U.S. patent application number 12/788420 was filed with the patent office on 2010-09-23 for system and method for emulating a long/short hedge fund index in a trading system.
This patent application is currently assigned to Merrill Lynch & Co., Inc.. Invention is credited to Steven R. Umlauf.
Application Number | 20100241593 12/788420 |
Document ID | / |
Family ID | 39686709 |
Filed Date | 2010-09-23 |
United States Patent
Application |
20100241593 |
Kind Code |
A1 |
Umlauf; Steven R. |
September 23, 2010 |
System and Method for Emulating a Long/Short Hedge Fund Index in a
Trading System
Abstract
A system comprises a memory operable to store a compound index
that is based at least in part on a plurality of component indices.
The plurality of component indices comprise an international
developed markets equity index, a U.S. large-cap equity index, and
a U.S. small-cap equity index. The compound index is further based
at least in part on a plurality of weights, wherein each weight is
associated with a respective one of the plurality of component
indices. The system further comprises a processor communicatively
coupled to the memory and operable to update the plurality of
weights according to a regression analysis. The regression analysis
is based at least in part on a respective set of returns associated
with each of the plurality of component indices and with a hedge
fund index. The plurality of weights are updated such that the
compound index emulates the hedge fund index. The processor is
further operable to determine a current compound index value based
at least in part on the plurality of component indices and on the
updated plurality of weights. The processor is further operable to
transmit the current compound index value to one or more
clients.
Inventors: |
Umlauf; Steven R.; (New
York, NY) |
Correspondence
Address: |
BAKER BOTTS L.L.P.
2001 ROSS AVENUE, SUITE 600
DALLAS
TX
75201-2980
US
|
Assignee: |
Merrill Lynch & Co.,
Inc.
New York
NY
|
Family ID: |
39686709 |
Appl. No.: |
12/788420 |
Filed: |
May 27, 2010 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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12022730 |
Jan 30, 2008 |
7739178 |
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12788420 |
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11673683 |
Feb 12, 2007 |
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12022730 |
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Current U.S.
Class: |
705/36R ; 705/35;
705/37 |
Current CPC
Class: |
G06Q 40/04 20130101;
G06Q 40/00 20130101; G06Q 40/06 20130101 |
Class at
Publication: |
705/36.R ;
705/35; 705/37 |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. A system, comprising: a computer memory configured to store a
compound index that is based at least in part on: a plurality of
component indices, wherein the plurality of component indices
comprise: an international developed markets equity index; a United
States large-cap equity index; and a United States small-cap equity
index; and a plurality of weights, wherein each weight is
associated with a respective one of the plurality of component
indices; and a computer processor communicatively coupled to the
memory and operable to: update the plurality of weights according
to a regression analysis, wherein: the regression analysis is based
at least in part on a respective set of returns associated with
each of the plurality of component indices and with a hedge fund
index; and the plurality of weights are updated such that the
compound index emulates the hedge fund index; and determine a
current compound index value based at least in part on the
plurality of component indices and on the updated plurality of
weights.
2. The system of claim 1, wherein: the computer processor is
further operable to allocate a plurality of investment instruments
of a fund; the fund comprises: a first set of investment
instruments associated with the international developed markets
equity index; a second set of investment instruments associated
with the United States large-cap equity index; and a third set of
investment instruments associated with the United States small-cap
equity index; and the plurality of investment instruments are
allocated according to the updated weights.
3. The system of claim 2, wherein allocating the plurality of
investment instruments comprises generating one or more trading
orders associated with at least one of the plurality of investment
instruments.
4. The system of claim 1, wherein the hedge fund index is an equity
hedge index.
5. The system of claim 1, wherein: the hedge fund index is
associated with a long/short investment strategy; the international
developed markets equity index is a United States dollar net total
return index; the United States large-cap equity index is a 500
total return index; and the United States small-cap equity index is
a 2000 total return index.
6. The system of claim 1, wherein: the hedge fund index is based at
least in part on a plurality of hedge funds; and each of the
plurality of hedge funds comprises long equities that are hedged
with short sales of at least one of the following: equities; and
equity options.
7. The system of claim 1, wherein the updating of the plurality of
weights is based at least in part on an interest rate.
8. The system of claim 1, wherein the respective set of returns
associated with a particular component index comprises a plurality
of monthly returns associated with the particular component index;
and each monthly return is associated with a respective month from
a sampling period that spans at least twelve months.
9. The system of claim 1, wherein: each set of returns is updated
on a monthly basis; and the plurality of weights are updated on a
monthly basis.
10. A method, comprising: storing a computer memory a value of a
compound index that is based at least in part on: a plurality of
component indices, wherein the plurality of component indices
comprise: an international developed markets equity index; a United
States large-cap equity index; and a United States small-cap equity
index; and a plurality of weights, wherein each weight is
associated with a respective one of the plurality of component
indices; updating, using a computer processor, the plurality of
weights according to a regression analysis, wherein: the regression
analysis is based at least in part on a respective set of returns
associated with each of the plurality of component indices and with
a hedge fund index; the hedge fund index is based at least in part
on a plurality of hedge funds; and the plurality of weights are
updated such that the compound index emulates the hedge fund index;
and determining, using the computer processor, a current compound
index value based at least in part on the plurality of component
indices and on the updated plurality of weights.
11. The method of claim 10, further comprising: allocating a
plurality of investment instruments of a fund, wherein: the fund
comprises: a first set of investment instruments associated with
the international developed markets equity index; a second set of
investment instruments associated with the United States large-cap
equity index; and a third set of investment instruments associated
with the United States small-cap equity index; and the plurality of
investment instruments are allocated according to the updated
weights.
12. The method of claim 11, wherein allocating the plurality of
investment instruments comprises generating one or more trading
orders associated with at least one of the plurality of investment
instruments.
13. The method of claim 10, wherein the hedge fund index is an
equity hedge index.
14. The method of claim 10, wherein: the hedge fund index is
associated with a long/short investment strategy; the international
developed markets equity index is a United States dollar net total
return index; the United States large-cap equity index is a 500
total return index; and the United States small-cap equity index is
a 2000 total return index.
15. The method of claim 10, wherein: the hedge fund index is based
at least in part on a plurality of hedge funds; and each of the
plurality of hedge funds comprises long equities that are hedged
with short sales of at least one of the following: equities; and
equity options.
16. The method of claim 10, wherein the updating of the plurality
of weights is based at least in part on an interest rate.
17. The method of claim 10, wherein the respective set of returns
associated with a particular component index comprises a plurality
of monthly returns associated with the particular component index;
and each monthly return is associated with a respective month from
a sampling period that spans at least twelve months.
18. The method of claim 10, wherein: each set of returns is updated
on a monthly basis; and the plurality of weights are updated on a
monthly basis.
19. A computer readable medium tangibly embodied with executable
code for updating a compound index, the code operable when executed
by a computer processor to: store a compound index that is based at
least in part on: a plurality of component indices, wherein the
plurality of component indices comprise: an international developed
markets equity index; a United States large-cap equity index; and a
United States small-cap equity index; and a plurality of weights,
wherein each weight is associated with a respective one of the
plurality of component indices; update the plurality of weights
according to a regression analysis, wherein: the regression
analysis is based at least in part on a respective set of returns
associated with each of the plurality of component indices and with
a hedge fund index; and the plurality of weights are updated such
that the compound index emulates the hedge fund index; and
determine a current compound index value based at least in part on
the plurality of component indices and on the updated plurality of
weights.
20. The logic of claim 19, wherein: the respective set of returns
associated with a particular component index comprises a plurality
of monthly returns associated with the particular component index;
and each monthly return is associated with a respective month from
a sampling period that spans at least twelve months.
Description
RELATED APPLICATION
[0001] This application is a continuation of U.S. application Ser.
No. 12/022,730, filed Jan. 30, 2008 entitled System and Method for
Emulating a Long/Short Hedge Fund Index in a Trading System which
is a continuation-in-part of U.S. application Ser. No. 11/673,683,
filed Feb. 12, 2007 entitled System and Method for Providing a
Trading System Comprising a Compound Index.
TECHNICAL FIELD OF THE INVENTION
[0002] The present invention relates generally to electronic
trading and more specifically to a system and method for emulating
a long/short hedge fund index in a trading system.
BACKGROUND OF THE INVENTION
[0003] Traditional trading systems allow traders to pursue various
investment schemes, including mutual funds and hedge funds. Some
traders perceive hedge funds as providing greater returns than
other types of investments. However, because hedge funds are
actively managed, hedge funds are generally associated with higher
fees than other types of investments. In addition, investments in
hedge funds are generally not as liquid as investments in other
types of assets.
SUMMARY OF THE INVENTION
[0004] In accordance with the present invention, the disadvantages
and problems associated with prior trading systems have been
substantially reduced or eliminated.
[0005] In some embodiments, a system comprises a memory operable to
store a compound index that is based at least in part on a
plurality of component indices. The plurality of component indices
comprise an international developed markets equity index, a U.S.
large-cap equity index, and a U.S. small-cap equity index. The
compound index is further based at least in part on a plurality of
weights, wherein each weight is associated with a respective one of
the plurality of component indices. The system further comprises a
processor communicatively coupled to the memory and operable to
update the plurality of weights according to a regression analysis.
The regression analysis is based at least in part on a respective
set of returns associated with each of the plurality of component
indices and with a hedge fund index. The plurality of weights are
updated such that the compound index emulates the hedge fund index.
The processor is further operable to determine a current compound
index value based at least in part on the plurality of component
indices and on the updated plurality of weights. The processor is
further operable to transmit the current compound index value to
one or more clients.
[0006] In certain embodiments, a method comprises storing a
compound index that is based at least in part on a plurality of
component indices. The plurality of component indices comprise an
international developed markets equity index, a U.S. large-cap
equity index, and a U.S. small-cap equity index. The compound index
is further based at least in part on a plurality of weights,
wherein each weight is associated with a respective one of the
plurality of component indices. The method continues by updating
the plurality of weights according to a regression analysis. The
regression analysis is based at least in part on a respective set
of returns associated with each of the plurality of component
indices and with a hedge fund index. The plurality of weights are
updated such that the compound index emulates the hedge fund index.
The method continues by determining a current compound index value
based at least in part on the plurality of component indices and on
the updated plurality of weights. The method concludes by
transmitting the current compound index value to one or more
clients.
[0007] The invention has several important technical advantages.
Various embodiments of the invention may have none, some, or all of
these advantages. One advantage is that the trading system provides
a weighted compound index associated with various component
indices. In some embodiments, each component index is associated
with assets having intraday liquidity. The transaction costs of
trading these assets are generally lower than the transaction costs
associated with hedge funds. Thus, the compound index offers more
liquidity and lower fees than a hedge fund index.
[0008] Another advantage is that the trading system periodically
updates the weights of the component indices that underlie the
compound index. The trading system may configure the weights so
that the compound index emulates the performance of a hedge fund
index. Thus, the compound index may provide traders with returns
similar to those provided by a hedge fund index.
[0009] Other advantages of the present invention will be readily
apparent to one skilled in the art from the description and the
appended claims.
BRIEF DESCRIPTION OF THE DRAWINGS
[0010] For a more complete understanding of the present invention
and its advantages, reference is now made to the following
description taken in conjunction with the accompanying drawings, in
which:
[0011] FIG. 1 illustrates a trading system, according to certain
embodiments;
[0012] FIG. 2 illustrates an example compound index fund, according
to certain embodiments;
[0013] FIG. 3 illustrates example market data, according to certain
embodiments;
[0014] FIGS. 4A and 4B illustrate example returns associated with
component indices, an interest rate, and a hedge fund index,
according to certain embodiments;
[0015] FIG. 5 illustrates example weights associated with component
indices, according to certain embodiments;
[0016] FIGS. 6A and 6B illustrate a table comprising example
closing levels of compound index, according to certain embodiments;
and
[0017] FIG. 7 illustrates a flowchart for updating compound index,
according to certain embodiments.
DETAILED DESCRIPTION OF THE INVENTION
[0018] FIG. 1 illustrates a trading system 10, according to certain
embodiments. Trading system 10 may comprise one or more clients 20,
an index server 30, one or more market data servers 40, and one or
more market centers 50 communicatively coupled by one or more
networks 60.
[0019] Trading system 10 is operable to execute trading orders 12
submitted by traders 14. Trading system 10 is further operable to
provide a financial indicator that emulates a hedge fund index 22.
The financial indicator may be referred to as compound index 18.
Compound index 18 is based at least in part on component indices 24
that are proportioned according to a particular weighting scheme.
The particular weighting scheme allows compound index 18 to emulate
hedge fund index 22. Component indices 24 may be associated with
assets having intraday liquidity.
[0020] In conjunction with determining compound index 18, trading
system 10 may provide compound index fund 16. In some embodiments,
compound index fund 16 represents a liquid and tradable asset that
is available to the trading public. According to certain
embodiments, because compound index 18 emulates hedge fund index
22, compound index fund 16 provides traders 14 with both daily
liquidity and hedge-fund-like returns 26.
[0021] As explained above, compound index 18 is based at least in
part on a plurality of component indices 24. Each component index
24 is predicated on various investment instruments 28 such as, for
example, equities, debt, currencies, commodities, stocks, bonds,
futures contracts, derivatives, and/or any suitable instrument. A
particular component index 24 is generally an indicator regarding
the market value and/or performance of the particular investment
instruments 28 that underlie the particular component index 24.
Examples of component indices 24 include, but are not limited to,
the Dow Jones Industrial Average, the German DAX, the British FTSE
100, the S&P 500 Total Return Index, the U.S. Dollar Index, the
MSCI Emerging Markets Free Total Return Index, the MSCI EAFE U.S.
Dollar Net Total Return Index, and the Russell 2000 Total Return
Index. Component indices 24 may be categorized according to various
attributes. For example, the NASDAQ index may be categorized as a
technology index because it is primarily based on securities
associated with technology companies. As another example, the MSCI
Emerging Markets Free Total Return Index, which is based on
securities from global emerging markets, may be categorized as an
international emerging markets equity index. In some embodiments,
component indices 24 may be categorized as international developed
markets equity indices, U.S. large-cap equity indices, U.S.
small-cap equity indices, commodity indices, debt indices, currency
indices, and/or any suitable type of index.
[0022] In addition, or as an alternative, to component indices 24,
compound index 18 may be based at least in part on one or more
interest rates 32. In some embodiments, interest rate 32 may be a
short-term interbank lending rate. For example, compound index 18
may be based at least in part on the BBA One Month USD Libor. In
other embodiments, interest rate 32 may be a prime rate, federal
funds rate, mortgage rate, wholesale rate, retail rate, discount
rate, and/or any number and combination of suitable lending
rates.
[0023] Using current values of component indices 24, trading system
10 may determine a current value of compound index 18. As explained
above, each of the component indices 24 associated with compound
index 18 may be weighted such that compound index 18 emulates a
particular hedge fund index 22. Generally, a hedge fund index 22 is
predicated on multiple constituent hedge funds and represents an
indicator of the market value of the multiple hedge funds
associated with the particular hedge fund index 22. Compound index
18 may be configured to emulate any suitable hedge fund index 22.
Examples of hedge fund indices 22 include, but are not limited to,
the HFRI Fund Weighted Composite Index, the CSFB Credit
Suisse/Tremont Hedge Fund Index, the FTSE Hedge Index, the DOW
Jones Hedge Fund Index, the Eurekahedge Hedge Fund Index, the HFRI
Equity Hedge Index, and/or any suitable hedge fund index 22.
[0024] According to certain embodiments, hedge fund index 22
represents an index of multiple hedge funds that employ long/short
investment strategies (e.g., long/short equity strategies). An
example of such hedge fund index 22 is the HFRI Equity Hedge Index.
In some embodiments, a long/short investment strategy involves
establishing a core holding of long equities that are hedged with
short sales of stocks and/or stock index options. In other
embodiments, a long/short investment strategy involves establishing
a long position in currencies, debt, commodities, stocks, bonds,
futures contracts, derivatives, and/or any suitable investment
instrument 28 hedged with a short position in any suitable number
and combination of investment instruments 28. The holdings of a
hedge fund that employs a long/short investment strategy may be
selected based on an analysis of individual companies as well as
risks and opportunities offered by particular industries, sectors,
and/or countries. In some embodiments, a fund manager associated
with a hedge fund that employs a long/short investment strategy may
attempt to achieve neutrality and/or reduce volatility by
diversifying and/or hedging positions across individual regions,
industries, sectors, and/or market capitalization bands. By
configuring compound index 18 to replicate hedge fund index 22 that
is based on hedge funds that employ long/short investment
strategies (such as, for example, the HFRI Equity Hedge Index),
compound index 18 may replicate the performance of long/short
investment strategies.
[0025] In some embodiments, the respective weights 34 of component
indices 24 may be updated periodically (e.g., weekly, bi-weekly,
monthly, and/or according to any suitable time period). Weights 34
may be determined based at least in part on returns 26 of the
respective component indices 24 and on returns 26 of the particular
hedge fund index 22 that compound index 18 is configured to
emulate. In some embodiments, a regression analysis may be
performed to determine the respective weights 34 of the component
indices 24. The respective weights 34 of component indices 24 may
be determined such that compound index 18 emulates the performance
of the particular hedge fund index 22. Compound index 18 may
emulate the performance of hedge fund index 22 by tracking or
replicating the movements of hedge fund index 22. Because compound
index 18 may emulate hedge fund index 22, returns 26 of compound
index 18 may be similar to returns 26 of hedge fund index 22.
[0026] As explained above, trading system 10 comprises one or more
clients 20. Client 20 represents any suitable local or remote
end-user device that may be used by traders 14 to access one or
more elements of trading system 10, such as index server 30. Trader
14 may use client 20 to submit deposits, make withdrawals, request
information, and/or communicate with various components of trading
system 10. In some embodiments, trader 14 may use client 20 to
invest in funds that are managed by index server 30. A particular
client 20 may comprise a computer, workstation, telephone, Internet
browser, electronic notebook, Personal Digital Assistant (PDA),
pager, or any other suitable device (wireless, wireline, or
otherwise), component, or element capable of receiving, processing,
storing, and/or communicating information with other components of
trading system 10. Client 20 may also comprise any suitable user
interface such as a display, microphone, keyboard, or any other
appropriate terminal equipment according to particular
configurations and arrangements. It will be understood that trading
system 10 may comprise any number and combination of clients 20. In
some embodiments, client 20 may comprise a graphical user interface
(GUI) 36.
[0027] GUI 36 is generally operable to tailor and filter data
presented to trader 14. GUI 36 may provide trader 14 with an
efficient and user-friendly presentation of trading orders 12,
market data 38, and/or other suitable information. GUI 36 may
comprise a plurality of displays having interactive fields,
pull-down lists, and buttons operated by trader 14. In one example,
GUI 36 presents relevant market data 38 to trader 14 and conceals
the remaining information to reduce visual clutter. Then, upon
receiving a request from trader 14, GUI 36 expands the visual
representation of market data 38 to display account information,
market information, and/or other suitable information. GUI 36 may
include multiple levels of abstraction including groupings and
boundaries. It should be understood that the term graphical user
interface may be used in the singular or in the plural to describe
one or more graphical user interfaces 36 and each of the displays
of a particular graphical user interface 36.
[0028] Although clients 20 are described herein as being used by
"traders", it should be understood that the term "trader" is meant
to broadly apply to any user of trading system 10, whether that
user is an agent acting on behalf of a principal, a principal, an
individual, a legal entity (such as a corporation), or any machine
or mechanism that is capable of participating in transactions in
trading system 10.
[0029] Trader 14 may use client 20 to communicate with index server
30. Index server 30 is generally operable to monitor component
indices 24. Based at least in part on the movement of component
indices 24, index server 30 is operable to update compound index
18. In some embodiments, index server 30 is operable to manage
compound index fund 16 associated with compound index 18. (Compound
index fund 16 is described in detail with respect to FIG. 2.)
[0030] Index server 30 is operable to update compound index 18
periodically (e.g., hourly, daily, weekly, and/or according to any
suitable time period). In some embodiments, index server 30
re-calculates compound index 18 on a daily basis. The daily value
of a particular indicator (e.g., component index 24, compound index
18, interest rate 32, and/or hedge fund index 22) may be referred
to as the closing level 42 of that indicator. In some embodiments,
closing level 42 refers to the official value of an indicator as
published by market data server 40 at a configurable time on a
given business day. Index server 30 is operable to transmit closing
level 42 of compound index 18 to market data server 40.
[0031] Index server 30 may comprise any suitable combination of
hardware and/or software implemented in one or more modules to
provide the described functions and operations. In some
embodiments, index server 30 may comprise a general-purpose
personal computer (PC), a Macintosh, a workstation, a Unix-based
computer, a server computer, or any suitable processing device. In
some embodiments, the functions and operations described above may
be performed by a pool of multiple index servers 30. A particular
index server 30 may comprise an index memory 44 and an index
processor 46.
[0032] Index memory 44 comprises any suitable arrangement of random
access memory (RAM), read only memory (ROM), magnetic computer
disk, CD-ROM, or other magnetic or optical storage media, or any
other volatile or non-volatile memory devices that store one or
more files, lists, tables, or other arrangements of information
such as market data 38. Although FIG. 1 illustrates index memory 44
as internal to index server 30, it should be understood that index
memory 44 may be internal or external to index server 30, depending
on particular implementations. Also, index memory 44 may be
separate from or integral to other memory devices to achieve any
suitable arrangement of memory devices for use in trading system
10.
[0033] Index memory 44 is generally operable to store index logic
48. Index logic 48 generally comprises rules, algorithms, code,
tables, and/or other suitable instructions for updating compound
index 18 and managing compound index fund 16. Index memory 44 is
further operable to store market data 38, compound index fund 16,
and compound index 18.
[0034] Index memory 44 is communicatively coupled to index
processor 46. Index processor 46 is generally operable to execute
index logic 48 stored in index memory 44 to calculate compound
index 18 and to manage compound index fund 16. Index processor 46
may comprise any suitable combination of hardware and software
implemented in one or more modules to provide the described
function or operation.
[0035] According to certain embodiments, index server 30 may trade
the assets of compound index fund 16 such that compound index fund
16 tracks compound index 18. To trade the assets of compound index
fund 16, index server 30 may generate and transmit trading orders
12 to market center 50. Trading orders 12 may comprise orders to
trade investment instruments 28 such as, for example, equities,
currencies, commodities, treasury notes, debt, credit, stocks,
bonds, futures contracts, options, derivatives, and/or any suitable
instrument. Trading orders 12 may comprise bids, offers, market
orders, limit orders, stop loss orders, day orders, open orders,
GTC ("good till cancelled") orders, "good through" orders, "all or
none" orders, "any part" orders, or any other suitable order for
trading.
[0036] Index server 30 may transmit trading orders 12 to one or
more market centers 50. Market center 50 is generally operable to
receive and execute trading orders 12. Once a particular trading
order 12 is executed, market center 50 is operable to generate and
transmit a trade confirmation message to index server 30. Market
center 50 is further operable to transmit trading data 52 to market
data server 40. Trading data 52 may comprise information regarding
trading activities in market center 50. In particular, trading data
52 may comprise information regarding best bid prices, best offer
prices, trading volumes, volatility, and/or any other suitable
information regarding trading activity in market center 50. In some
embodiments, trading data 52 represents raw data regarding
conditions in market center 50.
[0037] Market centers 50 may comprise all manner of order execution
venues including exchanges, Electronic Communication Networks
(ECNs), Alternative Trading Systems (ATSs), market makers, or any
other suitable market participants. Each market center 50 may
maintain a bid and offer price for at least one investment
instrument 28 by standing ready, willing, and able to buy or sell
that investment instrument 28 at publicly quoted prices, also
referred to as market center prices. Different market centers 50
may provide different market center prices for particular
investment instruments 28. For example, a particular market center
50 may offer a particular bid price and/or offer price for a
particular investment instrument 28, while another market center 50
may offer a different bid price and/or offer price for the same
investment instrument 28.
[0038] Market center 50 may be communicatively coupled via network
60 to market data server 40. Market data server 40 is generally
operable to receive and process trading data 52 from market center
50. Market data server 40 may process trading data 52 to generate
market data 38. Market data 38 may comprise current and/or
historical information regarding any suitable index, financial
instrument, mutual fund, hedge fund, exchange traded fund ("ETF"),
interest rate 32, investment instrument 28, trader 14, and/or any
suitable number and combination of indicators regarding trading
system 10. In particular, market data 38 may comprise current
and/or historical values of component indices 24, interest rates
32, and hedge fund indices 22. In some embodiments, market data
server 40 may be operated by a financial news service organization
such as, for example, Bloomberg, L. P. In other embodiments, market
data server 40 may be operated by a market maker, brokerage firm,
bank, market center 50, and/or any suitable financial services
entity.
[0039] Market data server 40 may comprise any suitable combination
of hardware and/or software implemented in one or more modules to
provide the described functions and operations. In some
embodiments, market data server 40 may comprise a general-purpose
personal computer (PC), a Macintosh, a workstation, a Unix-based
computer, a server computer, or any suitable processing device. In
some embodiments, the functions and operations described above may
be performed by a pool of multiple market data servers 40. A
particular market data server 40 may comprise a market data memory
54 and a market data processor 56.
[0040] Market data memory 54 comprises any suitable arrangement of
random access memory (RAM), read only memory (ROM), magnetic
computer disk, CD-ROM, or other magnetic or optical storage media,
or any other volatile or non-volatile memory devices that store one
or more files, lists, tables, or other arrangements of information.
Although FIG. 1 illustrates market data memory 54 as internal to
market data server 40, it should be understood that market data
memory 54 may be internal or external to market data server 40,
depending on particular implementations. Also, market data memory
54 may be separate from or integral to other memory devices to
achieve any suitable arrangement of memory devices for use in
trading system 10.
[0041] Market data memory 54 is generally operable to store trading
data 52 from market centers 50. Market data memory 54 is further
operable to store market data logic 58. Market data logic 58
generally comprises rules, algorithms, code, tables, and/or other
suitable instructions for generating market data 38 based at least
in part on trading data 52.
[0042] Market data memory 54 may be communicatively coupled to
market data processor 56. Market data processor 56 is generally
operable to execute market data logic 58 to generate market data
38. Market data processor 56 comprises any suitable combination of
hardware and software implemented in one or more modules to provide
the described function or operation.
[0043] As explained above, clients 20, index server 30, market data
servers 40, and market centers 50 may be communicatively coupled
via one or more networks 60. Network 60 may represent any number
and combination of wireline and/or wireless networks suitable for
data transmission. Network 60 may, for example, communicate
internet protocol packets, frame relay frames, asynchronous
transfer mode cells, and/or other suitable information between
network addresses. Network 60 may include one or more intranets,
local area networks, metropolitan area networks, wide area
networks, cellular networks, all or a portion of the Internet,
and/or any other communication system or systems at one or more
locations.
[0044] It should be understood that the internal structure of
trading system 10 and the servers, processors, and memory devices
associated therewith is malleable and can be readily changed,
modified, rearranged, or reconfigured to achieve the intended
operations of trading system 10.
[0045] In operation, compound index 18 is based at least in part on
component indices 24 that are proportioned according to a
particular weighting scheme. Index server 30 is operable to
determine a respective weight 34 for each component index 24 that
underlies compound index 18. The respective weights 34 may be
determined such that compound index 18 emulates a particular hedge
fund index 22. In some embodiments, index server 30 may
re-calculate the respective weights 34 on a periodic basis (e.g.,
weekly, monthly, bi-monthly, etc.). The day on which index server
30 re-calculates the respective weights 34 may be referred to as
the rebalancing day 62.
[0046] To re-calculate the respective weights 34, index server 30
may determine, based at least in part on market data 38, returns 26
associated with component indices 24 and hedge fund index 22. The
determined returns 26 may be weekly returns 26, monthly returns 26,
and/or returns 26 associated with any suitable time period. Return
26 of a particular indicator (e.g., component index 24, interest
rate 32, and hedge fund index 22) refers to the change in value of
the particular indicator over a particular time period. For
example, a monthly return 26 of component index 24 represents the
increase or decrease in value of component index 24 over a given
month. In some embodiments, return 26 may be expressed as a
percentage, as a currency amount, and/or according to any suitable
metric.
[0047] Based at least in part on the determined returns 26, index
server 30 is operable to determine a respective weight 34 for each
component index 24 and/or for interest rate 32. According to
certain embodiments, the respective weights 34 may be determined
based at least in part on a regression analysis. The respective
weights 34 may be determined such that compound index 18 emulates
the performance of the particular hedge fund index 22.
[0048] According to certain embodiments, the regression analysis
may be based at least in part on multiple returns 26 from a
configurable sampling period 64. Sampling period 64 refers to one
or more intervals of time for which returns 26 are input into the
regression analysis. For example, if sampling period 64 is
twenty-four months, then monthly returns 26 for each of the past
twenty-four months may be input into the regression analysis to
update weights 34 of component indices 24. The sampling period 64
may be twelve months, twenty-four months, thirty-six months, and/or
any suitable period of time.
[0049] After updating the respective weights 34 of component
indices 24, index server 30 may periodically determine closing
level 42 of compound index 18. In some embodiments, index server 30
updates closing level 42 of compound index 18 on a daily basis.
Index server 30 may determine closing level 42 of compound index 18
based at least in part on closing levels 42 of component indices 24
and on the current weights 34 of component indices 24. Closing
level 42 of compound index 18 may be further based at least in part
on interest rate 32.
[0050] As explained above, weights 34 may be updated periodically
(e.g., monthly, bi-monthly, etc.). Because weights 34 are updated
based at least in part on a particular hedge fund index 22, the
performance of compound index 18 emulates the particular hedge fund
index 22.
[0051] FIG. 2 illustrates an example compound index fund 16,
according to certain embodiments. Compound index fund 16 generally
holds a plurality of investment instruments 28 from each component
index 24 associated with compound index 18. The overall performance
of compound index fund 16 depends, at least in part, on the
particular investment instruments 28 held by compound index fund
16. The proportions of investment instruments 28 in compound index
fund 16 depend, at least in part, on weights 34 associated with
component indices 24.
[0052] An example illustrates certain embodiments. In this example,
compound index fund 16 is associated with three component indices
24--Component Index X, Component Index Y, and Component Index Z.
Component Index X is associated with Securities A-D, Component
Index Y is associated with Notes E-J, and Component Index Z is
associated with Commodities K-M. Compound index fund 16 is
associated with compound index 18, which is configured to emulate a
particular hedge fund index 22. In this example, based at least in
part on a regression analysis of Component Indices X, Y, and Z and
on the particular hedge fund index 22, index server 30 determines
that Component Index X is associated with Weight S, Component Index
Y is associated with Weight T, and Component Index Z is associated
with Weight U.
[0053] In the present example, compound index fund 16 holds each of
Securities A-D, each of Notes E-J, and each of Commodities K-M. The
number of Securities A-D in compound index fund 16 is proportional
to Weight S. The number of Notes E-J in compound index fund 16 is
proportional to Weight T. The number of Commodities K-M in compound
index fund 16 is proportional to Weight U. Index server 30 may
re-calculate Weights S, T, and U periodically. If the
re-calculation causes a change in any of Weights S, T, and U, index
server 30 may adjust the proportions of investment instruments 28
in compound index fund 16 accordingly. To adjust the proportions of
investment instruments 28 in compound index fund 16, index server
30 may generate and transmit trading orders 12 to market centers
50.
[0054] It should be understood that, in a particular component
index 24, the underlying investment instruments 28 (e.g.,
securities, notes, etc.) may be represented in different
proportions. In other words, a particular component index 24 may
internally weigh the investment instruments 28 that underlie that
particular component index 24. Investment instruments 28 in some
indices may be price weighted, market-value weighted, and/or
capitalization weighted. Index server 30 may configure compound
index fund 16 such that the proportions of investment instruments
28 in compound index fund 16 reflect weights 34 of component
indices 24 as well as any internal weightings of a particular
component index 24.
[0055] In the foregoing example, compound index fund 16 holds each
investment instrument 28 from each of Component Indices X, Y, and
Z. In other embodiments, compound index fund 16 may hold
representative investment instruments 28 from each component index
24 according to a statistical sampling of the market.
[0056] FIGS. 3-6 illustrate, in part, sample data and calculations
regarding an example compound index 18. In particular, FIGS. 3-6
illustrate example returns 26 of component indices 24, example
weights 34 of component indices 24, and example closing levels 42
of compound index 18, according to certain embodiments. In the
present example, compound index 18 is configured to emulate a
particular hedge fund index 22--namely, the HFRI Fund Weighted
Composite Index ("the HFRI Index"). In this example, compound index
18 is based at least in part on five component indices 24--namely,
the S&P 500 Total Return Index ("the SPTR index"), the Russell
2000 Total Return Index ("the RU20 index"), the MSCI EAFE U.S.
Dollar Net Total Return Index ("the INT index"), the MSCI Emerging
Markets Free Total Return Index ("the EMG index"), and the U.S.
Dollar Index ("the USD index"). In addition, compound index 18 is
based at least in part on a particular interest rate 32--the BBA
One Month USD Libor ("the Libor").
[0057] FIG. 3 illustrates example market data 38 that is stored in
index memory 44 and that is used to determine compound index 18,
according to certain embodiments. Index server 30 receives market
data 38 from market data server 40 on a substantially continuous
basis. In this example, market data 38 comprises closing levels 42
of the five component indices 24, the Libor, and the HFRI index.
Index server 30 is operable to store this information in index
memory 44. As illustrated in FIG. 3, for Nov. 30, 2006, index
server 30 determines, based at least in part on market data 38,
that the SPTR index is valued at 2155.885254, the RU20 index is
valued at 3317.79004, the INT index is valued at 4388.808, the EMG
index is valued at 302.957, and so forth.
[0058] In some embodiments, market data server 40 does not publish
each day a particular closing level 42 for hedge fund index 22. In
certain embodiments, closing level 42 for hedge fund index 22 may
be published monthly.
[0059] According to some embodiments, returns 26 of the various
indicators (e.g., component indices 24, interest rate 32, and hedge
fund index 22) may be calculated for configurable intervals (e.g.,
weeks, months, etc.). In certain embodiments, the last day of a
given interval may be referred to as the observation day 66.
Trading system 10 may be configured such that observation day 66
corresponds with the day on which market data server 40 publishes
closing level 42 of hedge fund index 22.
[0060] In the present example, returns 26 of the various indicators
are determined on a monthly basis. In this example, observation day
66 is the last day of each calendar month.
[0061] FIGS. 4A and 4B illustrate monthly returns 26 associated
with the five component indices 24, the Libor, and the HFRI index.
In this example, index server 30 determines monthly returns 26 as
follows:
Libor return=Libor closing level.sub.OD-1*(ACTUAL/360)/100 [0062]
The returns of the respective indices (e.g., the SPTR, RU20, INT,
EMG, USD, and HFRI indices) are determined according to the
following formula: return of respective index=(respective index
closing level.sub.OD/respective index closing level.sub.OD-1)-1
[0063] In the foregoing formulas, "closing level.sub.OD" refers to
closing level 42 of the particular indicator (e.g., index or Libor)
on a given observation day 66. "Closing level.sub.OD-1" refers to
closing level 42 of the particular indicator (e.g., index or Libor)
one calendar month prior to the given observation day 66. With
respect to the Libor return 26, "ACTUAL" refers to the actual
number of days in the calendar month in which the given observation
day 66 resides.
[0064] In the present example, index server 30 determines the
monthly Libor return 26 for November 2006. In particular, based at
least in part on market data 38 from FIG. 3, index server 30
determines that Libor closing level.sub.OD-1=5.32 (e.g., closing
level 42 of the Libor on the prior observation day 66). Index
server 30 further determines that ACTUAL=30 (the actual number of
days in November). Thus, index server 30 determines that the
monthly Libor return 26 for November 2006 is 0.004433333. Index
server 30 stores the determined Libor return 26 in index memory
44.
[0065] In the present example, index server 30 further determines
the monthly SPTR index return 26 for November 2006. Based at least
in part on market data 38 illustrated in FIG. 3, index server 30
determines that the SPTR index closing level.sub.OD=2155.885254
(e.g., closing level 42 of the SPTR index as of Nov. 30, 2006).
Index server 30 further determines that SPTR index closing
level.sub.OD-1=2115.653809 (e.g., closing level 42 of the SPTR
index as of Oct. 31, 2006). Accordingly, index server 30 determines
that the monthly SPTR index return 26 for November 2006 is
0.019016081. Index server 30 stores the determined monthly return
26 of SPTR index in index memory 44. In the present example, index
server 30 repeats the foregoing procedure with respect to the RU20,
INT, EMG, USD, and HFRI indices.
[0066] In the present example, index server 30 stores monthly
returns 26 for sampling period 64 of twenty-four months. Monthly
returns 26 from sampling period 64 are input into a regression
calculation for updating weights 34 associated with component
indices 24. Each month, returns 26 from the earliest month in
sampling period 64 may be discarded and returns 26 from the most
recent month may be added to returns 26 associated with sampling
period 64.
[0067] In some embodiments, market data server 40 may not publish
closing level 42 of hedge fund index 22 for a particular
observation day 66 until one or more days after the particular
observation day 66. Accordingly, in some embodiments, index server
30 may not determine return 26 of hedge fund index 22 for a
particular month until sometime during the following month.
[0068] In the present example, index server 30 is configured to
rebalance weights 34 associated with the five component indices 24
once each month. The day on which index server 30 rebalances the
respective weights 34 is referred to as rebalancing day 62. In this
example, rebalancing day 62 is the second business day following
the day on which market data server 40 publishes the monthly
closing level 42 (e.g., "end update") of the HFRI index. As
explained above, index server 30 may, on each rebalancing day 62,
re-calculate the respective weights 34 associated with component
indices 24. Although the present example illustrates rebalancing
day 62 as the second business day following the publication of the
end update of the HFRI index, it should be understood that
rebalancing day 62 may be any suitable day (e.g., last day of the
month, first day of the month, first day of the week, etc.).
[0069] FIG. 5 illustrates the results of an example linear
regression analysis based at least in part on returns 26
illustrated in FIGS. 4A and 4B. The respective weights 34 of the
five component indices 24 are determined in this example by
performing a multiple linear regression according to the following
fon iula:
HFRI index return-Libor return=Constant+Weight A*(SPTR index
return-Libor return)+Weight B*(RU20 return-Libor return)+Weight
C*(INT index return-Libor return)+Weight D*(EMG index return-Libor
return)+Weight E*USD index return
[0070] In the foregoing formula, "return" refers to the determined
monthly return 26 of the respective indicator (i.e., Libor or
index) for the second month preceding the current rebalancing day
62. Thus, if the current rebalancing day 62 is Jan. 4, 2007,
"return" refers to return 26 for November 2006. In some
embodiments, the reason for not including returns 26 from December
2006 is that market data server 40 may not publish the December
return 26 of hedge fund index 22 until the end of January or the
beginning of February. In other embodiments, however, returns 26
from the most recent month may be included in the regression
analysis.
[0071] In this example, the value of "Constant" may be determined
by executing the multiple linear regression according to a least
squares method. Like Weights A-E, the actual value of "Constant"
may be solved for by executing the linear regression.
[0072] In this example, sampling period 64 for the regression
analysis is the twenty-four month period ending on the second month
preceding the current rebalancing day 62. Thus, if the current
rebalancing day 62 is Jan. 4, 2007, sampling period 64 is from
December 2004 through November 2006.
[0073] In the present example, on Jan. 4, 2007, index server 30
performs the foregoing linear regression based at least in part on
returns 26 illustrated in FIGS. 4A and 4B. According to the
regression analysis, index server 30 determines that Weight A is
-0.198, Weight B is 0.176, Weight C is 0.219, Weight D is 0.090,
and Weight E is -0.009. Index server 30 stores Weights A-E in index
memory 44.
[0074] After updating Weights A-E on a given rebalancing day 62,
index server 30 may use Weights A-E during the ensuing month to
determine closing level 42 of compound index 18 on a daily basis.
FIGS. 6A and 6B illustrate a table comprising example closing
levels 42 of compound index 18, according to certain embodiments.
In the present example, index server 30 is configured to determine
closing level 42 of compound index 18 on each business day. To
determine closing level 42 of compound index 18 on a given day,
index server 30 first determines the accumulated total return
("ATR") associated with the Libor and the component indices 24. ATR
is determined according to the following formula:
ATR=Weight X*(Libor.sub.RD*(DAYS/365))+Weight A*((SPTR index
closing level.sub.ICD/SPTR index closing level.sub.IRD)-1)+Weight
B*((RU20 index closing level.sub.ICD/RU20 index closing
level.sub.RD)-1)+Weight C*((INT index closing level.sub.ICD/INT
index closing level.sub.RD)-1)+Weight D*((EMG index closing
level.sub.ICD/EMG index closing level.sub.RD)-1)+Weight E*((USD
index closing level.sub.ICD/USD index closing level.sub.RD)-1)
In the foregoing formula, "ICD" refers to the current day. "RD"
refers to the most recent rebalancing day 62. "DAYS" refers to the
actual number of days from (but excluding) the most recent
rebalancing day 62 to (and including) the current day. "Weight X"
equals (1-(the sum of Weights A through D)).
[0075] In the present example, the current day is Jan. 8, 2007. On
that day, index server 30 determines, based at least in part on
market data 38, that SPTR index closing level.sub.ICD=2178.80249.
Based at least in part on market data 38 stored in index memory 44,
index server 30 determines that SPTR index closing
level.sub.RD=2186.602783 (i.e., closing level 42 of the SPTR index
on the most recent rebalancing day 62--Jan. 4, 2007). Index server
30 determines that Weight A is equal to -0.198. Index server 30
repeats the foregoing procedure for the other component indices 24.
Based at least in part on the foregoing formula, index server 30
determines that the ATR is equal to -0.0066.
[0076] After determining the ATR, index server 30 determines
closing level 42 of compound index 18 for the current day. In the
present example, index server 30 is configured to determine the
closing level 42 of compound index 18 according to the following
formula:
Compound index closing level.sub.ICD)=(ATR+1)*compound index
closing level.sub.RD
In the foregoing formula, "ICD" refers to the current day. "RD"
refers to the most recent rebalancing day 62. In the present
example, index server 30 determines from data stored in index
memory 44 that compound index closing level.sub.RD is 1460.15
(i.e., the compound index closing level 42 on Jan. 4, 2007). Based
at least in part on the determined ATR, index server 30 then
determines that the compound index closing level 42 for the current
calculation day is 1450.56. In the present example, index server 30
transmits the determined compound index closing level 42 to clients
20 and to market data server 40. Market data server 40 may then
disclose the determined compound index closing level 42 to market
centers 50 and/or to other traders 14 in trading system 10.
[0077] In some embodiments, weights 34 of component indices 24 may
be subject to constraints. In some embodiments, constraints
represent limits that are configured to maintain compound index 18
within configurable thresholds. In the event that index server 30
imposes a particular constraint for a particular component index
24, the regression analysis may continue with respect to the other
component indices 24 as if no constraints had been imposed. In the
foregoing example, the respective weights 34 of the SPTR, INT, and
USD indices may be constrained to have a value of greater than or
equal to minus one and less than or equal to one. In this example,
weight 34 of the EMG index may be constrained to be greater than or
equal to zero and less than or equal to one, and weight 34 of the
RU20 index may be constrained to be greater than or equal to -0.3
and less than or equal to one. Although particular constraint
values are described herein, it should be understood that index
server 30 may be configured to impose any suitable number and
combination of constraints.
[0078] In the foregoing example, Weight A associated with the SPTR
index has a negative value. In some embodiments, any negative
weight value has the same effect on compound index 18 as if a short
position had been created in the applicable component index 24.
[0079] In some embodiments, the sum of weights 34 of component
indices 24 may exceed one. In certain embodiments, if the sum of
weights 34 exceeds one, the computation of compound index 18 is
associated with an element of leverage exposure.
[0080] In the foregoing example, compound index 18 is associated
with five component indices 24. It should be understood, however,
that compound index 18 may be associated with any number and
combination of component indices 24.
[0081] Component indices 24 in the foregoing example comprise the
SPTR, RU20, NT, EMG, and USD indices. In other embodiments,
however, component indices 24 may comprise some or none of the
foregoing indices. In certain embodiments, component indices 24 may
comprise one or more commodity indices, one or more debt indices,
one or more currency indices, one or more equity indices, and/or
other indices associated with any suitable class of investment
instruments 28.
[0082] In the foregoing example, compound index 18 emulates the
HFRI index. The HFRI index generally represents an index of a
plurality of constituent hedge funds. In some embodiments, the HFRI
index includes both U.S. domestic and off-shore hedge funds.
Although the foregoing example illustrates a particular compound
index 18 that emulates the HFRI index, it should be understood that
compound index 18 may be configured to emulate any suitable hedge
fund index 22 and/or any number and combination of hedge fund
indices 22. For example, compound index 18 may be configured to
emulate the CSFB Credit Suisse/Tremont Hedge Fund Index, the FTSE
Hedge Index, the DOW Jones Hedge Fund Index, the Eurekahedge Hedge
Fund Index, and/or any suitable hedge fund index 22. As another
example, compound index 18 may be configured to emulate the HFRI
Equity Hedge Index and/or any suitable hedge fund index 22 that
represents the performance of multiple hedge funds that employ
long/short investment strategies.
[0083] In the foregoing example, component indices 24 comprise at
least the SPTR index. In some embodiments, the SPTR index is the
total return version of the S&P 500 Index. The S&P 500
Index is associated with the stocks of five hundred large-cap
companies (mostly U.S. companies). According to certain
embodiments, dividends may be reinvested on a daily basis. In some
embodiments, Standard & Poor's acts as the index sponsor for
the SPTR index. Although the foregoing example illustrates compound
index 18 associated with the SPTR index, it should be understood
that, in some embodiments, compound index 18 may not be associated
with the SPTR index. According to certain embodiments, the SPTR
index is an example of a U.S. large-cap equity index. In certain
embodiments, compound index 18 may be based at least in part on any
suitable component index 24 associated with securities of large-cap
U.S. companies.
[0084] Component indices 24 in the foregoing example further
comprise the RU20 index. According to certain embodiments, the RU20
index may be based at least in part on the Russell 2000 Index,
which measures the performance of the 2,000 smallest companies in
the Russell 3000 Index. The Russell 3000 Index is generally formed
by listing U.S. companies in descending order by market
capitalization. The top 3,000 stocks (those of the 3,000 largest
U.S. companies) make up the Russell 3000 Index. The top 1,000 of
those companies make up the large-cap Russell 1000 Index, and the
bottom 2,000 (the smallest companies) make up the Russell 2000
Index. According to certain embodiments, the RU20 index is an
example of a U.S. small-cap equity index. In some embodiments, the
Russell Investment Group acts as the index sponsor for the RU20
index. Although the foregoing example illustrates compound index 18
associated with the RU20 index, it should be understood that, in
some embodiments, compound index 18 may not be associated with the
RU20 index. In certain embodiments, compound index 18 may be based
at least in part on any suitable component index 24 associated with
securities of small-cap U.S. companies.
[0085] In the foregoing example, component indices 24 further
comprise the INT index. In some embodiments, the INT index is based
at least in part on the MSCI EAFE Index (Europe, Australia, Far
East) (the "EAFE Index"). According to certain embodiments, the
EAFE Index is a free float-adjusted market capitalization index
that is designed to measure developed market equity performance,
excluding the U.S. and Canada. In some embodiments, Morgan Stanley
Capital International acts as the index sponsor of the INT index.
Although the foregoing example illustrates compound index 18
associated with the INT index, it should be understood that, in
some embodiments, compound index 18 may not be associated with the
INT index. In some embodiments, the INT index is an example of an
international developed markets equity index. In certain
embodiments, compound index 18 may be based at least in part on any
suitable component index 24 associated with equity performance in
developed markets.
[0086] Component indices 24 in the foregoing example further
comprise the EMG index. In some embodiments, the EMG index is based
at least in part on the MSCI EMF U.S. Dollar Index ("the EMF
Index"). According to certain embodiments, the EMF Index is a free
float-adjusted market capitalization index that is designed to
measure equity market performance in global emerging markets. In
some embodiments, Morgan Stanley Capital International acts as the
index sponsor of the EMG index. Although the foregoing example
illustrates compound index 18 associated with the EMG index, it
should be understood that, in some embodiments, compound index 18
may not be associated with the EMG index. According to certain
embodiments, the EMG index is an example of an international
emerging markets equity index. In certain embodiments, compound
index 18 may be based at least in part on any suitable component
index 24 associated with equity market performance in global
emerging markets.
[0087] In the foregoing example, component indices 24 further
comprise the USD index. According to certain embodiments, the USD
index indicates the general international value of the U.S. dollar.
In particular, the USD index may average the exchange rates between
the U.S. dollar and a plurality of major world currencies. Although
the foregoing example illustrates compound index 18 associated with
the USD index, it should be understood that, in some embodiments,
compound index 18 may not be associated with the USD index. In
certain embodiments, compound index 18 may be based at least in
part on any suitable component index 24 associated with one or more
currencies and/or one or more exchange rates.
[0088] In the foregoing example, compound index 18 is based at
least in part on the Libor (e.g., BBA One Month USD Libor). The
Libor, which is published by the British Bankers Association,
generally represents a particular interest rate 32 that is
applicable to the short-term international interbank market. In
some embodiments, the Libor applies to large loans borrowed for
anywhere from one day to five years. The short-term international
interbank market associated with the Libor allows banks with
liquidity requirements to borrow from other banks with surpluses,
enabling banks to avoid holding excessively large amounts of their
asset base as liquid assets. In some embodiments, the Libor is
officially fixed once a day. Although the foregoing example
illustrates interest rate 32 associated with the Libor, it should
be understood that, in some embodiments, compound index 18 may not
be associated with the Libor. In certain embodiments, compound
index 18 may be based at least in part on any number and
combination of interest rates 32.
[0089] In the foregoing example, weights 34 of component indices 24
are determined according to a linear regression. In other
embodiments, however, weights 34 of component indices 24 may be
determined according to a nonlinear regression, kernel regression,
simple linear regression, multiple linear regression, polynomial
interpolation, numerical integration, and/or any suitable number
and combination of formulas, equations, tables, and/or
algorithms.
[0090] In some embodiments, trading system 10 is operable to detect
a market disruption event. A market disruption event may comprise a
failure of the sponsor of component index 24 to publish closing
level 42 of component index 24. In some embodiments, a market
disruption event may comprise a disruption and/or failure
associated with one or more market centers 50. In some embodiments,
if index server 30 detects a market disruption event that affects a
particular component index 24, index server 30 may determine
closing level 42 of that particular component index 24 based at
least in part on prevailing market conditions, last reported
trading prices, and/or other information that is relevant to the
valuation of the affected component index 24. According to certain
embodiments, if index server 30 detects a market disruption event
associated with a closure of one or more market centers 50, index
server 30 may set closing level 42 of compound index 18 to be equal
to closing level 42 of compound index 18 on the previous business
day. In such embodiments, once market centers 50 reopen, index
server 30 may determine a current closing level 42 of compound
index 18.
[0091] The invention has several important technical advantages.
Various embodiments of the invention may have none, some, or all of
these advantages. One advantage is that trading system 10 provides
a weighted compound index 18 associated with various component
indices 24. In some embodiments, each component index 24 is
associated with assets having intraday liquidity. The transaction
costs of trading these assets are generally lower than the
transaction costs associated with hedge funds. Thus, compound index
18 offers more liquidity and lower fees than hedge fund index
22.
[0092] Another advantage is that trading system 10 periodically
updates weights 34 of component indices 24 that underlie compound
index 18. Trading system 10 may configure weights 34 so that
compound index 18 emulates the performance of hedge fund index 22.
Thus, the compound index 18 may provide traders 14 with returns 26
similar to those provided by hedge fund index 22. In some
embodiments, because compound index 18 emulates one or more hedge
fund indices 22, compound index 18 provides a benchmark for the
performance of alternative investments such as, for example, funds
of funds, hedge funds, and investable hedge fund indices 22.
[0093] FIG. 7 illustrates a flowchart for updating compound index
18, according to certain embodiments. The method begins at step 702
by storing in index memory 44 compound index 18. Compound index 18
may be based at least in part on interest rate 32 and/or on a
plurality of component indices 24. The plurality of component
indices 24 may comprise an equity index, a debt index, a commodity
index, a currency index, and/or an index associated with any
suitable number and combination of classes of investment
instruments 28. In index memory 44, each component index 24 may be
associated with a respective weight 34.
[0094] At step 704, index server 30 determines whether the current
day is rebalancing day 62. If index server 30 determines at step
704 that the current day is not rebalancing day 62, the method
continues to step 720. If, however, index server 30 determines at
step 704 that the current day is rebalancing day 62, then at step
706 index server 30 may determine one or more monthly returns 26
for each of the plurality of component indices 24. In some
embodiments, index server 30 may determine the monthly returns 26
based at least in part on market data 38 from market data server
40.
[0095] At step 708, index server 30 determines one or more monthly
returns 26 for a particular interest rate 32. At step 710, index
server 30 determines one or more monthly returns 26 for a
particular hedge fund index 22 that is emulated by compound index
18.
[0096] At step 712, index server 30 may execute a linear regression
to determine updated weights 34. Each of the updated weights 34 may
be associated with a respective component index 24. The linear
regression may be based at least in part on the determined returns
26 associated with component indices 24, the particular interest
rate 32, and/or the particular hedge fund index 22. The linear
regression may use monthly return data for a configurable sampling
period 64 of time (e.g., twelve months, twenty-four months, etc.).
The linear regression may be executed such that compound index 18
emulates the particular hedge fund index 22. At step 714, index
server 30 may store the updated weights 34 in index memory 44.
[0097] In certain embodiments, compound index 18 may be associated
with compound index fund 16. Compound index fund 16 may comprise a
plurality of investment instruments 28 and may be managed by index
server 30. At step 716, index server 30 may, based at least in part
on the updated weights 34, adjust the allocation of investment
instruments 28 in compound index fund 16. As an example, a
particular compound index 18 may comprise a first set of investment
instruments 28 corresponding to a first component index 24
associated with a first weight 34, a second set of investment
instruments 28 corresponding to a second component index 24
associated with a second weight 34, and a third set of investment
instruments 28 corresponding to a third component index 24
associated with a third weight 34. Upon updating the first, second,
and third weights 34, index server 30 may adjust the number and/or
type of investment instruments 28 in compound index fund 16 in
proportion to the updated first, second, and third weights 34. In
some embodiments, to adjust the proportions of investment
instruments 28, index server 30 may generate and transmit to market
center(s) 50 one or more trading orders 12.
[0098] At step 718, index server 30 determines a current closing
level 42 for each component index 24. Index server 30 may determine
the current closing levels 42 of component indices 24 based at
least in part on market data 38 from market data server 40. At step
720, index server 30 determines closing level 42 of compound index
18. The determination may be based at least in part on the most
recently determined set of weights 34 associated with component
indices 24. The determination of closing level 42 of compound index
18 may be further based at least in part on the plurality of
current closing levels 42 of component indices 24. At step 722,
index server 30 transmits closing level 42 of compound index 18 to
one or more clients 20 and/or to market data server 40. In some
embodiments, index server 30 and/or market data server 40 may
transmit closing level 42 of compound index 18 to one or more
market centers 50. The method then ends.
[0099] Although the present invention has been described in detail,
it should be understood the various changes, substitutions, and
alterations can be made hereto without departing from the scope of
the invention as defined by the appended claims.
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