class loan to the
Levered Account.
[0044] The net equity in the Levered Account will equal (a) $99.17
minus (b) $66.67 minus (c) $25, or $7.50. The ratio of net equity
in the Levered Account to total assets in the Levered Account will
equal 7.6% (7.50/99.17). Because such ratio is less than the
minimum required by the prime broker, additional margin may be
required by the Levered Account.
[0045] The net equity in the Unlevered Account will equal (a)
$198.33 minus (b) $133.33, or $65.00. The ratio of net equity in
the Unlevered Account to the borrowed funds in the Unlevered
Account will equal 32.8% (65.00/198.33). If such ratio is less than
the minimum required by the prime broker, additional margin will be
required.
[0046] On a periodic basis, the Pro Rata Percentages will be
rebalanced. In this scenario, the 15% loss (i.e., $52.50) in value
is allocated 1/3 to the Levered Account and 2/3 to the Unlevered
Account. The class loan and the margin loans are reduced
accordingly, resulting in equity in the Unlevered Account of $65
[100-(2/3.times.$52.50)], equity in the Levered Account of $7.50
[25-(1/3.times.$52.50)], a class loan of $7.50
[25-(1/3.times.$52.50)], a margin loan of $164.10
[244.10.times.67.23% (the portfolio loan to value ratio)], and
total assets in the General Trading Account of $244.10
[164.10+65.00+7.50+7.50]. The Levered Account Pro Rata Percentage
is now 18.75% The margin requirement also will be recalculated.
[0047] The adjusted margin requirement will be the sum of (i)
$244.10.times.10% or $24.41 plus (ii) $7.50/18.75% or $40.00. Thus,
the margin requirement will be $64.41. Because the equity in the
account is $80.00, no additional margin will be required.
[0048] In the event of an additional capital contribution to the
fund or a redemption of capital from the fund, the Pro Rata
Percentages will be recalculated in a similar manner. FIG. 4
illustrates a $4.00 redemption by the Levered Investor. The levered
equity is reduced to $3.50, resulting in a reduction in the share
loan to $3.50, and a reduction in the margin loan to $147.69
[219.69.times.67.23%]. The new Pro Rata Percentage is 9.72%
[(3.50+3.50)/(65.00+3.50+3.50)], resulting in a reallocation of the
margin loan between the Levered Account [$14.36] and the Unlevered
Account [$133.33]. The margin requirement goes down from $64.41 to
$57.97, while total equity is reduced to $72.00 [65.00+3.50+3.50],
so no additional margin is required.
[0049] An alternative investment structure could be utilized in the
context of a fund of funds 70, as generally illustrated in FIG. 5.
Multiple classes of investors, such as unlevered investors 72 and
one or more classes of levered investors 74, may invest in an
investment fund or fund of funds 70. The fund of funds 70, in turn,
invests in multiple investment funds 76, 78 and 80, rather than
directly undertaking trading activity. In this structure, the
investment fund 70 establishes a credit facility 82 with a lender
84, rather than opening a prime brokerage account with a prime
broker. The credit facility 82 provides for least three
sub-accounts, for example: one or more Levered Accounts 86, an
Unlevered Account 88 and a General Account 90. In this case, the
lender 84 provides class loans to the Levered Account 86 and
separate loans to the General Account 90. The General Account 90
will then be used to fund investments in separate investment funds.
To the extent class loans are provided to the Levered Account 86,
levered investors 74 will participate in the returns on the General
Account 90 as if the levered investors 74 contributed capital plus
any class loans made to that Levered Account 86. The unlevered
investors 72 will participate in the returns on the General Account
90 on the basis of their capital contributions alone. The lender 84
will have no recourse against any assets of any account other than
the Levered Account 74 as a result of a default by the Levered
Account 74.
[0050] Obviously, many modifications and variations of the present
invention are possible in light of the above teachings. Thus, it is
understood that within the scope of the appended claims, the
invention may be practiced otherwise than specifically described
above.
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