Marshall Wace Raises EU1.5 Billion in Hedge Fund IPO

Date: Friday, December 8, 2006
Author: David Clarke and Christine Harper,

(Bloomberg) -- Marshall Wace LLP raised 1.5 billion euros ($2 billion) in the largest initial public offering of a hedge fund, permitting individual investors to buy into a market normally limited to millionaires.

The London-based firm sold shares of MW Tops Ltd., a closed- end investment company, for 10 euros each, Marshall Wace said late yesterday. The stock closed unchanged in its trading debut on Euronext Amsterdam today.

Hedge funds have over the past two years become more available to individual investors, as Goldman Sachs Group Inc. and Rab Capital Plc sold shares. So-called alternative investment funds raised more than $16 billion through stock sales in Europe this year, up sevenfold from 2005, data compiled by Bloomberg show. MW Tops will invest in two Marshall Wace funds that have outpaced global stock market and hedge fund indexes this year.

``It's no surprise they raised this much,'' said John Godden, chief executive officer of London-based IGS Group, a hedge-fund advisory firm. The question is ``whether the exposure of existing investors will be watered down and whether they will have to go down the list of ideas to continue to make these returns.''

Marshall Wace, founded in 1997 by Paul Marshall and Ian Wace, has about $10 billion under management following the IPO. Before setting up the hedge fund manager, Wace, 43, was head of equity and derivatives trading at Deutsche Morgan Grenfell, and prior to that spent 11 years at SG Warburg. Marshall, 47, previously worked at Mercury Asset Management, which was bought by Merrill Lynch & Co. in 1997.

Raising Money

The new fund will aim for returns of between 12 percent and 16 percent annually after fees and expenses. The two Marshall Wace funds that MW Tops will invest in employ a computer program to gather and select investment ideas and take bets on declining and rising stocks.

Hedge funds have been attracting more money, pulling in $44.5 billion in the three months to the end of September, the most in one quarter since at least 2003, according to Hedge Fund Research Inc. in Chicago. Total assets in the industry were $1.34 trillion at the end of September.

The funds and their managers are also using a wider range of methods for raising money. Citadel Investment Group LLC, the Chicago-based hedge fund controlled by Kenneth Griffin, yesterday sold $500 million of five-year notes in the first-ever sale of bonds by a hedge fund.

Marshall Wace's MW Tops sold stock in euros, dollars and British pounds to investors in Europe, the Middle East and Asia. About 45 percent of the demand came from Britain. Few of the investors in MW Tops were already clients of Marshall Wace- managed funds, the company said in a statement.

`Broad Range'

``There is genuinely a broad range of investors who would not necessarily have come into our existing funds,'' said Marshall in a telephone interview today. The company's other funds have a minimum investment of $250,000.

MW Tops will invest equally in the Marshall Wace Tops Fund Opportunistic, which returned 15.1 percent in the first 10 months of the year, and the Marshall Wace Tops Fund Fundamental, which rose 13.3 percent. That compares with a 4.6 percent gain in the MSCI World Index and a 1.5 percent advance in the Credit Suisse Tremont Hedge Fund Index in the period, when expressed in euros.

Hedge funds are usually aimed at investors with at least $1 million, and endeavor to make money whether financial markets fall or rise. They can use leverage to help boost gains and can sell short, or borrow securities and immediately sell them with the hope of buying them back at a lower price.

Difficult to Understand

Hedge funds in Europe have been able to bypass rules restricting the sale of the investments to less affluent individuals by listing their funds as companies on the stock market and selling shares.

``These are incredibly difficult investments to understand, even for professionals,'' said Justin Modray, a financial adviser at Best Invest in London. ``Most retail investors won't have a clue how these work.''

Shares of some similar funds sold earlier this year have lagged behind stock market gains. The pound-denominated shares of Goldman's Dynamic Opportunities Ltd., a fund of hedge funds, closed at 100.75 pence. The shares were sold at 100 pence ($1.96) in July. Over the same period the U.K.'s FTSE 100 Index has gained 3.8 percent.

Deutsche Bank AG, Merrill Lynch & Co. and UBS AG managed the Marshall Wace sale and have an option to increase the offering by 15 percent in the next month. Deutsche Bank bought less than its maximum allocation in the share sale, spokesman Richard Thomson said, declining to elaborate. The bank had agreed to buy as much as 9.9 percent, according to the offer document.

Hedge Fund Fees

Investors in MW Tops paid an initial fee at the IPO equal to 1 percent of their investment. The annual management fee is equivalent to 2 percent of the assets invested, while the company also takes a fifth of any gains. The average U.K. mutual fund charges 1.79 percent of assets annually, according to the research firm Lipper Fitzrovia in London.

Funds that invest in other hedge funds have faced criticism for leveling two layers of charges, one for the fund itself and another for the funds in which it invests. Clients of the MW Tops Ltd. fund won't face a doubling of fees and will pay the same or less than investors in the underlying funds, the company said.

To contact the reporter on this story: Christine Harper in New York . David Clarke in Edinburgh at