Our correspondent examines how Marshall Wace became one of Europes largest hedge funds and a dominant force in the City
IT HAD its humble beginnings in 2001 on an Excel spreadsheet in Ian Wace’s Mayfair office. Since then, the computer system known as Tops has helped to transform Marshall Wace into one of the largest hedge fund groups in Europe, with $7 billion (£4 billion) under management.
In addition, it has made Wace, 42, and his colleague Paul Marshall, 46, two of the most powerful men in the City. And the richest. Together they are estimated to be worth more than £200 million.
Tops was nothing revolutionary. It revived a simple technique used by many conventional fund managers, who relied on recommendations from salesmen to buy or sell shares.
The concept for the custom-designed system sprang from a long-running debate between Wace and Marshall, who had disagreed over the value of such recommendations and whether there was money to be made from them.
The unique system of using algorithms to analyse the recommendations from salesmen and rank them to decide who wins Marshall Wace’s considerable business has paid off.
The generous commissions given to salesman appealed to their beady-eyed focus on bonuses. Now business from Marshall Wace, worth hundreds of millions of pounds, can make or break a sales desk.
Philip Augar, a former investment banker and the author of The Greed Merchants, said: “It’s a way of skimming the cream to get the best ideas.”
Some rivals are less generous, suggesting that the technique, while perfectly legal, may tempt less scrupulous brokers to stray into grey areas or even divulge price-sensitive information from the wrong side of the Chinese wall.
Marshall Wace says that Tops has stringent compliance procedures, provides a full audit trail and that the fund’s relationship with the Financial Services Authority is “very good”.
Competition between salesmen to win business from Marshall Wace is intense, as it is responsible for 3 to 4 per cent of all equities traded in London. A former saleswoman at a leading American bank, who declined to be identified, said: “With Marshall Wace as a client, you’re the star of the desk.”
Bankers have been known to break into bidding wars to curry favour with the two men during the fundraising auctions at lavish dinners for their pet charity Absolute Return for Kids.
Salesmen make their pitches to Marshall Wace via a website — which also allows the fund access to the vast databank of knowledge on equity trading floors across the City. The raw data is crunched by the Tops computer program designed by Wace and Anthony Clake, a fresh-faced youngster who joined the firm in 2001 after graduating from Oxford.
Clake, who now runs the Eureka Tops fund in Europe, works very closely with Wace. At 25, the tennis-playing Clake is one of the youngest hedge fund managers in the City.
Marshall Wace is taking the first steps towards launching a fund for Asia using the Tops system after its move to set up a branch in the United States, The Times has learnt.
This would make it one of the few European hedge funds with global reach. This year, the firm raised $1 billion in a day when it opened a new fund focused on North American equities, and another $1 billion when it opened the European Tops fund to new investors.
The system is not without its critics, with some rivals fearing that Marshall Wace may be unfairly favoured by sales desks. Proprietary traders at Goldman Sachs reportedly bought the same stocks that the bank’s salesman were recommending to Marshall Wace.
Wace said that they agreed with a Goldman Sachs internal inquiry that failed to find any misconduct. Goldman Sachs said that any allegations of wrongdoing were without merit.
Marshall Wace has not been immune to the low volatility in markets that has plagued many hedge funds this year. Wace admits that the flagship Eureka fund has performed poorly this year, rising just 3 per cent, compared to 13.3 per cent last year. Just weeks ago, a senior trader quit after the arbitrage unit that he ran lost more than 20 per cent this year, in spite of a boom in mergers.
Wace also scotched concerns that the firm may suffer from Marshall’s decision to cut back to four days a week to concentrate on his philanthropic and political interests — he is a keen Liberal Democrat. As chairman, Marshall is said to be closely involved with clients, although he has stepped back from day-to-day operations.
Yet Wace admits that business has become difficult. “The industry used to be below people’s radar screens and now, due to the performance of managers, it is not,” he said.
Marshall Wace said that it will counter competition by refining Tops and focusing on performance. It is aware that there are many in the City waiting for the firm to roll out Tops in Asia — their bonuses depend on it.
Leaders of the pack
A former head of trading at SG Warburg, Wace, 42, designed an order-routing system at the bank that is still in use today.
He was the bank’s youngest managing director on record.
In 1994 he watched in the rear-view window of his Mercedes as his wife and two children, travelling in the vehicle behind him, were killed in a car accident.
He has since remarried.
He formed Marshall Wace with Paul Marshall in 1997.
They are passionate supporters of ARK and last year donated £2 million to the hedge fund charity, which supports deprived children in Britain, South Africa and Eastern Europe.
Marshall, 46, read history and modern languages at St John’s College, Oxford. He also attended INSEAD, the business school, before joining Mercury Asset Management in 1985.
By the time of his departure in 1997 he was responsible for managing $12 billion in European equities.
He is a former researcher for Charles Kennedy, the Liberal Democrats leader, and chairman of the Liberal Democrat Business Forum.
Marshall funds the Centre for Reform, a think-tank with great influence in the party. Last year he co-edited The Orange Book of essays calling for the party to adopt more pro-market policies.
Marshall owns Pimpernel & Partners, an antiques shop on the Kings Road, Chelsea.
He is a fan of Charlie Mackesey, the Christian artist.
Hawtin, 43, has run Europe’s largest technology, media and telecoms hedge fund since joining the firm in September 1999.
He previously spent seven years at Enskilda Securities, the Scandinavian bank, as head of sales and a board member.
He also worked for nine years as an equity research analyst at a number of firms, including BNP Paribas, the French bank, and Ark Securities.
Clake, 25, grew up in Surrey, and read politics, philosophy and economics at The Queen’s College, Oxford. He also played tennis for the university.
He joined Marshall Wace immediately after graduation in 2001 and was made a partner last year.