Lee Ainslie is a pure long/short equity investor. He doesn’t trade bonds, currencies, commodities or options. He buys what he thinks will beat the market and he sells what he thinks will underperform. It’s as simple as that. He’s beaten the S&P 500 index on average by about 6-7 percentage points annually but with 50% less volatility. This leads us to think he has close to a 10% annual alpha, although we haven’t seen his monthly returns to calculate his actual alpha. During the last 10 years, Maverick returned 7.7% and this year it’s outperforming the S&P 500 by more than 4 percentage points.
Lee Ainslie underperformed 3 times in the past 10 years; in 2003, 2005 and 2009. In all three cases, his short positions hurt his performance. Last year, Maverick returned 23.6%, compared to 26.5% for the S&P 500 index.
Lee Ainslie, a graduate of UNC, met Julian Robertson when he was managing $700 million with seven other analysts. Ainslee joined Tiger in 1990, worked three years there and then launched Maverick in October 1993 at the behest and support of Sam Wyly. Ainslee was 29 years old.
Maverick, on average, has a net market exposure of around 49%. Ainslie discusses his investment strategy in detail in Katherine Burton’s “Hedge Hunters”. The median market cap in his portfolio is $9 Billion and his fund can liquidate 75% of holding within one week without significantly moving the stock prices. This paragraph from “Hedge Hunters” reveals how they make their investments:
Ainslie and his team are firm believers in finding out as much as they can about a company. In particular, they want to understand how sustainable earnings growth is and how much free cash flow the company will continue to produce and for how long. Maverick analysts spend much time talking to competitors, suppliers, and customers, as well as to corporate executives. The analysts and sector heads think strategically about the business and the industry, looking out two or three years, identifying the winners and the losers.
There are rumors out there right now that some hedge funds will be prosecuted because of aggressive use of expert networks that sometimes cross the line and provide illegal inside information. We’ll see whether Maverick will be prosecuted.
During the third quarter of 2010, Maverick added several companies to its portfolio. You can see Maverick’s 10 largest positions and 10 largest new positions. Usually larger companies will have the largest positions in a hedge fund’s portfolio simply because they’re more liquid, meaning more money can be invested in these stocks quickly without causing a big market impact. However, these stocks aren’t the best performers. We've developed a proprietary ranking methodology to determine the highest conviction stocks purchased by hedge funds. Here are the 7 new high conviction stock purchases by Lee Ainslie’s Maverick Capital:
|ABERCROMBIE & FITCH CO||(NYSE:ANF)||$266M|
|BED BATH & BEYOND INC||(NASDAQ:BBBY)||$255M|
|LIFE TECHNOLOGIES CORP||(NASDAQ:LIFE)||$122M|
|COCA COLA ENTERPRISES INC||(NYSE:CCE)||$126M|
|OWENS CORNING NEW||(NYSE:OC)||$45M|
Abercrombie & Fitch: A director of the Abercrombie & Fitch bought more than 7,000 shares at $35.51 in August. The stock is up 35% in three months.
Coca Cola Enterprises Inc: An officer of the Coca Cola Enterprises purchased 5,000 shares at the beginning of November at $24.28. The shares are up more than 2% in three weeks.
Kirkland’s Inc: This stock is down more than 50% since May. Maverick’s average price for this position is $13.86, 15% more than the current price.
Disclosure: No positions