Alpha - September 2007 - (Page 58)

Marshall Wace which was also launched in January 2005 and which culls company-specific ideas from industry and sector specialists, delivered an annualized return of 16.20 percent during the same period. By the end of July, the Marshall Wace team — concerned about the increased volatility in the global equity markets caused by credit fears and the possibility of the subprime contagion spreading — had already begun to reduce its exposure to the ﬁnancial sector across all of its TOPS products. Although the market upheavals in August did cause a spike in the funds’ volatility, the two biggest TOPS funds ended the month down 1 percent or less, and all of the TOPS funds are still in positive territory for the year. TOPS also powers Marshall Wace’s first-ever closed-end investment fund, MW TOPS, which was launched on Amsterdam’s Euronext exchange — DANIEL SQUIRES, in December 2006, raising DIRECTOR OF EQUITY MARKETS, E1.5 billion ($1.96 billion). MERRILL LYNCH With $10.9 billion in assets under management, Marshall Wace was the ninth-largest European hedge fund ﬁrm when this year began, according to Alpha’s Europe 50 survey. As of July 31 it employed 120 people and had $13.8 billion in assets under management — the vast majority of which was invested in TOPS-driven funds. “Marshall Wace has taken a fascinating approach to gathering information, and it has really had an impact on the way in which people think about handling the equity markets,” says Sir Andrew Large, chairman of MW TOPS and a former Bank of England deputy governor. “I think it’s very exciting.” In TOPS, Marshall Wace’s founders have devised a scalable, sustainable system they can use to build whatever investment products they want: market neutral, long-only, geographically focused, even dedicated-sector funds. The most innovative aspect of TOPS may be its fusion of stock recommendations with data about the brokers themselves — which ones, for example, perform better in a rising or falling market — creating what is in essence a whole new investment universe, where the securities are brokers’ stock picks rather than the stocks themselves. “TOPS is almost akin to a disruptive technology,” says chairman Marshall, 48, a reticent, blond, bespectacled manager known for his fundamental investing style. “And the development of the system presents an enormous global opportunity for us because the data we gather, which is massive, can be analyzed and assembled in an almost infinite number of ways. We’ve only just begun to scratch the surface of what is possible.” Although Marshall Wace holds ﬁrst-mover advantage, other hedge fund ﬁrms, investment banks and traditional money managers are also developing proprietary electronic data filters, known in the industry as alpha-capture systems. In London two hedge fund powerhouses, GLG Partners and Gartmore Investment, have recently created their own self-styled alpha-capture funds to skim the cream of their brokers’ best ideas. And investment bank Merrill Lynch International has created an in-house system, called Trade Ideas Monitor, to highlight its teams’ high-conviction ideas. In addition to local threats emerging in London, global changes in the hedge fund industry itself are driving Marshall Wace’s evolution. Long-short equity investing may be among the most liquid of strategies, but it is also the most crowded: Since 2002, when TOPS was launched, the number of hedge funds worldwide (including funds of funds) has nearly doubled, to 9,832, according to Chicago-based Hedge Fund Research. Assets in long-short equity have increased by 280 percent in those ﬁve years, to $489.6 billion — more than a quarter of the $1.76 trillion managed by hedge funds worldwide. “The industry is becoming more crowded, and the best managers are those who are really pushing to evolve their strategies,” says Michael Burton, head of EAFE equity long-short research with London-based Financial Risk Management, which manages $13 billion in funds of hedge funds. His firm began investing in Marshall Wace’s value-oriented Eureka Fund in 1999 and now has money spread across a range of TOPS funds. “Some managers have gone from being pure value investors to adopting strategies that are much more akin to private equity,” says Burton. “Others, like Marshall Wace’s TOPS team, have become more and more systematic in the way that they differentiate themselves.” MARSHALL AND WACE NEVER EXPECTED TOPS to become such a powerful and proﬁtable tool. Following the bursting of the tech-stock bubble in 2000, they were frankly skeptical that the sell side’s recommendations had any value whatsoever. In the press, research analysts were being excoriated for losing their objectivity in favor of reaping investment banking profits, and sell-side brokers were seen as lackeys, paid to simply distill their analysts’ reports. What that overriding view didn’t take into account, however, were the material differences between individual brokers’ recommendations — which is exactly what TOPS was designed to determine. In 2001, Marshall and Wace tapped a recently minted University of Oxford graduate, Anthony Clake, who has degrees in philosophy, politics and economics, to design a database that would assimilate the ﬂood of broker picks and pans that crossed their doorstep. The ﬁrst version of TOPS was little more than an Excel spreadsheet. “When we undertook this project, we didn’t think that the results were going to be particularly good,” says the affable, boyish-looking Clake, 27, now a partner at the firm and the TOPS project manager. “Our working as- “TOPS taps into the psyches of many frustrated salespeople who would secretly like to be hedge fund managers.” 58 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2007

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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