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Tuesday, October 19, 2021

U.S. patent officers apparently getting no vacations this summer


Date: Tuesday, August 25, 2009
Author: AllAboutAlpha

Thinking of starting a business in the asset management industry?  Say, a company that develops methods for constructing investable hedge fund indices?  Or maybe an outfit that lends money to asset managers in exchange for a share of its revenues?  Well, you can forget about it.  This week, U.S. patents were awarded to companies that have developed somewhat novel ways to do both.

Royal Bank of Canada, the world’s tenth most profitable bank locked up the patent rights for a long list of business processes relating to the management of investable hedge fund indices and the structured products built upon them (see patent).  In typically passive and arcane language, the patent itself reads like a case study in excessive patenting:

“What is claimed is:  A computer implemented method for balancing an index of a plurality of hedge funds, the method comprising: calculating, by a computer system, a hedge fund weight for a hedge fund included in the index; determining, by the computer system, if the calculated hedge fund weight exceeds a hedge fund weight maximum, the hedge fund weight maximum corresponding to a maximum proportion of the total index that can be allocated to a particular fund; determining, by the computer system, if the calculated hedge fund weight is less than a minimum hedge fund weight, the minimum hedge fund weight corresponding to a ratio of a required capacity or exposure to the net exposure of the index; and adjusting the percentage of the index allocated to the particular fund if the calculated hedge fund weight exceeds the hedge fund weight maximum or is less than the minimum hedge fund weight…”

In other words, RBC Capital Markets now owns the rights to use a “computer system” (?) to calculate hedge fund index weights.  Yet many of the claims stated in the patent document sound remarkably similar to an index methodology white paper.  For example…

“Adjusting the weights can include adjusting the weights based on an estimate of the maximum amounts that can be redeemed from the hedge funds…the dates at which the redemptions are allowed…the redemption notice periods prescribed by the hedge fund…the redemption rules prescribed by the hedge fund…the maximum amounts that can be invested in the hedge funds in the future…the maximum amounts that can be invested in the hedge funds in the future and maximum amounts that can be invested on each particular date in the future.”

In fact, the patent even makes reference to the Credit Suisse /Tremont “Index Rules” of April 1, 2005 (two months before the filing was originally made).

Incidentally, Credit Suisse is no stranger to the U.S. Patent office either.  Last week, Asset Management Finance LLC, a company that “provides up-front capital in exchange for a limited-term, expiring interest in a firm’s future revenues” announced that it too had been awarded a patent for a business process that may be familiar to others in the asset management industry.  In a press release, the firm said it now owns the U.S. Patent rights to the “Revenue Share Interest Method of Financing an Asset Management Firm”.  AMF was acquired by Credit Suisse last year.

Although we’re obviously not fans of business process patents, AMFs business model is note-worthy nonetheless.  Instead of taking a share of profits (a.k.a. common equity) or a fixed repayment (a.k.a. debt), the firm basically lends the asset manager money in exchange for a call on the top line revenue for a specific period of time.  If anything, their “Revenue Share Interest” approach is like a super-preferred share where the payout comes not just before the other equity holders, but before bonuses, salaries, rent, office boondoggles and all the other agency costs endemic to asset management firms (see company white paper explain the process in non-patent terms here).  It’s an approach that seems ideally suited to the asset management sector.

It’s a good idea to be sure.  But patentable?  Maybe not.  Business method patents like this have been growing at 15% per annum but experienced a huge spike in the dotcom boom (see chart below from Wikipedia):

business method patents

The US Patent and Trademark office tried to put the kibosh on these patents in 2001 with a decision specifying that a business method patent must make use of the “technological arts”.  Apparently, the use of something called a “computer” suffices as technological artistry.  Hence, the conspicuous and often humorous use of the term “…by computer system…” throughout the RBC patent above.

Of course, RBC and CS aren’t the first to be suspected of simply adding the term “…using a computer system…” to their marketing materials in order to win patents.  In 2007 we wrote about business method patents won by Robert Arnott, the founder of Research Affiliates (see “The Patent King of Pasadena“, June 17, 2007).   At around the same time, Morningstar was awarded a patent for what looks t the untrained eye as a form of simple retirement savings (see “Morningstar Patents Retirement Savings“, July 16, 2007)

There are a lot of good ideas out there.  But not all should be patentable.  So let’s give patent officers a summer vacation.