market folly

Continuing our series of hedge fund profiles and biographies, we turn our attention now to Lee Ainslie of Maverick Capital. We thought this transition was appropriate given how we just yesterday initiated our profile series with coverage of hedge fund legend Julian Robertson of Tiger Management. (We also covered Robertson's big inflation bet as well). We turn to Lee Ainslie of Maverick Capital now because Ainslie formerly worked under Julian at Tiger. As such, he is a 'Tiger Cub' and employs much of the investment methodologies he learned while at Tiger as their technology analyst.

Ainslie graduated from the University of Virginia and then received his MBA from the University of North Carolina. He founded Maverick Capital at age 29 in 1993 with $38 million in seed capital from Texas entrepreneur Sam Wyly. Maverick has offices both in Dallas and New York and now managers well over $5 billion. They are a long/short equity hedge fund in the 'old school' sense of the word. The truly are a hedged fund as they focus on equities on both the long and the short side. In an interview with McKinsey, Ainslie has said that, "Our goal is to know more about every one of the companies in which we invest than any noninsider does. On average, we hold fewer than five positions per investment professional - a ratio that is far lower than most hedge funds." They focus on exhaustive research and that is their edge. This methodology carries over from his days at Tiger Management, who was also known for their extensive research.

Ainslie learned one thing in particular from Robertson which he still does to this day. When he reviews his gameplan and stocks, he tests his conviction by gauging whether the name is a buy or a sell; there is no hold. Ainslie says, "Either this security deserves incremental capital at the current price point or it doesn't - in which case, let's sell it and put the money to work in a security that deserves that incremental capital."

Maverick's strategy is straight up stock picking, both long and short. While they focus on both sides of the book, we've been told before that they do not deploy pairs trades. One thing Maverick does use, however, is multiple variants of risk management. Ainslie likes to manage risk appropriately by keeping positions tight and under control. Typically, he likes to keep each position top out at around 5-8% of the overall portfolio. This discretion allows for solid position diversification and risk mitigation. Additionally, instead of having one or two people making all the investment decisions, Maverick has six industry sector heads. The industry heads of the consumer, health care, cyclical, retail, financial, and technology sectors all report to Ainslie. While Ainslie still has the ultimate say, he considers them peers and values the team culture at Maverick. In an interview in the past, Ainslie has said "I spend the majority of my day talking to them because they know so much more about each of their stocks than I could ever hope to. We're all peers."

Each sector head typically has around 7 analysts and so there is a real team atmosphere both on a micro a firm-wide level. Ainslie serves as a centerpoint amongst the teams, as his job is to weigh the input from the heads and allocate the right amount of capital to the best ideas. It's key to also point out the impact Steve Galbraith has at Maverick. Galbraith joined Maverick after leaving his post as chief equity strategist for Morgan Stanley. He plays just as an important role in the investment plan as Ainslie because he offers what Ainslie says he himself lacks: a more macro perspective. They don't use price targets and instead adapt as the world around them changes, constantly re-evaluating their investments. Historically, Maverick has run 25-75% net long, with it typically falling around the 49% range. Additional figures show that in the past they've allocated 140-145% of capital to stocks expected to rise, while allocating around 100% of capital to their shorts.

As such, they employ some leverage, typically landing their gross exposure at around 200-250%. Ainslie makes the case for using this slight amount of leverage as a tool to run a more balanced portfolio. Without leverage, a 75% long and 25% short portfolio gives you a ratio of longs:shorts of 3:1. But, when employing a slight amount of leverage, he can run his book 150% long and 100% short. That leaves his ratio of longs:shorts at a more risk-friendly 1.5:1.

What is interesting about their short positions is that they don't short things simply as a hedge. They don't usually use index hedges and instead focus on individual stocks/companies. They harp on risk management by allocating their plays equally by both industry and world region. Maverick is a long/short equity fund and pick stocks, that's all there is to it. This is one of the main reasons we track them (& the other Tiger Cubs) in our hedge fund portfolio tracking series. By following funds that use a fundamental bent and focus on stockpicking, we can be assured that they typically have a longer investment timeframe. They are investing in their portfolio companies rather than trading rapidly in and out of them. We're covering Maverick's holdings today, but we've already covered some of Ainslie's fellow Tiger Cubs including Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, and Andreas Halvorsen's Viking Global. All of those funds have solid track records and are good to track due to their investing methodologies.

Getting back to Maverick, it is also prudent to point out that they focus a lot on both valuation and management teams. Ainslie points out that, "We have made the mistake more than once of not investing in a company with a great management team because of valuation concerns - only to look back a year later and realize we missed an opportunity because the management team made intelligent, strategic decisions that had a significant impact." Maverick typically looks for a one to three year holding period for their investments and seeks companies that will out or under-perform by a wide margin on an annualized basis. Additionally, they don't like to evaluate the success of a company by whether or not they beat the market's expectations on quarterly earnings. However, they do dissect the numbers and like to compare their own expectations with the reality of the company's performance.

When talking about Maverick's opportunity set, Ainslie has said that, "At Maverick, we define our investment universe as all stocks that have an average daily volume greater than $10 million - there are roughly 2,500 such stocks around the world. Since we may hold long or short positions in any of these stocks, we have about 5,000 different investment opportunities." It is clear that Maverick ultimately wants to be invested in liquid companies, as they have previously stated that they could liquidate more than 70% of their portfolio within a week's time. This is prudent to note when you consider numerous funds in the financial crisis had problems with illiquid positions.

As of the end of 2008 they had six main funds that we're aware of: Maverick Fund, Maverick Levered, Maverick Neutral, Maverick Neutral Levered, Maverick Long, and Maverick Long Enhanced. The additional funds contain the same positions as their main fund, but they contain different quantities based on the strategy and fund structure. Maverick uses a value approach (obviously learned from Julian) and one of their most popular metrics is comparing companies' enterprise value to their sustainable free cash flow.

They are an ideal fund for any aspiring stock picker to follow and hopefully you now see why. Check out Maverick's investments and recent portfolio changes to get a better idea as to what they're up to these days. Also, make sure you read the other posts in our Market Folly hedge fund Profile/Biography Series: Julian Robertson (Tiger Management). Stay tuned, as we'll be adding new funds to the series periodically.


Sources: Investor Letters, Various Interviews, HedgeHunters, & McKinsey