Abstract:
Systems and techniques for organizing and managing investment funds. An investment fund is organized according to an agreement between a managing entity and a plurality of investors, with provisions for compensation for investor losses occurring due to declines in investment value. The risk associated with the obligation for compensation is borne by the managing entity, and the agreement prescribes management fees in an amount calculated to compensate the managing entity for this additional risk. When an event occurs triggering a compensation obligation, the managing entity contributes the required sum, suitably drawn from a previously established compensation fund sufficient to cover the maximum possible obligation.

Description:
FIELD OF THE INVENTION 
       [0001]    The present invention relates generally to improved methods and systems for providing financial management services. More specifically, the invention relates to advantageous systems and techniques for designing, marketing, and managing an investment fund, such as a hedge fund, a mutual fund, or the like that provides loss protection to shareholders and better aligns the interests of shareholders and fund managers. 
       BACKGROUND OF THE INVENTION 
       [0002]    Numerous investment vehicles are available to investors, with most having both the potential for returns and the risk of loss. One popular investment vehicle is a managed investment fund, with investors depositing money to be managed by a third party for a fee. By pooling the assets of multiple investors, an investment company can give investors access to a wider range of securities than the investors themselves would individually have typically been able to access. Also, the investment company is able to gain economies of scale in operation and to negotiate reduced trading costs. One exemplary investment fund is a hedge fund, formed by agreement between a general partner and a plurality of limited partners. A hedge fund is a private investment limited partnership fund that is typically not required to register under securities laws and is free from many securities regulations, such as liquidity requirements and restrictions on the types of investment vehicles that may be purchased. As one example, corporate institutions, high net worth individuals and private partnerships may invest in derivatives, go short, use leverage, or complex combinations of such vehicles to attempt to manage risk while achieving a particular investment goal. 
         [0003]    The general partner of a hedge fund charges fees to the limited partners, with the fees often being directly related to the investment returns generated by the fund. One common fee arrangement is that the general partner receives fees of 20% of the investment return of the fund. Other types of funds often charge fees that are related to, or influenced by, the investment returns produced by the fund. For example, a fund might charge a fee of 0.5% of the sum tinder management. This does not explicitly compensate the entity managing the fund based on the performance of the fund, but a high performing fund will tend to attract more capital, so that the fees collected will often tend to increase with fund performance. 
         [0004]    When a fund performs poorly, or incurs losses, the investors suffer the losses. The manager&#39;s fee may decrease, but the typical third party manager does not share the losses of the fund. As a result, the typical structure of fund management fees tends to create a divergence of interests between managers and investors. Investors are motivated to seek returns and avoid losses, but the typical structure of management fees tends to create a much stronger incentive to pursue high returns than to avoid losses. 
       SUMMARY OF THE INVENTION 
       [0005]    Among its several aspects, the present invention recognizes that there exists a need for systems and techniques for creating and structuring investment funds and compensation for managers managing the funds that will create a closer commonality of interest between investors and managing entities. Further, there may be investors willing to forego upside return for increased protection against downside risk. According to one aspect, the present invention addresses systems and techniques for compensating investors for losses, along with an investment fee structure calculated to compensate a fund manager or an entity managing a fund for sharing the risk of loss. Thus, in accordance with one aspect of the invention, a fund may compensate investors for losses up to a prescribed limit, preferably by establishing a reserve fund contributed by the fund manager or managing entity based on the amount invested. The management fee structure is set based so as to provide the manager or managing entity with a higher compensation as a result of the reduced risk faced by investors as a result of the loss compensation feature. For example, the management fee may be 50% of an investors return. If an investor withdraws capital while showing a loss, an appropriate sum is allocated to the investor from a reserve fund, based on the investor losses and the compensation limit. 
         [0006]    A more complete understanding of the present invention, as well as further features and advantages of the invention, will be apparent from the following Detailed Description and the accompanying drawings. 
     
     
       BRIEF DESCRIPTION OF THE DRAWINGS 
         [0007]      FIG. 1  illustrates an investment fund structure according to an aspect of the present invention; 
           [0008]      FIG. 2  illustrates a data processing system for managing an investment fund according to an aspect of the present invention; and 
           [0009]      FIG. 3  illustrates a process of investment fund creation, marketing, and management according to an aspect of the present invention. 
       
    
    
     DETAILED DESCRIPTION 
       [0010]      FIG. 1  illustrates an investment fund structure  100  according to an aspect of the present invention. For the sake of illustration, the fund  100  is a hedge fund based on a contractual agreement between a general partner  102  and a plurality of limited partners  104 A- 104 J. The fund  100  includes an investment pool  106 , contributed primarily by the limited partners  104 A- 104 J and used to make various investments. The investment pool  102  is under the control of the general partner  102 . The general partner  102  makes investments and manages the operations of the fund  100 . 
         [0011]    In addition to the investment pool  106 , the fund  100  also includes an additional loss compensation reserve  108 , which is contributed by the general partner  102  out of the funds of the general partner  102 . The loss compensation reserve  108  may suitably be based on the total funds invested. The loss compensation reserve  108  may be held by a bank  110 , or some other trusted intermediary or fiduciary, and the terms under which the reserve  108  is held may include restrictions on withdrawals commensurate with providing assurance that the reserve  108  will be administered to compensate for losses as agreed. 
         [0012]    The operation of the fund  100  is typically governed by an agreement between the general partner  102  and the limited partners  104 A- 104 J, with the agreement suitably providing for the mechanics of investment and redemption, time that an investment must remain deposited before redemption is allowed, terms of compensation for the general partner  102 , details of loss compensation for the limited partners  104 A- 104 J, and other necessary details for management of the fund  100 . 
         [0013]    In the present example, the manager&#39;s compensation is based on the positive return generated by the fund  100 , for example, 50%, and the loss compensation for a limited partner is 10% of the investment of the limited partner. General partners in traditional hedge funds charge a fee of 20% of the fund&#39;s return, and the larger fee of the fund  100  reflects the greater risk borne by the general partner. 
         [0014]    In a typical scenario, the general partner  102  will solicit investors, presenting information relating to characteristics and desired investment goals of the fund  100 , and will, before or after such solicitations, provide necessary infrastructure and personnel in order to operate the fund. The costs of any infrastructure and personnel, such as office space, trading computers, salaries of support staff, researchers and traders, for example, will typically be investments made by the general partner, with the investment pool  106  contributed by the limited partners being reserved for investments to be made by the fund  100 . Once the limited partners  104 A- 104 J have agreed to participate in the fund  100  and have provided capital, the fund  100  begins its investment operations. If the fund  100  is so structured, additional investors may be allowed to invest in and participate in the fund by becoming additional limited partners. 
         [0015]    If a limited partner incurs losses, in accordance with the invention, these losses may be compensated according to a schedule prescribed in the agreement between the general partner  102  and the limited partners  104 A- 104 J. The schedule may prescribe factors such as the length of time the investment must be held in order to be eligible for loss compensation, the conditions under which loss compensation is to be available, and the limits on loss compensation, for example, the 10% of the limited partner&#39;s investment referred to above. The conditions under which loss compensation is to be available may include one or more of a number of different conditions. For example, compensation may be available if a limited partner has redeemed all or part of his investment at a loss after holding the investment for the minimum prescribed period. To take another example, compensation may be available if an investor claims compensation after having shown a paper loss on an investment for a prescribed period. In such a case, the agreement between the general partner  102  and the limited partners  104 A- 104 J might prescribe that a subsequent redemption by the investor might be reduced to account for the compensation already received if the value of the limited partner&#39;s investment partially or fully recovers. As another example, as an incentive to reduce capital flight from the fund, one level of compensation may be available if funds were withdrawn and a different higher level of compensation may apply if a paper loss lasts a predetermined time, but funds are left invested. 
         [0016]    To take an example, suppose that an initial investment pool  106  is funded with $1,000,000, based on investments of $100,000 from each of ten limited partners  104 A- 104 J. The general partner contributes a sum of 10% of the initial investment pool, or $100,000 to the compensation fund  108 . After 6 months, the value of the investment pool  106  has declined by 15%, to $85,000, and the proportionate share of each of the limited partners  104 A- 104 J is $85,000. The value of the compensation fund  108  is still $100,000 or slightly above if invested in a relatively risk free vehicle. At this point, if limited partner  104 A withdraws his or her investment) he or she will receive $95,000, which is the value of the investment at the time of withdrawal of  106  $85,000, plus compensation up to the agreed limit, which is 10% of the original investment, or $10,000. After a further 6 months, if the value of the investment pool has recovered from $765,000 ($850,000(minus limited partner  104 A&#39;s withdrawal of $85,000) to $900,000, then the original loss of the remaining limited partners  104 A- 104 J has now been fully recovered. The remaining compensation fund is $90,000) and sufficient to satisfy the maximum possible claims of the nine remaining limited partners. If at this point limited partner  104 B withdraws from the fund  100 , he or she will receive $100,000 from the investment pool  106 , and will not receive any compensation. The general partner  102  may now withdraw $10,000 from the loss compensation fund  108 , because $80,000 is now sufficient to satisfy the maximum possible claims of each of the eight remaining limited partners. Alternatively, a new limited partner can now join the fund without requiring additional funds to be added to the loss compensation fund  108 . 
         [0017]    If after a further 6 months the value of the investment pool stands at $1,000,000, this value now represents a 25% gain for the remaining eight limited partners over their initial investment of $800,000. At this point, if limited partner  104 C withdraws from the fund  100 , the proportionate gross share of the limited partner  104 C is $125,000, but this amount is reduced by $12,500, representing the management fee (50% of the gain of $25,000) owed to the general partner. The value of the investment pool  106  is now $875,000, and the compensation fund  108  can be reduced to $70,000. While not presently preferred, as an alternative, the loss compensation pool can be contractually set up so that no money is withdrawn from it by the general partner so that remaining investors have greater absolute dollar protection, or such greater protections could be offered only if limited partners remain invested for a prescribed period. 
         [0018]    Suppose now that a limited partner is able to claim compensation if, for example, the value of his or her investment depreciates by a prescribed amount for a prescribed length of time, such as 25% for two years. Continuing with our example, we assume the value of the investment fund  106  now declines from $875,000 to $525,000, and remains at or below that value for two years. Suppose that all seven of the remaining limited partners then claim compensation, but do not withdraw their investments. The general partner then pays out $70,000 from the compensation fund  108 , $10,000 to each of the remaining limited partners, exhausting the fund  108  and satisfying all claims. The compensation fund  108  does not need to be replenished at this point, because the maximum possible claims have been fully satisfied. 
         [0019]    Subsequently, suppose that the value of the investment fund  106  increases to $1,400,000, and the limited partner  104 D withdraws his or her share. The proportionate gross share of the limited partner  104 D is $200,000, of which $100,000 represents investment gains. The limited partner  104 D is allowed to withdraw $140,000, because his or her share is reduced by the management fee of 50% of the gains, or $50,000, to the general partner  102 , as well as reduced by the $10,000 in compensation already received. 
         [0020]      FIG. 2  illustrates a system  200  suitable for use in managing an investment fund such as fund  100  of  FIG. 1 , according to an aspect of the present invention. The system  200  may suitably include a computer  202 . The computer  202  includes a processor  204 , high speed memory  206 , long term storage such as a hard disk  208 , suitably communicating over a bus  210 . In addition, the computer  202  may include user interface devices such as a keyboard  21 . 2  and display  214 , and a remote interface  215 , for communicating with other computers and devices, for example, through a network  216 . The network  216  may allow for public connection through the public Internet  218 . Typically, encryption will be employed to secure any investment related data and communications. Such an arrangement allows, for example, easy connection to personal computers of investors or potential investors, for example, the computers  220 A- 220 E. 
         [0021]    The suitably programmed central computer  204  may be used to maintain information and perform operations relating to a fund such as the fund  100 . For example, the hard disk  210  may store a fund information database  222 , maintaining financial and investment information for the fund. The fund information database  222  may include, or may be accompanied by, an account information database  224 , providing individualized information for each investor. The central computer  204  may also suitably host fund management software  226 , which provides an interface to a managing entity for reviewing data and performing operations for the fund as a whole, as well as individual interfaces for investors, allowing an investor to review his or her information and perform operations relating to his or her investment. For example, an investor may view the amounts deposited and withdrawn, the current value of the investment, whether the investment represents a current profit or loss, and may also view the progress of the investment over time. The investor may also enter orders for deposits and withdrawals and may view the net amount that would be received upon withdrawal, taking into account the loss compensation, if any, that would be received, or the management fees, if any, that would be imposed. 
         [0022]    The managing entity may review investments made and their performance, amounts received from and paid to investors, fees earned and received, loss compensation paid and due to investors, and the status of the loss compensation fund, as well as numerous other items of information typical of such funds. The managing entity may also manage the fund&#39;s investment portfolio, purchasing and selling investments as needed, may deposit and withdraw funds into and from the loss compensation fund, and may make disbursements to investors, as well as performing other operations useful for management of the fund. Alternatively, the withdrawal of funds from the loss compensation fund may be restricted so that the manager or managing entity can only receive funds based upon the independent analysis of a trusted intermediary or a fiduciary representing the limited partners. 
         [0023]      FIG. 3  illustrates a process  300  of fund organization and management according to an aspect of the present invention. At step  302 , a structure for an investment fund is created, suitably described in a proposed contractual agreement between a manager or managing entity and a plurality of potential investors. The structure of the fund includes provisions for compensation by the managing entity of an investor suffering a loss due to a decline in value of the fund, with the compensation being subject to prescribed limits and available under specified circumstances. The structure of the fund also may suitably provide for a fee structure calculated to compensate the managing entity for the risk of undertaking the loss compensation obligation. For example, the fee may be based on a percentage of positive investment returns generated by the fund, with the percentage due to the managing entity being greater than for managing entities of similar funds lacking loss compensation provisions. At step  304 , when a sufficient number of investors have subscribed to the fund and contributed their investment capital, and investment pool is created for management by the managing entity. At step  306 , a loss compensation fund is established through contributions from the managing entity, suitably sufficient to satisfy the maximum possible loss compensation for all investors. At step  308 , investment operations are begun. At step  310 , when an event occurs calling for compensation, an appropriate contribution is made by the managing entity, suitably by a withdrawal from the compensation fund. At step  312 , when a management fee is due to the managing entity, an appropriate transfer is made to the managing entity, for example by deduction from a withdrawal paid to an investor, or a deduction from the investment pool. At step  314 , when the loss compensation obligation decreases, for example, when an investor partially or totally withdraws from the fund without loss, the loss compensation fund may be adjusted, suitably through a transfer to the managing entity. At step  316 , when the loss compensation obligation increases, for example, through an additional investment by a current or new investor, the loss compensation fund is increased through a contribution by the managing entity. 
         [0024]    While the present invention is disclosed in the context of aspects of presently preferred embodiments, it will be recognized that a wide variety of implementations may be employed by persons of ordinary skill in the art consistent with the above discussion and the claims which follow below. For example, the compensation of the manager or managing entity may be the same as or lower than that of a similar entity without loss compensation, with the loss compensation feature being utilized as a selling feature providing a competitive advantage.