What makes a good fund manager? The attached link to an interview with Sir Paul Marshall, cofounder of the Marshall Wace hedge fund, gives an interesting insight into the thinking of one of Britain’s smartest fund managers. There are no share tips but it does contain useful clues as to how to succeed in the hedge fund business.


Marshall, 61, an ex-Mercury Asset fund manager, founded Marshall Wace with Ian Wace, 57, a former head of global trading at Deutsche Bank, in 1997. They started with $25m backing from George Soros and another $25m from family and friends. Since then it has grown into one of the biggest global hedge funds managing over $40bn, split equally between traditional discretionary fund management and sophisticated proprietary trading strategies.

Although Marshall runs a global hedge fund equipped with the very best algorithems, he believes that there is no area of financial life with such a big disconnect as between academic theory and market practice. On one side are a bunch of economists who have won Nobel prizes for research on efficient markets and rationality, and on the other are multimillionaires and billionaires who have made their fortunes because they think that markets are anything but efficient. Academics cannot cope with the idea of modelling stupidity in financial markets says Wace who jokes that “forty per cent of what I do is stupid”.

He believes that behavioural ways of thinking are more relevant for studying success in fund management. How do you deal with disposition bias – the tendency to cut winners and run losers – and anchoring bias, where an investor relies on tried and tested rules which have served them well over the years.

Wace’s critique is not reserved just for academics. Warren Buffett, regarded as one of the world’s great investment gurus, does not escape criticism. His idea that if you know what you are doing you don’t need to diversify has not prevented a deterioration in the returns on his concentrated portfolio in recent years. The view that diversification is a protection against ignorance is a pretty arrogant statement says Wace, who regards the combination of the benefits of concentration with diversification as the “holy grain of investing”.

In this context Marshall Wace is credited with creating the world’s first ‘Alpha Capture’ application nearly 20 years ago. Its MW TOPS is a proprietary system that…

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