US 7,689,493 B1Granted

Methods for asset index tracking

AssigneeMerrill Lynch & Co., Inc.

InventorsMichael A. Sullivan, Philip Fischer, Philip Galdi, David Shen

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Abstract

The disclosure details the implementation of apparatuses, methods, and systems for asset index tracking. The disclosure details how an asset index tracker aligns investor asset portfolios to a selected asset index. The asset index tracker enables investors to automatically match their portfolio to a predefined index. The asset index tracker compares the investor's portfolio to the selected index and provides recommendations to rebalance the portfolio at specified intervals. This is achieved by comparing the investor's portfolio to the index to determine the trades necessary to align the portfolio to the index. A correlation and estimated tracking error of the portfolio to the index may be calculated to validate how the portfolio matches the index. The resulting trade recommendations may be executed upon the investor's approval or automatically. The execution of the trades achieves the rebalancing of the investor's portfolio to more closely track a selected target index.

A processor-implemented method to adjust a portfolio, comprising:

selecting by a processor an index of assets;
selecting a portfolio of asset holdings;
selecting by the processor component assets within the index that adjust to match the index,
wherein the selection of component assets is based on indicate risk characteristics,
wherein the selection of component assets is based on an asset portfolio component alignment heuristic that employs duration and convexity to select assets for the portfolio,
wherein duration is equal to V_−V+2Vo(Ay)
wherein convexity is equal to V++V—−2Vo
where:
Δy is a change in rate used to calculate new values,
V+ is a price if the yield is increased by Δy,
V− is a price if the yield is decreased by Ay, and
Vo is an initial price,
wherein the asset portfolio component alignment heuristic, includes:
a) targeting a number of assets to be included in a basket;
b) splitting the index into a number of groups composed of different assets;
c) determining a number of assets that will comprise each group;
d) excluding all assets with an issuer weight less than some weight threshold setting;
e) splitting each group into duration cells;
f) ranking the assets in each cell, wherein the ranking is by an absolute value of the difference between the duration of the assets and the duration of each cell;
g) selecting the assets with a smallest combined duration and convexity ranking differential within each cell;
h) distributing each group's market weight between its constituents;
i) sub-dividing each group's constituents;
and
j) rebalancing;
providing a recommendation to change a composition of the asset holdings so that the asset holdings will match the index;
and
adjusting by the processor the portfolio of asset holdings to match the index by effecting a trade of assets per the recommendation, wherein the effectuation of the trade occurs if a user approves the transaction, wherein the adjustment of the portfolio of asset holdings to the index recurs with a specified frequency, and wherein the adjustment of the portfolio of asset holdings matches the index to a degree specified by tolerances for index adjustment parameters.

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Abstract

Claims33