market folly

Lee Ainslie's hedge fund firm Maverick Capital finished the first quarter up 3.6% and has seen 14% annualized returns since 1995. Many of their recent gains are attributable to their short positions in emerging markets. As we've detailed before, some hedge funds believe inflation is the biggest threat to the emerging world.

The hedge fund is now paying more attention to global macro issues as they affect markets more than ever. Maverick is not the first equity-centric hedge fund to include macro observations in their research as David Einhorn's Greenlight Capital has done this for a few years as well.

China's Importance

In Maverick's first quarter letter, Steve Galbraith talks about the importance of emerging markets. He writes, "From a top down perspective, what we see in China is a wonderful investment cocktail characterized first and foremost by tremendous growth potential, likely laced with enormous winners and losers but with still meaningful reliance on the state for capital allocation."

Interestingly, Maverick had $2 billion in gross capital (both long and short) exposed to China. They are long consumer and technology companies, financial firms with double digit return on equity, Chinese social media companies, as well as industrial companies with wide moats. On the short side, they are focusing on bad balance sheets and bad governance. In the past we've highlighted some of the Chinese reverse merger frauds as well.

Maverick believes the biggest risk in China is the misallocation of capital. Galbraith writes that, "Ironically, I suspect the true test of the Chinese economic model will come not with hardship, but with prosperity." Many investors are watching cautiously to see how the Eastern nation handles such growth.

Embedded below is Maverick Capital's first quarter letter (email readers need to come to the site to read it):



In recent portfolio activity from this hedge fund, we detailed how they reduced their position in Rightmove recently (LON: RMV). For more commentary from Ainslie, be sure to read his 2010 year-end letter focusing on the impact of fund size on returns.