Notes From Lee Ainslie's Talk at Citi Australia Conference ~ market folly

Thursday, October 22, 2015

Notes From Lee Ainslie's Talk at Citi Australia Conference

Maverick Capital's founder Lee Ainslie recently presented at the Citi Conference in Australia and below are some notes from the event.

Notes From Lee Ainslie's Talk at Citi Australia Conference 2015

Founded Maverick in 1993
Ex Tiger Cub
Engineering degree
$10bn FUM
Typically 100 positions, 37 investment staff
2/3 of capital is from the profits they have made
Med and Large cap, 75% gross in US
The hedge fund targets 135% long 90% short
Focusses on stock specific risk and portfolio risk
Don't think looking at net long, gross, volatility, beta etc is that useful for them. They used to do that, but it changed 4 yrs ago as it doesn't adequately look at the risk
Constantly stress test portfolio - how would it have performed in 08 or other crises?
Invest in stocks that perform well in bad markets
Very atuned to what their peers are doing so they don’t get caught up in HF loved stocks (MF note: Their Q2 13F as of June 30th shows they held positions in some hedge fund hotels such as VRX (though they were reducing the stake), AGN, CHTR, PCLN, LBTYK, FLT, TDG and a few others ~ but obviously their portfolio might have changed since then)

Focus on 3 factors: Stock dispersion,  intra stock correlation, equity volatility 

Volatility has been subdued for a while now but sudden spike last 2 months
BUT even with spike still below LT avg, can go much higher
Went 49yrs never hit that level from 1939-1988?
10 yrs 1988 - 98
4yrs 98-02
6yrs 02-06
Volatility spikes are becoming more frequent which is good for HF's 

Volatility of other asset classes running above LT avg - 10yr trading 199% of LT avg vol. Oil 126%
Dispersion of stock prices has been very low for 5yr period.. not good for HF's
When dispersion is high HFs outperform 

Stock correlation is very high - meaning stocks reacting more to macro than fundamental
Lower correlations equal better returns
Country policy convergence is widening which is good for HFs.. eg China vs Europe vs US
First time Eu and Fed have had conflicting policy = lower correlation 

They see these headwinds as becoming tailwinds - i.e. vol will go up, dispersion will increase, stock correlation will reduce.
HF's have been poor performers in recent times, but that could change as environment will help them 

HFs reduce gross in high vol but they are such a large % of mkt they all take off gross at same time and hence large moves 

Thinks the 3 key things that happened in fin crisis 
1. Short bans
2. Worries about PB's not having stock available
3. Survival of financial institutions called into question 

All 3 unlikely to happen again in next crisis  

HFs are currently very defensive... good contrarian indicator
Stocks always over-react on down side so need to be in a position to buy the crisis sell offs
Risky stocks sell off first.. avoid them   

Question & Answer Session  

Where has his performance come from?  

In early may net and gross was on their LT avgs
Indicator of changing risk was peaking which set off alarm bells
HFs had high exposure to stocks which don’t perform well in down mkts, so they pulled back risk
Stuck to stocks which outperform in down mkts
Looked at which stocks did well in crisis
Always debate merits of individual positions weekly - 3hr meeting
Also have a top down meeting once a week with chief PMs on where their risks are
Returning money when don't see opportunities builds confidence within investor base.. don't want to be too large and damage performance if you can’t use it. Wont be better off in the long run 

Thoughts on China? 

Cautious view, worse than ppl think. More than half of every listed company delisted themselves(?) The damage to investor confidence in that scenario is bad. Too many rules, scares investors, people dont want to put their money in as risk it gets locked up. Less tools for them now to be reponsive and hence why the devaluing is continuing. They are neutrally postured. Have equal amount long and short in terms of revenue from China. No active bets 

Has he found Australia good for alpha? Best idea here? 

No exposure currently due to Superannuation - so much capital trapped domestically so valuations are too high on global standards. Not short though as doesn't think that is a bubble that will burst soon. (For those unfamiliar: Superannuation is an Australian pension system where employers take 9% of gross wage and it goes into a regulated pension saving on behalf of the employee.  Most of it typically goes into Australian listed shares and property, so for that reason these assets are often overvalued when looking at global multiples so it's harder for offshore funds to invest as they have to pay up.)  

View on liquidity? 

On fixed income side scares him to death. The day Gross left Pimco he tried to make a few changes and it moved treasury markets big time. The % Maverick trade electronically has sky rocketed  

View on ETFs? 

ETFs can be big problem for investors but doesn't worry about them as much as most. Can create dynamics that are not good in the short term but can create opportunities. Some don’t work as advertised under periods of stress. Possibly an opportunity when it happens 

Fed rates? 

Surprised they didn't raise in Sept - unless data weakens will be very surprised if they dont raise in the 1st 6 months next yr. Holds consensus view 

Portfolio weighting US vs Asia? 

Portfolio very heavily weighted to US vs Asia - always been there, better relationships with mgmt etc. Quality of companies very high in US. 3/4 of port is in US which is LT avg (that is % of gross)

For more on this manager, we've posted up some of Maverick Capital's recent activity.

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