Patent EA-004949-B1 (EA)
Title: Hedging exchange traded mutual funds or other portfolio basket products
Inventor: GASTINEAU GARY L
IPC: G06Q40/00
Filed: 2001-03-26
Abstract: 1. A method of hedging investment risk in actively managed exchange traded funds, the method comprises the steps of: extracting or determining factor information of the actively managed exchange traded fund using a computer system, said factor information determines factors that affect the price of the exchange traded fund and selecting a portfolio of financial instruments with similar behavior with respect to the determined factors to produce a hedging portfolio that tracks the price of the exchange traded fund. 2. The method of claim 1 wherein the portfolio tracks the price of the exchange traded fund. 3. The method of claim 1 further comprising: producing a hedging portfolio from the portfolio of financial instruments to hedge a position taken in the exchange traded fund. 4. The method of claim 1 wherein determining further comprises: applying factor analysis to the portfolio of the exchange traded fund to provide the factors. 5. The method of claim 3 wherein applying occurs in a trusted computer system. 6. The method of claim 1 wherein the factors that are examined by factor analysis include economic activity, inflation rates or other factors that are related to measures of economic activity. 7. The method of claim 1 further comprising: constructing a factor portfolio based upon weightings and selections of securities from a given group of securities. 8. A computer program product residing on a computer readable medium for hedging investment risk in actively, managed, exchange traded funds, comprises instructions for causing a computer to: extract factor information from a portfolio of the actively managed exchange traded fund; determine factors that affect the price of the exchange traded fund; and select a portfolio of financial instruments with similar behavior with respect to the determined factors to produce a hedging portfolio that tracks the price of the exchange traded fund. 9. The computer program product of claim 8 wherein the portfolio tracks the price of the exchange traded fund. 10. The computer program product of claim 8 further comprising instructions to: produce a hedging portfolio from the portfolio of instruments to hedge a position taken in the exchange traded fund. 11. The computer program product of claim 8 wherein instructions to determine further comprise instructions to: apply factor analysis to the portfolio of the exchange traded fund to provide the factors. 12. The computer program product of claim 11 wherein instructions to apply are executed in a trusted computer system. 13. The computer program product of claim 8 wherein the extracted factors that are examined by factor analysis include economic activity, inflation rates or other factors that are related to measures of economic activity. 14. The computer program product of claim 8 further comprising instructions to: construct a factor portfolio based upon weightings of and selections from a given group of instruments. 15. A computer system for determining a basket of securities for hedging investment risk in actively managed exchange traded funds, comprises: a trusted computer system; and a computer storage medium storing a computer program product for determining the basket of instruments for hedging investment risk, comprising instructions for causing the computer to: extract factor information from a portfolio of an actively managed exchange traded fund; determine factors that affect the price of the exchange traded fund; and select a portfolio of financial instruments with similar behavior with respect to the determined factors to produce a hedging portfolio that tracks the price of the exchange traded fund. 16. The system of claim 15 wherein the computer program further comprises instructions to: produce a hedging portfolio from the portfolio of stocks to hedge a position taken in the exchange traded fund. 17. The system of claim 15 wherein instructions to determine further comprises instructions to apply factor analysis to the portfolio of the exchange traded fund to provide the factors. 18. The system of claim 15 wherein system examines factors including economic activity, inflation rates or other factors that are related to measures of economic activity. 19. The system of claim 15 wherein the computer program further comprises instructions to: construct a factor portfolio based upon weightings and selections from a given group of instruments. 20. A method of calculating a Net Asset Valuation proxy comprises: producing a hedging portfolio to track an actively managed fund by extracting factor information from a portfolio of the actively managed exchange traded fund and determining factors that affect the price of the exchange traded fund to select a portfolio of financial instruments with similar behavior with respect to the determined factors to produce the hedging portfolio; and applying current prices to the hedging portfolio to determine a NAV proxy value for the exchange traded fund. 21. A method of intra-day trading of an actively managed fund on an exchange, comprises: determining in a computer system a hedging basket of securities that tracks the actively managed fund to allow a market specialist to manage investment risk that the specialist takes in the actively managed fund; and trading the fund through the specialist through pricing of the financial product as determined between buyers and sellers of the fund. 22. The method of claim 21 wherein the value of the portfolio tracks the price of the exchange traded fund. 23. The method of claim 21 further comprising: applying factor analysis to produce the hedging portfolio that tracks the portfolio of financial instruments to hedge the position taken by the specialist in the exchange traded fund. 24. The method of claim 23 wherein the factors that are examined by factor analysis include economic activity, inflation rates or other factors that are related to measures of economic activity. 25. The method of claim 21 wherein pricing of the product takes into consideration a calculated intra-day net asset value proxy for the fund. 26. The method of claim 21 further comprising: determining an intra-day net asset value proxy for the fund by applying prices received from a quote feed to security positions in the fund portfolio as of the prior close of the fund. 27. The method of claim 26 wherein determining further comprises: applying factor analysis to the portfolio of the exchange traded fund to provide the factors. 28. The method of claim 27 wherein applying occurs in a trusted computer system. 29. The method of claim 21 wherein the factors that are examined by factor analysis include economic activity, inflation rates or other factors that are related to measures of economic activity. 30. A method of trading intra-day an exchange traded fund comprises: calculating an intra-day net asset value proxy for the fund by applying prices received from a quote feed to security positions in the fund portfolio; trading the shares on a securities exchange by determining a price of the financial product between buyers and sellers taking into consideration information about the determined intra-day net asset value proxy for the fund. 31. The method of claim 30 wherein trading the shares on a securities exchange further comprises: trading through a specialist and wherein the method further comprises: hedging a position by the specialist to offset a position in the exchange traded fund. 32. The method of claim 30 wherein calculating the intra-day net asset value comprises: adjusting the portfolio to reflect any transactions made on the prior trading day. 33. The method of claim 32 wherein the portfolio is adjusted to take into consideration factors such as dividend credits and expenses attributable to the current trading day. 34. The method of claim 30 wherein the net asset value proxy calculation is executed within a trusted system. 35. The method of claim 30 wherein the trusted system is a physical hardware and operating system configuration in which domain configuration and trust relationships are established to determine access to information in the trusted system. 36. The method of claim 35 wherein the relationship established in the trusted system is denying access to the decrypted portfolio file from outside of the calculation process. 37. The method of claim 30 wherein decrypting further comprises: decrypting a portfolio file received from the fund and populating a table with fund positions including a security identifier and quantity of shares held in the fund. 38. The method of claim 30 further comprising: disseminating the intra-day net asset value proxy for the fund on a periodic basis throughout a trading day. 39. A computer program product residing on a computer readable medium for trading an actively, managed, exchange traded funds, comprises instructions for causing a computer to: produce a hedging basket of securities for a market specialist to allow the market specialist to manage investment risk in the actively managed fund; and record executed trades of the fund between buyers and sellers that occur through the specialist by determining a price of the financial product between buyers and sellers of the fund. 40. The computer program product of claim 39 further comprising instructions to cause the computer to: apply factor analysis to produce the hedging portfolio that tracks the portfolio of financial instruments to hedge the position taken by the specialist in the exchange traded fund. 41. The computer program product of claim 40 wherein the factors that are examined by factor analysis include economic activity, inflation rates or other factors that are related to measures of economic activity. 42. The computer program product of claim 40 further comprising instructions to cause a computer to: determine an intra-day net asset value proxy for the fund by applying prices received from a quote feed to security positions in the fund portfolio as of the prior close