Lansdowne Partners and Marshall Wace: a tale of two hedge funds

Born a year apart a quarter of a century ago, Lansdowne Partners and Marshall Wace struck out on the same path, using fundamental analysis to buy and sell European equities.

Now the London hedge funds are very different animals. Lansdowne has struggled to diversify beyond its flagship fund, hamstrung by a static ownership structure that limits incentives for new hires. Assets under management have plunged by two-thirds from a 2015 peak of $21bn and it has shifted from high-margin hedge funds to a long-only business commanding a fraction of the fees.

Marshall Wace, meanwhile, has carved out a position as Europe’s answer to US industry giants Citadel or Millennium Management. Assets under management have swelled to a record $63bn, an anomaly among the region’s equities hedge funds that have largely retrenched. And a dynamic partnership structure has ensured retiring partners make way for the next generation.

The Financial Times spoke to more than a dozen top insiders, investors and rivals about how the firms’ fortunes came to diverge in a Darwinian tale of performance, succession and strategy.

Their trajectories provide a microcosm of the hedge fund sector’s evolution from a cottage industry of boutique managers to a handful of big names running diversified, sophisticated and technologically driven businesses. They also serve as case studies on the need to keep innovating, on whether hedge funds can or should outlast their founders — and on how past performance is no guarantee of future success. 

“Like a lot of fund managers, people might be clever and good at investing,” said one investor. “But they’re not always good at getting the strategy of their own firm right.” 

In 2017 Lansdowne began discussions with BlackRock head of European credit Michael Phelps over whether the London firm might be able to bring his team on board to launch a credit fund, according to several people familiar with the talks. 

It would have been a big departure for Lansdowne, which had carved out a reputation as the gold standard in equity investing, led by portfolio managers Peter Davies and Stuart Roden, who had cut their teeth at Mercury Asset Management. 

The cerebral pair, who managed Lansdowne’s flagship UK fund that was later rebranded as the developed markets fund, had prospered by knowing the companies in which they invested inside-out. Chief executives sometimes even cited them as understanding their businesses better than they did themselves.

But the top decision makers at Lansdowne could not agree on its own strategy. While it had launched several other funds over the years, the developed markets fund — a long/short equity strategy that bets individual stocks will either rise or fall — still dominated the firm, accounting for about 80 per cent of its assets and even more of its profit.

Roden, who stopped running money in 2016 to focus on the business, told investors a foray into credit would help diversify the firm and bring on a new generation of talent. But a deal was never struck, with Roden unable to convince its retired founders and controlling shareholders Sir Paul Ruddock and Steven Heinz to dilute their share of Lansdowne to incentivise a new team, according to the people familiar with the talks. 

Phelps left BlackRock and in 2019 set up Tresidor Capital Management in one of the more successful European hedge fund launches of recent years, securing $200mn in seed capital from alternatives giant Blackstone and growing to $2.2bn in assets with double-digit annualised returns since then, according to an investor.

Roden left the firm in September 2018 to “pursue other interests”, joining Tresidor as chair the following year. Investors say he was open about the reason for his departure: frustration that attempts to diversify the firm had not come to fruition. 

His exit coincided with the $21bn peak of the firm’s assets under management and was followed by a period of mixed performance, investor outflows and organisational upheaval.

Founded in 1998, Lansdowne enjoyed early success as it grew with the European hedge fund industry. By the time it sold a 19 per cent stake to Morgan Stanley Investment Management in November 2006, it was managing $12bn across five different investment strategies: European equities, UK equities, global financials, macro, and emerging markets. 

It further cemented its reputation during the 2007-08 financial crisis, when Davies and Roden’s UK equities fund profited from lucrative short positions in financials and housebuilders. They then turned positive on equities and caught the market rebound, ending 2009 up 25.6 per cent.

But the run did not last. The UK equities fund lost 20.1 per cent in 2011 after it was hurt by its long positions in financials. In April 2012 it was renamed the Lansdowne Developed Markets fund to reflect its wider remit. 

After Ruddock retired in June 2013 and Heinz stepped back from day-to-day activities the following year, they kept their large ownership stakes and remained Lansdowne’s controlling shareholders, paving the way for some of its later challenges.

“You can’t manage a successful organisation with that percentage of the economics going to non-producing owners,” said one rival. 

Lansdowne appointed Alex Snow, founder of UK stockbroker Evolution, as chief executive in September 2013. He brought on Per Lekander, a portfolio manager from UBS and Norges Bank Investment Management, and a team to launch an energy fund. 

But within three years Snow had left in an exit also linked to frustration at not being able to expand the firm, he told investors.

“Snow was told to make Lansdowne a bigger asset manager but he was never fully empowered to do that,” one said.

Snow’s departure was followed by the closure of Lansdowne’s financials hedge fund. And in July 2020 the firm announced it was closing the flagship developed markets fund after a long period of poor performance. About half its investors converted to the long-only strategy, which has gained 43 per cent since then. The following year Lekander — once Lansdowne’s great hope for rebuilding its hedge fund business — left to launch his own firm, Clean Energy Transition. CET gained 19 per cent last year, is down a small amount this year, and has grown to manage $2.7bn, according to investors.

Lansdowne’s struggles are symptomatic of an existential crisis that has beset the European long/short equity sector. The rise of passive investing has resulted in big swings in markets as exchange traded funds move in and out of individual stocks. The dominance of large US tech companies has meant markets are increasingly driven by a handful of stocks. And a protracted bull market since the financial crisis, turbocharged by central bank stimulus, has made “shorts” — betting on falling prices — more difficult.

In the past couple of years, peers including Adelphi Capital and Sloane Robinson have thrown in the towel while others such as Egerton Capital and Pelham Capital are running smaller hedge fund businesses than before.

A person close to Lansdowne acknowledged that it had not sufficiently evolved. Once again trying to grow its business and reduce dependence on the developed markets fund, it announced the purchase last month of long-only boutique Crux Asset Management. 

The acquisition, for which financial terms were not disclosed, is partly aimed at catalysing the evolution of Lansdowne’s ownership structure, the person close to the firm said. “Over time more of the firm’s equity needs to be in the hands of the current portfolio managers and management.”

Between them Davies, Ruddock and Heinz still own 55 per cent of the firm. Morgan Stanley will retain its 19 per cent stake in Lansdowne and Arkansas-based financial services company Stephens, which last year bought a minority stake in Crux, will transfer its stake to Lansdowne and increase it to 9 per cent.

Lansdowne sees its future in three main revenue streams: its traditional institutional client base, a more recent push into the wealth market, and expanding its hedge fund servicing business where it provides middle and back office services to other managers. It has about $6bn in assets under administration in the servicing business, including Lekander’s Clean Energy Transition, with which it has a profit share, and Patrick Degorce’s Theleme Partners.

“This is a special place built on 25 years of investing patiently in equities and doing so against consensus, transparently and with high conviction,” managing partner Brian Heyworth told the FT. “There is a great group of people here across the whole firm. We think the opportunities available outside of the familiar US large caps are really compelling.”

Marshall Wace was set up by Paul Marshall and Ian Wace in 1997 with $50mn in assets, some of which came from Hungarian-born financier George Soros. Marshall was ex-Mercury while Wace had worked at SG Warburg then Deutsche Morgan Grenfell. 

“The best thing we ever did was recognise that Paul’s interest was in markets and my interest was in business-building, and that we allowed each other to develop in those spaces,” Wace told the FT in a rare interview. “A defining characteristic of Marshall Wace is that I spend a considerable amount of time thinking about how to build this business . . . that’s really, really important in building a definable competitive advantage.”

The pair did not start with a grand plan and their strategy has kept evolving, he said, through “constantly sitting there thinking . . . how do you do it? We never had analysis paralysis. We were always pretty ambitious to try to invest in the business systems, processes, controls.”

A crucial development came in 2002 with the invention of Trade Optimised Portfolio System (Tops), a proprietary trading system developed by Anthony Clake that analyses buy and sell recommendations from about 1,000 external analysts. The concept is known as “alpha capture” and the flagship Tops fund is market neutral — generating returns uncorrelated with equity markets.

These strategies keep evolving. “You will never ever be successful mining spent ground,” said Wace.

The Tops Market Neutral fund is up 2.88 per cent this year and has recorded an average annualised gain of 9.31 per cent since its November 2007 inception. Marshall’s Eureka fund, which accounts for about a third of the firm’s assets, is flat this year but has delivered average annualised gains of 11.9 per cent since its 1997 launch, according to investors. 

Tops has been the linchpin for Marshall Wace’s quantitative business, which has added scale to the firm and allowed it to diversify beyond its roots in fundamental equities. Two-thirds of its $62bn in assets is run in systematic strategies that use computer algorithms, about a third of its 550 or so employees work in technology-related roles and the firm spends tens of millions of dollars a year on technology.

“In order to try and access these systematic businesses, the first thing is the idea but the other thing is how do you actually optimise and execute that idea,” said Wace. “When you see that competitive advantage, invest in it. But the devil is in that execution.” 

As Marshall Wace grew, it also distributed ownership of the company more widely among key personnel. “The root of our success has been partnership,” said Wace. It counts 33 partners and when one retires their holding is diluted to a smaller stake, with the rest of the shares purchased and redistributed.

“Lansdowne and Marshall Wace are two polar opposites,” said one investor. “Marshall and Wace have said that they’re happy to be a smaller shareholder in a bigger group to incentivise the next generation.” 

Marshall Wace suffered a near-death experience in 2008 when clients pulled their money and assets plunged from $14bn to $3.95bn in three months, heralding soul searching about the shape of the business.

“When you watch a horrendously large percentage of your assets disappear out of the door within an extraordinarily short period of time, you vow that you would never allow this to happen,” said Wace. This meant rethinking liquidity and fee structures, extending funding terms and increasing the portion of US institutions and sovereign wealth funds in its client base.

As part of the push to stabilise the business, Marshall Wace sold a 24.9 per cent stake to KKR in September 2015. The alternatives giant has since increased its holding to 39.9 per cent and during their partnership Marshall Wace’s assets under management have almost tripled.

Wace said the KKR deal “focused the mind of the partners about the value of partnership, and it focused the investors on the value of investment”.

“I think when you build a business, what you try to do is to build people who build a business,” said Wace. “You don’t build a business, it’s all about people.”