Marshall Wace Returns 26% This Year With TOPS Japan Hedge Fund

Date: Friday, December 4, 2009
Author: Tomoko Yamazaki and Komaki Ito, Bloomberg

Marshall Wace LLP, the London-based hedge-fund manager overseeing $4 billion in assets, returned 26 percent with its Japan-focused hedge fund this year by tapping ideas from 150 equity salespeople from outside the firm.

The Marshall Wace TOPS Japan Fund’s gains contrasts with the Topix index’s 2.3 percent drop this year through November, the worst performing benchmark among developed nations this year. The long-short equity strategy fund invested in about 200 Japanese stocks out of 1,000 that trade more than $1 million a day, Des Anderson, a partner at Marshall Wace Asia Ltd., said in an interview in Tokyo.

The company introduced its strategy first in Europe in 2002, employing a computer-based poll of brokerage salespeople to construct the portfolios based on the top idea pitches. The strategy was introduced in the U.S. in 2005 and Asia in 2006.

“What we do with that information is our crown jewel,” Anderson said on Dec. 2. “Japan is clearly a difficult market, but there is a lot of scope here to be successful. If you think you’re a stock picker, Japan is a great place to pick stocks.”

Marshall Wace, founded in 1997 by Paul Marshall and Ian Wace, has invested about $250 million in Japan with its TOPS strategy. Anderson, 40, started the firm’s Asian office in Hong Kong in 2006.

The firm polls institutional salespeople in Tokyo, London and New York from 24 brokerages including Nomura Holdings Inc., UBS AG and smaller firms such as Tachibana Securities Co. and Ichiyoshi Securities Co., he said.

500 Ideas

The asset manager gets about 500 ideas a day in Asia for investments. In return, the brokerages get a commission based on the performance of individual salespeople’s picks.

The firm’s Japan fund trades stock worth about 2.8 times its own size every month, compared with 2 to 2.5 times for its Asia funds and 1 to 1.5 times for its funds in Europe, Anderson said. Commissions rise with higher volume.

Japan’s lack of consolidation across industries makes it easier to find liquid stocks, giving the market more equities with over $1 million worth of trade a day, Anderson said. The 1,000 stocks a day with that trading volume in Japan is more than all of Europe’s markets can provide, he said.

To diversify and limit risk and control liquidity, no single stock is more than 3 percent of a fund’s net asset value and positions between long and short bets are kept “rather neutral,” Anderson said. In a short sale, a trader borrows stock and sells it in the hope of buying back cheaply later.

Geographic Strategies

The fund’s investors can trade in and out of the portfolio on monthly basis, while the portfolio itself can be extinguished within one trading day, according to Anderson.

While global hedge funds have made a comeback this year after posting record losses in 2008 in the wake of the global financial crisis, Anderson said that capital-raising, even for Marshall Wace’s best performing funds, has been difficult.

“Investors, having been through a difficult time, are more comfortable investing in global strategies than they are going to geographic specifics,” Anderson said. “That’s a function of people being hurt by the crisis and they don’t want to narrow their scope too much by betting on Japan.”

The Eurekahedge Hedge Fund Index, which tracks more than 2,000 funds globally, has gained 18 percent through November, heading for its best year since 2003. In 2008, it posted an 11 percent loss, the biggest on record.

Anderson forecasts that the direction of the Japanese market in 2010 hinges on what the Bank of Japan will do after the central bank this week announced a 10 trillion yen ($113 billion) credit program to expand lending and curb the rising yen’s effect on exporters.

‘Crucial Point’

“We’re at a crucial point and if the Bank of Japan follows through with some significant quantitative easing, that would be received very well by the market,” Anderson said. “People have been shorting Japan to raise capital to invest in the rest of region. That has clearly been a very successful trade this year, but that trade has to reverse at some point.”

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net