Calculate Fund of Funds Allocations using the Allocation Method

In the fifth phase of processing fund of funds allocations, the system calculates the fund of funds allocations. Six allocation methods are available for calculating the percentage used to allocate the cash flow on the top level-fund to each underlying securitized fund. The six methods include Actual, Rebalance Target, Rebalance Over/Under, Asset Class, User Defined and Security Level Target with Rebalance. A breakdown of each calculation follows.

Actual Allocation Method 

The Actual method allocates the cash flow amount to each underlying fund/security by taking the master fund's cash flow multiplied by the underlying fund's actual percentage. The system calculates the actual percentage for each underlying fund by taking the prior night market value of each underlying fund and dividing it by the master fund's adjusted prior night net assets. The master fund's prior night net assets is equal to the sum of all the underlying funds/securities' prior night market value.

Rebalance Target Method

The Rebalance Target method allocates the cash flow amount to each underlying fund/security by taking the master fund's cash flow amount and multiplying it by each underlying fund's target percentage. The system then adjusts the individual underlying fund allocation amounts by the projected over/under net asset amount for the underlying fund.

Rebalance Over/Under Method

The Rebalance Over/Under method groups the underlying securities into asset classes. The system splits the master fund cash flow amount between the asset classes by taking the total target percentage for each asset class multiplied by the cash flow amount. Once the system identifies the cash flow amount for each asset class, the system allocates it to the underlying securities of the asset classes that are under target (positive cash flow) or over target (negative cash flow). The system allocates the remaining cash in each asset class within that asset class based on the target percentages of the underlying securities.

If the cash flow is positive, the allocation process needs to determine which underlying securities are under their targeted allocation and allocate the cash flow to those securities until the target percentage is achieved. If extra cash is left over, it then allocates it to all underlying securities using their individual targeted allocation percentages.

If the cash flow is negative, the allocation process needs to determine which underlying securities are over their targeted allocation and allocate the cash flow to those securities until the target percentage is achieved. If extra cash remains, it then allocates it to all underlying securities using their individual targeted allocation percentages.

Rebalance Asset Class Method

The Rebalance Asset Class method groups the underlying funds into asset classes (such as equity, bond). The system splits the master fund cash flow amount between the asset classes by taking the total actual percentage for each Asset Class times the cash flow amount. Once the system identifies the cash flow amount for each asset class, it allocates it to the underlying securities of the asset classes that are under target (positive cash flow) or over target (negative cash flow).

The system allocates the remaining cash in each Asset Class within that Asset Class based on the target percentages of the underlying securities. If the master fund's cash is positive, the system allocates the cash to the underlying securities in each asset class that are under the target allocation until the target percentage is achieved. If extra cash is left over, the system then allocates it to all securities in that asset class using the securities' individual targeted allocation. The system repeats this process for all asset classes. If the master fund's cash is negative, the system allocates the cash flow to the underlying securities in each asset class that are over the target allocation until the target percentage is achieved. If extra cash is left over, the system then allocates it to all securities in that asset class using the securities' individual targeted allocation. The system repeats this process for all asset classes.

If the master fund's cash is positive, then the system first allocates the cash to the underlying securities where projected net assets are under target for that asset class. It allocates any remainder from the cash available per asset class and actual target amount to allocate to all underlying securities.

If the master fund's cash is negative, then the system first allocates the cash to the underlying securities where projected net assets are over target for that asset class. It allocates any remainder from the cash available per asset class and actual target amount to allocate to all underlying securities.

User Defined Method

The User Defined method allocates the cash flow amount to each underlying fund/security by taking the master fund's cash flow multiplied by the underlying fund's user defined percentage. The system identifies the actual percentage for each underlying fund by the cash flow amount, based on the percentage you entered. You can define the percentage to use for a positive cash flow and the percentage to use for a negative cash flow. If the cash flow is positive, then the system uses the target percentage defined for positive cash flows for allocation. If the cash flow is negative, then the system uses the target percentage defined for negative cash flows for allocation. The master fund's prior night net assets is equal to the sum of all the underlying funds/securities' market value.

The user defined method is the only method that you can use to produce fund of fund allocations for unheld securities, because the only data needed to process a fund of fund allocation is the user defined target percentages. All other methodologies require underlying holding fund data such as market value to calculate fund of fund holdings.

Security Level Target with Rebalance Method

The Security Level Target with Rebalance method first allocates the master fund's current day capital stock activity. After it calculates target net assets for each underlying fund/security, it groups them by their need to meet their target percentage. If current day capital stock activity or cash flow #1 is positive, the system ranks the underlying funds/securities below target by greatest need. Conversely if cash flow #1 is negative, the system ranks the underlying funds/securities that are above target by greatest need. The system allocates the underlying fund/security with the greatest need a portion of the master fund's cash flow to true up to the second ranking underlying fund/security. This leaves the first and second ranking underlying funds/securities with the same need going into the next iteration, which allocates to true up to the third ranking underlying fund/security. This process repeats until cash flow #1 is fully allocated or all needs are equal and the remaining cash flow is evenly distributed to the underlying funds/securities. The system generates a single pending trade for the total allocation amounts with a prior day trade date and price.

After the first allocation of current day capital stock activity, the system performs a check for a cash buffer realignment amount or cash flow adjustment. If either exists, a second allocation for the net of these two amounts occurs. The second allocation takes into account the amounts from the first allocation and adjusts the net assets of the underlying funds/securities. Then, the whole process repeats. If the cash buffer realignment plus cash flow adjustment or cash flow #2 is positive, then the system ranks the underlying funds/securities below target by greatest need. If cash flow #2 is negative, the system ranks the underlying funds/securities above target. The system allocates the underlying fund/security with the greatest need the amount to true up to the second ranking underlying fund/security and so on, until cash flow #2 is fully allocated or all needs are equal and the remainder is evenly distributed. The system generates a second pending trade for the total allocation amount but generates it with a current day trade date, and the trade remains pending until the current day price of the underlying fund/security is available. You can then update and release the pending trade.