Alpha - September 2007 - (Page 62)

Marshall Wace Dublin Stock Exchange. Just as at Marshall Wace, GLG’s system was ﬁrst developed as an internal research tool and was run for more than three years before the creation of the Esprit fund. GLG, however, gathers investment recommendations from a much more select group of brokers and imposes a very different filtering system. Instead of capturing as much data as possible on brokers’ picks, GLG asks its counterparties to select one broker from within their organization — currently they have 51 total contributors — and deputize that person to gather the firm’s best long-term, fundamental ideas. Just as with TOPS, those ideas are delivered to GLG through a Web-based system, and the results are then processed using algorithms to optimize the buy and sell signals for the portfolio. “The best fund managers know that if you ask someone for their top 100 ideas, you’re likely to get diversified nothing,” says Merrill Lynch’s Millar. “But if you ask them for the ﬁve or six ideas that they’re most passionate about, then you tend to get better results and alpha capture.” GLG’s Esprit fund is by far the biggest and most public rival for Marshall Wace, but Gartmore is also keen on capturing alpha. Last year the firm set up a broker-driven fund, AlphaGen Acamar, which is even more concentrated than GLG’s Esprit. Acamar traces its origins to the work of several members of fund manager Roger Guy’s team, including Guillaume Rambourg, who is a senior manager of European equities for Gartmore. They invited about a dozen of their favorite, most-trusted brokers to submit their highest-conviction ideas for a new hedge fund. “Part of the impetus for developing this strategy was the realization that only about 40 percent of the ideas coming from our best brokers were making their way into our existing funds,” says Rambourg. He cites various reasons for those omissions: The funds primarily focus on large-cap companies, and some of the brokers’ suggestions were small-to-midcap names; other suggestions were focused on companies in peripheral European countries, like Portugal and Greece, which have never been central to their fund mandates. Unlike Marshall Wace, which typically has 750 to 1,000 live positions in any one of its TOPS funds, Gartmore has constructed a concentrated portfolio of just 70 to 80 positions. Every idea comes from its chosen brokers, who are allowed to submit four to six recommendations per quarter. Participants are encouraged to present only those ideas they believe will have a price movement of at least 15 percent, up or down, during that three-month period. Although all of the picks are equally weighted in the 62 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2007 portfolio, Gartmore does have a few rules in place to prevent the fund from having a disproportionate amount of risk: No single stock can be more than triple-weighted, even if several brokers recommend it. The fund also has country and sector limits of 25 percent, to maintain diversiﬁcation, and a rolling stop loss of 10 percent on any single position before it gets cut. Gartmore determines the gross and net exposures of the fund, but beyond those parameters it truly is a broker-driven product. Although AlphaGen Acamar delivered a 14 percent net return from its February 2006 inception through August 2007, the fund has yet to ﬁnd many adherents. Currently, it has just $200 million under management, with 80 percent of that coming from Gartmore itself. While GLG and Gartmore pride themselves on deputizing only a few brokers, and allowing them to have input into their customized alpha-capture funds, Marshall Wace is moving rapidly in the opposite direction — becoming ever more inclusive and voracious in its search for information. In the past few months, the ﬁrm has added brokers in the Philippines, Russia, Turkey and Vietnam. No market is off-limits, provided that it offers sufficient liquidity and a well-established network of stockbrokers. Thanks to TOPS, what was once an arbitrary assessment process has, in the span of just five years, become increasingly quantifiable and standardized. More important, the surprise that TOPS delivered — the proof that many brokers do add value, if one knows how to listen to them — has already transformed sales desks at investment banks all over the world. As TOPS reaches maturity, the system could begin to drive fund development in new and unanticipated directions. Wace, who speaks of the possibilities with an almost evangelical fervor, offers examples of new and unusual arbitrage opportunities across countries and industry sectors — opportunities that few investors have seized because they require gathering and interpreting vast amounts of information, including behavioral data, on the brokers with whom they work. “The key drivers of TOPS are Wace and Clake’s passion for data and for precision in their analysis,” says Merrill Lynch’s Millar. “They were the first to turn this type of research into a semi-industrial process — they have got dozens of quants and engineers working to enhance this system every day.” What began as a bet between friends has since transformed the firm: Marshall Wace now has 28 mathematicians working full-time on optimizing TOPS, 15 dedicated traders, eight risk managers and 12 locallanguage speakers in far-flung locales to recruit brokers. Some 50 other people work on its Internet technology and back-ofﬁce systems at centers in India and Vietnam, making sure that everything operates smoothly. In a world where fund managers have long questioned the worth of brokers’ recommendations, Marshall Wace has simply turned the use of that information on its head — and built a highly successful business.

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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