Making Hedge Funds Simpler (Where's My Cut?)

Dec. 4 (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.

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. 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, UBS AG and smaller firms such as Tachibana Securities Co. and Ichiyoshi Securities.

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. 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. The 1,000 stocks a day with that trading volume in Japan is more than all of Europe’s markets can provide.

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”. 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. 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.

p/s photos: Fala Chen