Multi-level leverage account structure

Abstract

An investment structure for multiple classes of investors that combines the advantages of both the master feeder structure and the reverse master feeder structure with segregated accounts. In particular, an investment structure is formed in which investors invest in a common fund. The common fund, in turn, opens a common prime brokerage account, having at least three sub-accounts, for example: an unlevered account; one or more levered accounts and a general trading account. The prime broker provides class loans to the levered account and margin loans to the general trading account. To the extent class loans are provided to the levered account, levered investors will participate in the returns on the general account as if the levered investors invested capital plus the amount of any class loans to that levered account. The unlevered investors will participate in the returns on the general trading account on the basis of their capital contributions alone. The prime broker will have no recourse against any assets of any account other than the levered account as a result of a default or margin call of the levered account. In an alternative embodiment of the invention, the investment structure is structured as a fund of funds, in which multiple classes of investors invest, which, in turn, invests in multiple investment funds, or a fund that employs alternative investment strategies that overlay the basic trading strategies. In this embodiment, a credit facility is established with the equivalent of three sub-accounts as discussed above.

Description

BACKGROUND OF THE INVENTION[0001]1. Field of the Invention[0002]The present invention relates to an investment fund structure and more particularly to an investment fund structure for multiple classes of investors based upon a managed level of leverage applicable to each class, in which the investment fund opens a prime brokerage account with a prime broker having at least three sub-accounts, for example: one or more Levered Accounts, each of which may provide for a different level of leverage; an Unlevered Account; and a General Trading Account; through which the prime broker provides margin financing through cash advances to the General Trading Account and additional financing by way of class loans to the Leveraged Account and the classes of investors share in the returns on the General Trading Account based on different levels of leverage. The present invention is also applicable to a investment structure in which multiple classes of investors invest in a fund of funds, which, in...

AI Technical Summary

Benefits of technology

[0013]The present invention relates to an investment structure that enables an investment fund to provide leverage at the investor level in addition to leverage at the portfolio level and does so with greater administrative, legal, operational and cost efficiency than known structures. In addition, this structure may offer potentially lower costs of borrowing due to the greater legal certainty related to the structure. In one embodiment of the invention, an investment structure is formed in which investors invest in a common fund having multiple classes. The common fund, in turn, opens a common prime brokerage account, having at least three sub-accounts, for example: one or more Levered Accounts, an Unlevered Account and a General Trading Account. The prime broker provides class loans to the Levered Account and margin loans to the General Trading Account. To the extent class loans are provided to the Levered Account, levered investors will participate in the returns on the General Trading Account as if the levered investors contributed capital plus any class loans made to that Levered Account. The unlevered investors will participate in the returns on the General Trading Account on the basis of their capital contributions alone. The prime broker will contractually agree that it will have no recourse against any assets of any account other than the Levered Account as a result of a default by or margin call against the Levered Account.

[0015]The present invention offers significant advantages over the structures described above. In particular, the present invention requires a single document, a prime brokerage agreement, rather than the numerous documents that are required in the other structures. This results in a significant reduction in implementation time and lower legal fees. Because this structure does not require the creation of multiple levels of entities, there are reduced administrative and operational expenses. Further, because the leverage provider will have a direct security interest in the General Trading Account, there is greater legal certainty for the leverage provider. Finally, the investment structure allows for multiple classes of leverage for the Levered Accounts, which facilitates management of the account.

Problems solved by technology

Similarly, losses in a leveraged fund will be greater than those in an unleveraged fund and will be further increased by the cost of funds borrowed.

There are disadvantages of such an investment structure.

Although it may be prudent to require a guarantee, lenders may forego such requirement because of the legal complexity and expense.

This extensive documentation results in significant legal expenses that must be incurred to implement the structure.

Although the reverse master-feeder investment structure reduces the costs to the levered investors, there are several disadvantages to such an investment structure.

This results in a cumbersome, inefficient means of trading, and more complicated trade reconciliation processes.

In both structures described above, there are ongoing administrative and operational expenses resulting from the need to create and maintain multiple entities to achieve the desired leverage at the investor level.

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