Marshall Wace - social investing, hedge fund style
Marshall Wace has taken the concept of social investing / wisdom of the crowd investing to a whole new level. These guys created a trading system called Trade Optimized Portfolio System (TOPS), which basically ranks analysts from brokerages on the performance of their tips, benchmarks them, and follows the investment recommendations of the best performers. They’re not exactly small fries either - with an estimated $15bn dollars in Assets Under Management (AUM), they’re responsible for some 3-4% of the daily volumes of all equites traded on the London Exchanges, and are ranked amongst the 10 biggest hedge funds in Europe.
As one investment banker put it, the idea behind TOPS was simple (in concept, though probably fairly complex in the algorithms used). It was the equivalent of ’skimming the cream to get the best investment ideas’. The incentive system is clearly in place, as well - if you rank highly according to the the ranking table spat out by the TOPS system, then Marshall Wace will not only take your advice, but transact through your brokering outfit - and this means millions of dollars in commission revenue. In fact, Marshall Wace is rumoured to dole out $250mn in commissions to brokerages every year. Wow.
Because of this incentive system, however, the fund has been subject to scrutiny, with some quarters claiming that the TOPS system could drive salespeople / analysts to breach chinese walls to get a hold of insider information to get an edge and win commissions.
‘So, what?’, I say. I don’t see how this is any different from what happens anyway. Let’s face the facts: chinese walls (mechanisms put in place to prevent price sensitive insider information from leaking from banks’ departments that may be privy to it - e.g. from an Mergers and Acquisitions team of a bank that knows about a particular deal that would move stock prices, leaking to and being used by traders on the trading floor) are thinner than we wish they were / imagine them to be.
In a competitive environment such the US / UK - salespeople are always driven by landing big bonuses based on even bigger deals. So they’re always going to want to get an edge, get that extra bit of insider information that will lead to a better trade for their fickle clientele. Anyway, the various regulators didn’t object at the end and they very much carried on.
What makes this story even more interesting is that the Eureka Fund - which uses the TOPS system - is run by Anthony Clake, and has been doing so for the last two years. He joined the fund after graduating from Oxford. He was the one that designed the software (although the concepts that drove the algorithm must have been a team effort) behind TOPS. When became the fund manager he was all but 25 years old - making him one of the youngest fund managers in London (surely there aren’t any other 25-year-old fund managers? Does my managing my own funds qualify me as a ‘fund manager’?). Apparently this guy trained in the Deutsche Bank analyst training programme before he joined the fund.
Oh I almost forgot the little detail around their performance. Yeah, they’ve got that covered (I’ve only looked at TOPS funds and those that have been around for at least 3 years - long enough to demonstrate a track record. Source: FT):
In fact this strategy is so successful that despite the unraveling global economy in light of the subprime collapse and rising commodity prices, Marshall Wace just raised another EUR 2bn in March this year!
Tags: Equities, Finance, Investing, Investment, Investor community, Marshall Wace, Social Investing, Social Networking, Stock Market, Wisdom of the Crowd
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