Crossing Share Redemption Netting for Mutual Fund Cost Reduction
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Solution Overview
Problem
Investment funds face significant transaction costs and capital gains realization due to share redemptions, which negatively impact performance and investor returns, especially for short-term traders who are often restricted from participating.
Innovation Solution
A method is introduced that issues crossing shares with specific redemption restrictions, allowing only offsetting purchase requests to process redemptions, and includes non-crossing shares with different redemption rules, enabling cash redemption without equivalent purchase requests, and exchange-traded shares for conversion into monetarily equivalent values, all tracked and processed in a computer system to minimize transaction costs.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Loss of energy
If share redemption restrictions are imposed to minimize transaction costs, then transaction costs are reduced, but investor flexibility and liquidity are reduced
Solution Approach 1:
The patent segments the share structure into multiple classes: crossing shares and non-crossing shares. Crossing shares allow redemptions to be offset by purchase requests within the same class, minimizing transaction costs for active traders. Non-crossing shares follow traditional redemption rules. This segmentation allows different investor types to choose shares matching their trading needs, resolving the contradiction between cost minimization and flexibility.
Solution Approach 2:
The patent changes the redemption parameter rules differently for different share classes. Crossing shares use a netting mechanism where redemptions are offset by purchase requests, effectively changing the redemption cost parameter to near-zero for offsetting transactions. Non-crossing shares maintain traditional redemption parameters. This parameter differentiation resolves the contradiction by allowing cost-efficient trading for some while maintaining flexibility for others.
2Loss of energy
If crossing share redemption requests are offset by purchase requests, then transaction costs on underlying assets are minimized, but redemption processing complexity increases
Solution Approach 1:
The patent introduces an intermediary offsetting mechanism where purchase requests act as mediators to cancel out redemption requests for crossing shares. Instead of directly selling underlying assets for redemptions, the system uses offsetting purchase requests to neutralize the redemption impact. This intermediary approach minimizes transaction costs on underlying assets while the computer system manages the matching complexity.
Solution Approach 2:
The patent replaces the mechanical system of direct asset sales for redemptions with a computational netting system. The computer system automatically matches and offsets crossing share redemption requests with purchase requests, substituting automated computational processing for manual asset trading. This reduces transaction costs on underlying assets while managing processing complexity through automation.
3Adaptability or versatility
If multiple share classes with different redemption rules are issued, then investor choice and flexibility are improved, but administrative complexity and tracking requirements increase
Solution Approach 1:
The patent segments the share structure into distinct classes (crossing shares and non-crossing shares) with different redemption rules, allowing investors to choose based on their needs. The computer system maintains separate tracking for each share class, managing administrative complexity through structured segmentation rather than a monolithic system.
Solution Approach 2:
The patent creates a universal share structure where multiple share classes operate under a single fund framework. The computer system provides universal tracking and processing capabilities that handle both crossing and non-crossing shares through standardized procedures, reducing administrative complexity despite the diversity of share classes. The system is designed to accommodate multiple share types without requiring entirely separate administrative infrastructures.
Data Source
AI summary
A mutual fund having at least one class of crossing shares that cannot be redeemed for cash unless there is a crossing request to buy shares in the fund and at least one class of non-crossing shares. The fund may offer one or more of several other non-cash redemption options that minimize transaction costs incurred by the fund. The non-crossing shares may include one or more conventional share classes and/or one or more exchange-traded share classes. Additional redemption options available to holders of crossing shares may include redemption in kind for a basket of representative financial assets, conversion to exchange-traded shares (where available), or redemption for cash less a redemption fee.