Multi-Factor Return Forecasting for Illiquid Alternative Assets
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Solution Overview
Problem
Certain asset classes, such as artwork, lack robust markets, leading to transactional inefficiencies and risk management challenges due to illiquidity.
Innovation Solution
A computer-implemented system and method using a multi-factor model to evaluate, diversify, and monitor Alternative Asset Products as Reference Assets, incorporating both private and public return components, with forward-adjusted forecasts based on macroeconomic metrics and historical data analysis.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If alternative assets are held directly without liquidity mechanisms, then asset ownership is maintained, but risk management capability deteriorates due to inability to exchange assets efficiently
Solution Approach 1:
The patent introduces a liquidity provider and swap mechanism as an intermediary between asset holders and those seeking liquidity. This mediator enables indirect exchange of alternative assets through financial instruments (swaps, forwards, options) without requiring a direct robust market for the alternative asset itself, thus maintaining ownership while improving risk management and transactional efficiency
Solution Approach 2:
The system creates financial copies or derivatives of alternative assets through swap agreements and other structured products. These copies allow participants to gain exposure to alternative asset returns without directly holding the illiquid assets, enabling efficient risk management and liquidity transfer while the underlying alternative assets remain intact
2Productivity
If a robust market is created for alternative assets, then liquidity and transactional efficiency improve, but asset valuation stability deteriorates due to increased price volatility
Solution Approach 1:
The patent segments the valuation and liquidity functions by separating the alternative asset ownership from the liquidity provision. The alternative asset returns are segmented into contractual cash flows (via swaps) that can be traded liquidly, while the actual asset valuation remains stable and is managed separately through direct ownership relationships and professional asset management
Solution Approach 2:
An intermediary structure is introduced that decouples liquidity provision from direct asset valuation. The liquidity provider and swap mechanism act as buffers, allowing liquid trading of financial derivatives without directly impacting the stability of underlying alternative asset valuations, thus achieving both liquidity and valuation stability
Data Source
AI summary
Disclosed is a computer-implemented system for processing algorithms within a forward-adjusted multi-factor model to calculate an expected return for an alternative asset based on signals relating to the historical outperformance of alternative asset classes and from macroeconomic metrics of the public markets.