The return of Paul Marshall
Putting aside political ambitions, a co-founder comes back to help revive Marshall Wace.
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From his penthouse office in central London, Paul Marshall has
a bird's eye view: To the west, he sees the Houses of
Parliament, a wistful reminder of ambitions that led him to
seek public office in 1987 & has kept him active in
politics ever since. Turning to the east, he looks at St.
Paul's Cathedral & the skyscrapers of the City's financial
district, a stark rejoinder to the task that occupies him these
days: returning the firm he co-founded, Marshall Wace, to its
Largely as a result of his passionate interest in politics, the
50-year old Marshall stepped back from the investment side of
the firm in 2004 and was rumored to be considered for
Parliament in recent years. That had left Ian Wace, with whom
he had started the firm in 1997, in charge. As markets began to
tumble last year, taking Marshall Wace's many hedge funds with
it, Marshall, who had retained the title of chairman, returned
to a more active role while maintaining his policy work
regulating hedge funds, arguing against the U.K. ban on short
selling and calling for limits on leverage and more disclosure
for the industry.
Now, getting Marshall Wace's own house in order is the task at
hand. Most of Marshall Wace's hedge funds underperformed their
indices last year, with its flagship Eureka fund down more than
19%, raising questions about the volatility of its innovative
trading system, TOPS (Trade Optimized Portfolio System), which
had propelled Marshall Wace to the upper tier of the European
hedge fund industry. Poor performance and loose liquidity terms
at the once-heralded fund led investors to flee. By the end of
June, Marshall Wace's assets had plunged by more than 75% to
$3.5 billion, from $15.8 billion at their peak in January 2008.
At that time, Marshall Wace was the sixth largest European
hedge fund firm, according to EuroHedge's semiannual survey. It
now ranks nineteenth.
That's quite a comedown for Marshall Wace, which has long been
one of the most successful and talked-about hedge fund groups
in Europe, its growth spurred by the introduction in 2002 of
TOPS, which was widely copied in Europe and the U.S. But TOPS
depends on analysts' and brokers' predictions to make market
bets and takes positions in large-cap stocks. When those own
views proved wrongheaded, and the stocks collapsed, so did the
TOPS funds. Was TOPS merely a bull-market phenomenon that
tracked the markets, leaving no room for managerial
Last year's losses have prompted a rethinking at Marshall Wace.
The firm is quickly adding manager-led long/short funds to its
stable in Asia and the U.K. and hiring the best talent from
places such as Morgan Stanley's prop desk. It's also refining
the TOPS process. "We have to innovate every day in order to
enhance the way we extract and use the information," says
Marshall. Learning from last year, for example, the firm is
putting more focus on external risk factors such as
correlations with other hedge fund managers. Marshall Wace is
also in the vanguard of firms offering new retail funds for
sale throughout Europe, using UCITS (Undertakings for
Collective Investments in Transferable Securities)
Marshall insists that the firm had not become too
one-dimensional with its dependency on the TOPS process. "It's
true that as managers of the business we were heavily focused
on the global rollout of TOPS, but we had always wanted to
build out the fundamental long/short side of the business," he
says. In addition to its numerous TOPS funds, in November 2006,
Marshall Wace issued public stock in MW TOPS, a closed-end
investment company, which proved to be the largest ever
offering of permanent capital from a hedge fund firm, raising
"We realized that we had built a first-rate global
information-gathering and execution platform, along with a
strong brand name," says Marshall. "That gave us the bandwidth
to expand and also proved to be a big advantage in attracting
the right talent, which is always very hard to find."
MW TOPS shares have slid on the open market, however, and the
fund is now worth just €180 million ($230 million). Being
a brand name firm didn't prove helpful in retaining investors'
money in its hedge funds either, although Marshall Wace's
refusal to lock up capital has won it admiration. "Because they
acted honestly in the crisis, it's firms like Marshall Wace
that people will return to," says Caron Bastianpillai, a
portfolio manager at Notz Stucki in Geneva.
The money may not be coming back yet, but performance has
already started to rebound. That doesn't answer the question as
to whether or not TOPS just follows market rallies, however.
Marshall Wace contends that the TOPS strategies capture more of
the market's upside than they do losses on the downside. At any
rate, the TOPS comeback may put to rest the argument that its
TOPS system was too widely copied to work anymore. This year
its TOPS Europe fund is up 18.11% through August, well above
both the median of 7.68% for the EuroHedge long/short index,
after being down about 20% in 2008, compared with a median
decline of 9.21% for the index last year.
Paul Marshall and Ian Wace brought different but complementary
skill sets when they formed their partnership in 1997. Ian Wace
started his working life at SG Warburg (now part of UBS),
where, at the precocious age of 25, he became the youngest ever
director. Marshall's first job was as a scaffolder-despite
having earned a degree in history and modern languages at
Oxford University and an MBA from the INSEAD Business School
near Paris. Marshall went on to become the chief investment
officer for European equities at Mercury Asset Management, the
largest fund manager in Europe at the time. In contrast, Wace
was a gifted trader who rose to become head of proprietary
trading at Warburg before moving on to serve as global head of
equity and derivatives trading at Deutsche Morgan
"Paul is very articulate and thoughtful and works well as the
public face of the firm," says one former investor, explaining
how the two complement each other. Marshall's public role has
been aided by his involvement in British politics and work on
hedge fund regulation, which the firm embraces. On the other
hand, the investor says, "Ian is an extraordinarily talented
and driven individual who can identify decent managerial talent
and has largely been responsible for building the global
operational infrastructure." (Further illustrating Wace's role
as the inside man, he declined to be interviewed for this
During its first five years of operations, Marshall Wace
focused on building its flagship vehicle, Eureka Fund, a
European biased long/short equity fund which was running assets
of some $593 million at midyear. The fund is co-managed by
Marshall and Wace and has since become something of a
multistrategy feeder into the many other vehicles they manage.
Despite its losses last year, Eureka still is outdoing the
competition over time. Since inception in 1998, Eureka has a
net annualized return of 14.32% through August of 2009,
compared with 9.87% for the EuroHedge European Long/Short
One of the firm's earliest backers was George Soros, who alone
accounted for half of the initial $60 million raised. Today,
institutional investors make up most of the investor
The firm really took off following the conclusion of a
long-running debate between the founders as to whether brokers'
and analysts' recommendations offered any economic value.
Coming from the buy side, Marshall argued that investment
research and sell-side ideas provided virtually no value
whereas Wace believed investment banks wouldn't spend billions
of dollars on research if it were a waste of time. Ultimately,
Marshall says, "Ian was proved right." At the very least, these
recommendations do move markets, Marshall Wace learned.
The partners decided to resolve the issue by asking Anthony
Clake, a young Oxford University graduate, to start measuring
the sell-side recommendations. "We asked the 40 people who
covered our account at that time to produce their ideas in a
virtual portfolio format and send Web-based texts, rather than
sending us e-mails or telephone messages," recalls
Clake was asked to design a filter that would assess investment
recommendations by not only looking at companies, but also
measuring the behavior of brokers and the performance of the
ideas they generated. The filtering tool that emerged, TOPS,
employs algorithms to analyze and evaluate stockbrokers' best
tips and feeds them into an enormous interactive database of
sell-side recommendations. Contributors provide as many
recommendations as they like through a dedicated Website, but
they are also expected to quantify their convictions by stating
how much would be invested in a virtual world. Marshall Wace
sets limitations on each stock in terms of market
capitalization and liquidity.
"Having created an electronic order trail and measuring every
contributor, we found that not only was there very significant
alpha in the information we captured, but we could also
optimize the alpha and create even further value by translating
it into real portfolios," explains Marshall. "The system
reverse-engineers our relationship with the Street."
Because the system is electronic, TOPS can cope with far more
ideas than the average fund manager. The system takes a high
number of extremely small positions-the maximum position cannot
exceed 3% of net asset value in any portfolio-that are
generally held on a medium-term basis for six to 12 months.
What the system didn't anticipate, however, is that the
liquidity of its holdings would subject it to extreme turmoil,
as occurred last year.
In addition, Marshall Wace broke new ground by decoupling trade
recommendations and trade orders by placing a trade with the
broker it judges to be most able to execute it. Brokers who
provide the best ideas might not necessarily receive a direct
order, but they will be paid for their recommendations. But
most of the firm's substantial commissions are directed toward
those securities firms whose ideas proved to be most
"They have always been ready to embrace new concepts when other
competitors have never even considered them," says Kevin
Gundle, senior executive officer of London-based Aurum Funds.
"Paul and Ian share a combination of a very sharp intellect and
an open-mindedness for really pushing the envelope."
Because the firm trades in large blocks as well as making
hundreds of trades each day, it generates a huge volume of
business. Until last year, Marshall Wace accounted for an
estimated 2% to 3% of overall trading on European exchanges and
as much as 4% on the London Stock Exchange. A novice broker at
an investment bank could accelerate his career prospects by
becoming involved in TOPS, which receives contributions from
approximately 3,000 people in more than 50 countries.
Led by 29-year-old Clake, 60 of the firm's 140 employees are
working on TOPS. The team includes actual rocket scientists,
such as Aron Cooper, who heads portfolio management in Marshall
Wace's U.S. office. Cooper holds a M.S.in aeronautics and
astronautics from the Massachusetts Institute of Technology and
worked at the NASA Goddard Space Flight Center before moving
into the investment industry.
The success of TOPS generated both controversy and imitators.
Critics have argued that although TOPS may have transformed the
relationship between the buy side and the sell side, it might
be guilty of providing privileged information that could
generate conflicts of interest. Marshall adamantly denies these
charges, however, and the U.K. Financial Services Authority
gave it a pass in 2006.
"If you look at TOPS, every trade comes from a broker, and
there is a transparent electronic audit trail from us to the
brokers who are then also able to do their own compliance check
on their person who puts an idea into the system," says
Marshall. "So, from a compliance perspective, it's the most
bulletproof system that exists. The advantage we may enjoy is
that in any market there is always somebody who gets the first
call from a salesman with a new idea-particularly if you're the
largest firm," he says. "We don't get the first call in the
U.S. because we're not the biggest trader in that market, but
we probably do get one of the first calls in Europe. Yet,
whether or not we get the first call, TOPS reacts very quickly
to that information."
Marshall's defense was backed by a report on these so-called
alpha capture systems, as the TOPS process became known, by the
Financial Services Authority, which said in a 2006 report that
largely because of the audit trail, the risk of obtaining
privileged information through these systems "might be lower
than through traditional communication methods."
The success of TOPS led a number of hedge fund managers to
launch their own version, and rivals are nipping at Marshall
Wace's heels. Firms such as Two Sigma in New York City, which
has basically replicated the TOPS process, have proved to be
the most direct competitors.
The latest to introduce a rival strategy is GSA Capital
Partners in London, known for its quant-based and statistical
arbitrage skills, which launched the GSA Alpha Capture Fund in
2008 and has raised about $200 million. "Being quant managers
who were very familiar with high-frequency equity trading and
short-term forecasting, we had been watching how TOPS operates
for quite some time and greatly admired what we regarded as a
genius process," says Jonathan Hiscock, a founder and managing
partner of GSA.
Though Marshall Wace may be the first, Hiscock argues his firm
might become the leader, as the firm with the "best mousetrap
that can suck out as much alpha from the information as
possible and create the best returns ... will be the top
player. We're confident that we've developed a pretty good
Another well-known firm using a TOPS-like strategy is Gartmore
Investment Management in London. Meanwhile, FactSet in New York
City, First Coverage in Toronto, and YouDevise in London have
created similar platforms.
But as Sanford Bragg, president and chief executive officer of
New York City's Integrity Research Associates, points out,
"These platforms don't have anywhere near the sophisticated
modeling that Marshall Wace possesses. Because they don't offer
performance measurement, customers can't gauge how to compare
them to other sell-side ideas."
Still, the competition hurts, as has the slide in Marshall
Wace's assets. "The problem for Marshall Wace is that the new
platforms have distracted the sell side, and the firm is not
getting the tender loving care that it had in the past," says
Bragg. "Wall Street is very mercenary and when your assets drop
sharply, you get less attention. It therefore diminishes the
carrot that Marshall Wace can offer to the sell side."
The European track record for TOPS started in mid-2002 when the
first allocation to MW European TOPS came from the Eureka fund,
which serves as a feeder into several TOPS vehicles as well as
having a manager-led component. The firm launched MW Americas
TOPS in 2005, MW Asian TOPS in June 2006, and MW Global TOPS MW
Market Neutral TOPS in 2007. The latest TOPS offering is called
TOPS Bespoke Product Design, which offers customized products
either by creating a new strategy within the TOPS platform or
through a managed account. "In terms of net capital flows since
May, there has been a distinctive bias towards managed accounts
where we have seen quite rapid growth," says Marshall.
With the dual flotation of MW TOPS on Amsterdam's Euronext
exchange in 2006 and later on the London Stock Exchange in
2008, Marshall Wace bolstered its reputation as an innovative
firm by having the largest hedge fund flotation to date.
Offering daily liquidity and the opportunity to invest in
various hedge fund strategies, the closed-end investment
company aimed to broaden the firm's retail base.
The listing benefited from buoyant market conditions and the
good returns that the TOPS process had been generating. Last
October, however, as a result of a widening discount to the
fund's underlying NAV amid plunging equity markets, Marshall
Wace allowed investors to cash out their shares. As a result,
the value of the listed vehicle has sunk to $230 million. On
September 17, the estimated NAV of the sterling share class
stood at 1,032 pence and the closing price was 865 pence,
indicating a discount of 14.7%.
Whether or not TOPS remains the firm's central strategy,
Marshall Wace determined it needed to build up other
businesses. In June 2008, the firm formed a joint venture,
Marshall Wace GaveKal Asia Limited, with Hong Kong's GaveKal
Holdings, a research boutique and fund management company. "We
combined their expertise and knowledge of the Asian markets
with our stock picking, execution and risk management skills,"
The new venture is responsible for the management of GaveKal's
absolute return funds with nearly $300 million under
management. Last December, it launched the MW GaveKal Japan
Fund (Market Neutral) and the MW GaveKal Japan Fund (Dynamic
To broaden the manager-led strategies, Marshall Wace took
advantage of the financial crisis to recruit top talent to run
additional new long/short funds. After hiring Amit Rajpal from
Morgan Stanley, where he ran Asian proprietary trading in Hong
Kong and was responsible for the global financials portfolio,
the firm launched Global Financials Fund, with an emerging
markets bias, in late 2008. This was followed in February 2009
by the Global Opportunities Fund, led by Fehim Sever, a former
manager of the award-winning Fidelity European Fund, out of
London. Since inception, Global Opportunities has returned more
than 19%. Another key hire, Rod Rehnborg, who previously worked
for Rosehill Capital in El Segundo, Calif., and is a 15-year
veteran of investing in Japanese markets, was recruited to run
the MW GaveKal funds.
Marshall Wace is also trying to gain a bigger toehold in the
U.S. market. In June, it brought on Jordan Foster, former
managing director at Intrepid Capital Management of New York
City, as head of marketing for North America to nab more U.S.
Marshall Wace's U.S. office opened in May 2004, and operations
began in February 2005 with the launch of the long/short equity
TOPS Americas, with a relatively modest $194 million in assets.
As a result, Marshall Wace became one of the few European hedge
funds whose U.S. business included an investment management
function as well as a marketing operation. TOPS Americas is the
only vehicle managed in the U.S.
of our office from the outset was to prove to ourselves and our
clients that the TOPS process was not only robust within a
European context, but could also be imported into a new region
and still deliver the same sort of attractive risk-adjusted
returns," says Michael Sargent (right), chief
executive officer of Marshall Wace, North America.
Essentially, Marshall Wace has created a microcosm of the main
London office in the U.S. "Our great advantage is that because
we've built a globally consistent infrastructure, there is no
need to have redundant systems in each region," adds Sargent.
"So our business has many of the same capabilities as
London-just writ smaller."
Although Paul Marshall has returned to a more active role at
the firm, he hasn't totally abandoned his political
activities-including those on behalf of the hedge fund
Marshall had his first taste of the rough-and-tumble of
electoral politics in 1987 when he unsuccessfully ran for
Parliament for the SDP/Liberal Alliance in London's Fulham
constituency. Despite rumors that he was interested in running
again, he hasn't ventured back into the electoral arena and
says he has no interest in doing so. Nevertheless, he has
stayed heavily involved in the SDP's successor, the Liberal
Democrats, which is the third-largest party in Parliament, and
serves as an adviser to Nick Clegg, the leader of the Liberal
Democrats. Marshall was the founding chairman of City Liberal
Democrats and has also held the chairmanship of the Liberal
Democrat Business Forum.
"I'm a 'liberal' in the British-not the American-sense, which
means combining economic liberalism with social justice," says
Marshall. "I believe everyone should have the same
opportunities as I did. We must strive to create a level
playing field, but we shouldn't aim to equalize the
In the past 10 years, Marshall has coedited several books on
economic and social policy, including the "Orange Book" in
2004, which had a significant impact on the party's thinking.
"The book was basically trying to get back to the roots of
liberalism, because the party was neglecting its liberal
economic history," he says. "We needed to resurrect the
philosophy of Adam Smith, John Stuart Mill and William
Gladstone, all of whom advocated free trade and a smaller
state. So it was necessary to combine the four key strands of
political, personal, social and economic liberalism to find
solutions to contemporary problems."
Marshall's passion for policy has found an intellectual outlet
through his chairmanship of the independent liberal think tank,
CentreForum, which he launched in 2005. Although CentreForum
has attracted various donors, Marshall is the chief benefactor,
having underwritten the £1 million launch.
In another arena, both Wace and Marshall were founder trustees
in 2002 of the children's charity, Absolute Return for Kids,
undoubtedly the favored charity of the London hedge fund
community. ARK annually raises significant amounts of money to
improve the lives of children who are victims of abuse,
disabled or poor. In addition, Marshall serves as a trustee of
Every Child a Chance Trust, which also runs programs to help
socially disadvantaged children.
Perhaps Marshall's greatest contribution to both policy and
hedge funds has been his role in the global debate over new
hedge fund regulation.
Marshall Wace was one of the 14 principal hedge fund managers
to establish the Hedge Fund Working Group in 2007, which
eventually evolved into the Hedge Fund Standards Board (on
which Marshall serves as a director). The firm is also
represented on the steering committee of the Alternative
Investment Association, the global hedge fund industry's trade
"It's very clear that our investment strategies are more
complex than those of traditional managers," says Marshall. "We
therefore created a set of standards, which interpret the
Financial Services Authority's 11 principles in relation to
issues which are particularly relevant to hedge funds, such as
disclosure, valuation, risk management and governance, and
which the majority of Europe's larger hedge funds have now
signed up to."
Marshall argued forcefully against the four-month ban on short
selling in the U.K., which he believes has proved to be a
mistake. Instead, he says, the relationship between short
selling and financial stability should be addressed by a
sensible disclosure policy. He thinks the FSA should monitor
overall figures on short positions, rather than those of
individual funds, and that could be combined with individual
disclosure of short positions in excess of 3%, the same
standard that is applied to the long side. Although he doesn't
expect a future U.K. ban on short selling, he says, "there may
well be a ban on naked short selling, which I think is
For Marshall, it's essential that the fight for regulatory
reform adopts a global perspective toward creating a new set of
standards for the hedge fund industry and, therefore, he
praised the G-20 meeting in April when it announced that the
Financial Stability Board would work to develop hedge fund
standards. "If you don't take a global approach, you will have
regulatory competition, and that normally leads to a leveling
down of standards," he asserts.
By the same token, he is highly critical of the current draft
European Union Directive, which aims to apply regional rules
that would transfer power to the Brussels authorities. In a
recent article in the Financial Times, he described this move
as "a classic exercise in closet protectionism."
In the U.S., Marshall recognizes that there are political
pressures for better regulations and supports the registration
of U.S. hedge funds, better control over leverage provided to
the hedge fund industry by prime brokers and a willingness on
the part of hedge funds to provide a greater degree of
transparency for the regulators in terms of the leverage they
"Back in 2006 to 2007, prime brokers were lending to hedge
funds which had highly leveraged, illiquid equities," he says.
"But if they had been extending credit to hedge funds on more
appropriate terms, many of these hedge funds which blew up
wouldn't have been able to deploy their capital in the same
Having survived the severe downturn in the assets that it
manages, Marshall Wace has demonstrated that it has the
capacity to come back fighting-partly through the strong
performance that many of its funds have generated this year.
While the TOPS process will remain at the core of the firm's
strategy for the foreseeable future, the fortunes of the firm
will also depend on the success of the manager-led funds it is
now developing as well as the new UCITS structures it will
Marshall Wace was among the first London-based hedge fund firms
to offer these European products with the launch of a UCITS
III-compliant version of an MW TOPS market-neutral strategy in
2008. The products are taking off because they allow funds to
be sold freely throughout the EU both to retail and
institutional investors who cannot invest in offshore vehicles
and are seeking low minimum entry levels as well as daily
Marshall Wace believes its funds are highly adaptable for a
UCITS wrapper because they employ modest leverage and are
Says Notze Stucki's Bastianpillai, "Unlike the typical hedge
fund model, Marshall Wace has a key edge in that it can readapt
its original classic, long/short model over and over
Assets under management: $3.5 billion (July 1,
Flagships: Eureka (14.32% annualized through
Aug 31), MW European TOPS (9% annualized), MW TOPS Market
Neutral (-1.09% annualized)
Founders: Paul Marshall & Ian Wace
Offices: London, Greenwich, HK