Maverick Capital's Lee Ainslie on Impact of Fund Size on Returns ~ market folly

Thursday, February 10, 2011

Maverick Capital's Lee Ainslie on Impact of Fund Size on Returns

Maverick Capital's founder and manager Lee Ainslie recently sent out his year-end 2010 letter to investors. In it, we learn that Maverick's main fund returned 11.2% for 2010, while its Levered Fund returned 30.1%. You can see how they stack up against others in our post on 2010 hedge fund returns.

Since inception in 1995, the Maverick Fund has seen 14% annualized returns and Maverick Levered has returned 22.7% annualized. Be sure to check out what Maverick has been investing in via our newsletter (new issue coming out very soon).

Impact of Fund Size

In his letter, Ainslie highlights that "maintaining a significant critical mass is very advantageous to our ability to generate returns on a sustainable basis. Of course, this is also contrary to conventional wisdom which holds that size is the enemy of performance." He then lays out the common concerns with fund size and addresses them one by one.

Concern: Decreasing Investment Universe
Rebuttal: Their investable universe is defined as stocks with a market cap of at least $1 billion that trade at least $10 million per day. This universe has grown more than five-fold since 1995.

Concern: Loss of Agility
Rebuttal: "The average daily volume of the largest stocks in the world has grown almost ten-fold since 1995." Maverick's median position has averaged anywhere between one and two days of trading volume over the last 12 years.

Concern: Sizing of Investments Determined by Liquidity
Rebuttal: Ainslie argues that, "Maverick has always had, and always will have, positions whose position sizes are constrained by liquidity concerns. However ... such positions have never comprised a substantial portion of our portfolio, and growth in market liquidity has actually led to a reduction in Maverick's exposure to such less liquid positions."

Overall, he claims that these 'concerns' are less relevant considering that equity markets are not static. In John Paulson's year-end letter, the fund manager also extolled the benefits of running a hedge fund of size as well.

To wrap up his argument, Ainslie brings out a study done by Roger Ibbotson of Yale back in 2006. The conclusions drawn in the study summarized by Ainslie are that "the largest 20% of hedge funds have slight advantages over 80% of funds of lesser size. Secondly, the largest 1% of funds have substantial advantages over smaller funds."

Here's a breakdown of annualized performance of hedge funds by size from 1995-2009:

Largest 1% of hedge funds: 10.1% annualized return
Largest 5%: 8.6%
Largest 10%: 8.7%
Largest 20%: 8.9%
Largest 50%: 8.0%
Smallest 50%: 7.5%

Embedded below is Maverick Capital's fourth quarter 2010 letter to investors which also talks about generating short alpha:

You can download a .pdf copy here.

To see Maverick's latest investments, subscribe to our Hedge Fund Wisdom newsletter as the new issue comes out in a little over a week.

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