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Apparatus and accompanying methods for automatically modifying a financial portfolio through dynamic re-weighting based on a non-constant function of current capitalization weights
| Details |
Inventors: Fernholz, Erhard Robert;
Assignee: Enhanced Investment Technologies, Inc. (Palm Beach Gardens, FL)
Primary Examiner: Stamber; Eric W.
Assistant Examiner:
Attorney, Agent or Firm: Michaelson & Wallace, Michaelson; Peter L.
Apparatus and methods for automatically modifying a financial portfolio having a pre-defined universe of securities, such as, e.g., an index fund, that tracks a given capitalization weighted index, through dynamic re-weighting of a position held in each such security. Specifically, in a computer system (50, 60), a target weight is accorded to each such security, relative to others in the portfolio, in proportion to a non-constant function of current capitalization weights of the securities in the index. Once these target weights are determined, then, in response to both the target weight of each such security and an actual weight, as a proportion of the portfolio, in which that security is currently held, a trade will be generated by the system in order to conform, within a predefined band, the actual weight to the target weight so as to rebalance the holdings in the portfolio. The system can selectively operate in either one of two modes: a dynamic rebalancing mode for calculating new target weights and issuing appropriate trades, or a cash investment mode for issuing one or more trade(s) to consume excess cash then held in the portfolio. |
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DETAILED DESCRIPTION Advantageously, my present invention substantially, if not totally, remedies the deficiencies inherent in the art.
Specifically, I have broadly recognized that, for a portfolio, such as an index fund, that holds a pre-defined universe of securities which collectively forms a capitalization weighted index, the portfolio can be effectively managed by dynamically re-weighting the position of each security in the portfolio in a manner proportional to a non-constant function of current capitalization weights of the securities in the index.
I have found that, for appropriately selected functions, the resultant return generated by such a portfolio will consistently and reliably outperform that of the index itself.
Specifically, my inventive apparatus contains circuitry which obtains appropriate input information and an appropriately programmed computer system.
The input information, which can be provided from any of a wide variety of sources, includes an enumeration of each security in the index and its shares currently outstanding, as well as current price information on each such security and its price change.
The computer system, using this information as well as internally stored portfolio data, first determines a variable ("target") weighting for each of the securities in the portfolio as the non-constant function of current capitalization weights associated with the index, so as to define a set of target weights.
Once all the target weights have been so determined, the computer then issues digital trading instructions, each of which represents a trade of a corresponding security, to, e.
g.
, an electronic trading network such that current assets held in the portfolio are to be distributed, upon subsequent execution of the instructions, amongst the securities in the portfolio in proportion to and as defined by the target weights so as to dynamically rebalance the portfolio.
This inventive portfolio rebalancing method is periodically repeated, such as weekly, daily or at any other such desired interval, to: analyze current changes in share price and current index composition and weightings, calculate new positions in each security held in the portfolio and issue appropriate market trade orders to appropriately update, i
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Finance 
