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.

Coatue Management & Maverick Capital Short Ashtead Group

Philippe Laffont's hedge fund firm Coatue Management has recently filed a disclosure with the UK's regulatory body regarding a short position.  They are now short 1.02% of Ashtead Group's (LON:AHT) shares as of September 30th.  This is up from the 0.91% of shares they were short just two days prior.  This is also an increase from the 0.52% they were short back on August 6th.

Lee Ainslie's hedge fund Maverick Capital has also filed similar disclosures.  Per their filing, Maverick now is short 0.74% of Ashtead Group as of September 24th.  However, Maverick's position has decreased in size recently from the 0.85% of shares they were short on September 23rd.


Given the volatility in markets as of late, we're providing updates on various hedge fund short positions.  You can scroll through them all by clicking here: hedge fund short positions.

The UK regulatory rules for short position disclosures state that hedge funds must file when their net short position eclipses 0.2% of the issued share capital of a company.  Notification is also required again at each 0.1% increment after that.  This applies to both increases and decreases in the position.  Public disclosure is required when net short positions reach 0.5% of issued share capital.  Additionally, disclosure is required when the position subsequently falls below 0.5%.

Per Google Finance, Ashtead Group is "a United Kingdom-based equipment rental company with networks in the United States and the United Kingdom. The Company operates through two business units: Sunbelt, which provides pump and power, climate control and scaffolding service, and A-Plant business, which operates through Eve Trakway Limited (Eve), which constructs temporary roadways and barriers; PSS, which offers trenchless technology and fusion services, and FLG (lifting) services. Both the units are also engaged in general equipment and related businesses. The Company rents a range of construction and industrial equipment across a range of applications. Its equipment can be used to lift, power, generate, move, dig, compact, drill, support, scrub, pump, direct, heat and ventilate. Its subsidiaries include Ashtead Holdings PLC, Sunbelt Rentals, Inc., Sunbelt Rentals Industrial Services LLC, Ashtead Plant Hire Company Limited, Ashtead Capital, Inc. and Ashtead Financing Limited."

Maverick Capital & Odey Out Buying AO World Shares

Lee Ainslie's hedge fund firm, Maverick Capital, has disclosed a holding in London listed online retailer AO World (LON:AO).  Due to trading on March 16th, Maverick hold the equivalent of 3.31% of AO's voting rights via a total return swap.

AO World recently traded around 330p / share and now trades at 182p.  Maverick first disclosed an interest in AO in November 2014 but sold enough shares to go below the 3% disclosure threshold a few weeks later.  You can view other past portfolio activity from Maverick here.

Crispin Odey's firm Odey Asset Management have held AO stock for over a year but due to trading on March 13th, 2015 increased their stake substantially from 5.03% to 10.09%.  About 40% of Odey's holding is held via derivatives.

Per Google Finance, AO World is "an online retailer of domestic appliances. The Company sources, sells and delivers domestic appliances, including washing machines, washer dryers, tumble dryers, dishwashers, refrigerators, freezers, ovens, range cookers and microwaves, as well as a range of small domestic appliances, including vacuums, floor cleaners, coffee machines, mixers and food processors. The Company’s sales activities are focused primarily on sales of appliances through the Company’s branded Websites, principally AO.com. The Company also offers ancillary services to its AO Website and third-party branded Website customers, including delivery, installation, removal and recycling services and sales of third-party product protection plans."

Lee Ainslie Long Qihoo 360 Pitch at Capitalize For Kids Sohn Canada Conference

We're posting up notes from the Capitalize For Kids Sohn Canada conference that just took place.  Next up is Maverick Capital's Lee Ainslie who pitched Qihoo 360 Technology (QIHU) long.


Lee Ainslie's Sohn Canada Presentation

He pitched Long Qihoo 360 Technology, a Chinese internet company.  China has penetration rates about half of the US (47% vs. 81%). It took Qihoo only 4 years to reach 6% of e-commerce penetration, great feat given Alibaba’s presence. This was helped by the growth of online advertising in China, now 36% of all advertising.

Revenue segments are: PC/Tablet Gaming (30%), Navigation page (AOL) 25%, App Store (23%), Search (22%). Believes management team is best in-class. Compared the CEO/Founder to Bezos, in a sense that he is looking to dominant difference domains and not his business acumen.

Insiders own ~22% of the company – a true rarity for Chinese based companies. Firstly, they have not monetized search, with traditional search based ads like Google or Bing. Secondly, both the “app store” and navigation/gaming have grown per user over the last 5 year quite well. Believes they have an opportunity in Search (since Google left), mobile app store (once Google left, the Android apps went away), Security (Government of China is looking for a domestic security company to to provide enterprise security, traditional have used US based companies on occasion. At the moment, they do not charge for their security feature.

China has recently passed a law to try and create a standard of enterprise security, in which it selected 5 different companies with Qihoo being one of them. Believes this change can lead to new business in 2015, could do as much as $60m in 2015 for security (admitted it could be way higher, but not sure). Opportunity is present following the selloff last 4-6 weeks.

Be sure to check out the rest of the presentations from Capitalize For Kids Sohn Canada here.

Maverick Capital Discloses Pets at Home Group Position

Lee Ainslie's hedge fund Maverick Capital has disclosed a new holding in London listed Pets at Home Group (LON:PETS).  Due to trading on July 29th, Maverick now own the equivalent of 3.14% of voting rights, all via a total return swap.

Pets at Home was floated in March at 245p per share.  It looks as though Maverick might have bought their shares somewhere around 175p.

To see what else Maverick has been buying, check out our just released Hedge Fund Wisdom newsletter.

Per Google Finance, Pets at Home is "a specialist retailer of pet food, pet-related products and pet accessories. The Company also operates a small animal veterinary business by combined number of surgeries both in its stores and at standalone sites and is a joint venture operator in the market. The Company is an operator by number of salons of pet grooming services offered through Pets at Home’s in store salons. The Company’s product range consists of two product groups: pet food and pet accessories, which are complemented by services, including veterinary services (both in stores and on a standalone basis) and in store Groom Room grooming services. In addition, the Company also offers pet insurance, advanced nutrition food consultation, acquaria water testing, microchipping services and dental checks, which complement the services offered by its veterinary surgeries and Groom Room grooming salons."

Lee Ainslie on M&A Boom, Cybersecurity & the VIX

Institutional Investor just released an excerpt from an interview with Maverick Capital's Lee Ainslie from the Delivering Alpha Conference.  In it, Ainslie touches on the M&A boom, cybersecurity, and the low volatility index readings (VIX).

Ainslie says that there could be a bigger level of mergers and acquisitions than in 2007 thanks to large corporate cash balances and the fear that interest rates will increase or the tax inversion loophole will close. 

He also likes to look for secular trends from the top down and then identify specific companies that will benefit from those trends.  One of the biggest trends he's seeing now is network security / cybersecurity, though he doesn't mention any specific names.

Lastly, Ainslie points out that the VIX has seen spikes on a more frequent basis as the years go by.  He argues that the there's a contrast between the threats in the world and the low levels the VIX has been sitting at, which he thinks is not being priced appropriately. 

Embedded below is Institutional Investor's interview with Lee Ainslie:



You can view some of Maverick Capital's portfolio activity here.

Maverick Capital Starts Countrywide Plc Stake

Lee Ainslie's hedge fund firm Maverick Capital has disclosed a new position in London listed residential estate agent, Countrywide Plc (LON:CWD).  Due to trading on July 14th, Maverick now hold the equivalent of 3.04% of Countrywide's voting rights, all via total return swap.

Countrywide Plc is the UK's largest estate agency group.  In 2007, the company was taken private by Apollo Management.  In March 2013, it was re-listed on the London Stock Exchange.  Currently, the largest shareholder is Howard Marks' Oaktree Capital with 27.59% of the voting rights.

For more on Maverick, check out an in-depth interview with Lee Ainslie here.

Per Google Finance, Countrywide Plc is "an integrated residential estate agency and property services group in the United Kingdom. The Company offers estate agency and lettings services, together with a range of complementary services. The Company operates in five businesses: residential property sales; residential property lettings and property management; arranging mortgages, insurance and related financial products (provided by third parties) for participants in residential property transactions; surveying and valuation services for mortgage lenders and prospective homebuyers, and residential property conveyance services. Countrywide Holdings, Ltd. is the holding company of the Company."

Maverick Capital Discloses Castlight Health Position

Lee Ainslie's hedge fund firm Maverick Capital has filed a Form 3 and Form 4 with the SEC disclosing a new position in Castlight Health (CSLT). 

Castlight just recently completed its initial public offering (IPO) and shares surged from the IPO price of $16 up to $40 on its first day of trading. 

The Form 4 indicates Maverick acquired 450,000 shares of class B stock at a price of $16 on March 19th.  The Form 3 they filed indicates that each share of class A common stock (which Maverick owns) is convertible into one share of class B common stock at any time after the IPO. 

And after the IPO was complete, each share of Series A preferred stock, Series B preferred stock, Series A-1 preferred stock, Series C preferred stock and Series D preferred stock convert automatically into class A common stock.

Maverick owned stakes in all of those share classes according to the Form 3.  So after all is said and done after the IPO, the main takeaway is that Maverick owns a stake in the newly public Castlight Health.

Per Yahoo Finance, Castlight Health is a company that "offers health information via the internet to inform medical choices and reduce insurance costs."

For more on this manager, be sure to check out Lee Ainslie's interview with Columbia Business School.

Lee Ainslie Interview: Columbia Business School's Graham & Doddsville

Columbia Business School is out with the Winter 2014 issue of its Graham & Doddsville investment newsletter.  This time, they feature a rare interview with Maverick Capital's Lee Ainslie.

The hedge fund manager talked about how he's always trying to learn new things and how he's read every investing book he can get his hands on (if you need some ideas, check out all our recommended reading lists in the right-hand column on the site).


Some interesting quotes from the interview:


On portfolio positioning: "In terms of sizing, our average long is roughly twice the size of an average short at Maverick and our long portfolio is more concentrated than our short portfolio.  This construction allows us to maintain net long exposure typically between 30% and 60%.  The greater diversification of our short portfolio reflects the riskier nature of these investments and that these positions turn over more frequently, so having a deeper bench of such investments is helpful."


On valuation:  "So while we place great emphasis on valuation in our investment decisions, valuation alone should never be the driver of either a long or a short investment ... I believe it is important to identify a catalyst that should benefit the valuation ... The most commonly used valuation metric at Maverick is sustainable free cash flow in comparison to enterprise value."


On what he looks for in deep dives: "The most critical factor that we're trying to evaluate is the quality of management - their intelligence, competitiveness and, most importantly, their desire to create shareholder value."


On what he looks for when hiring: "The most important components we gauge include competitiveness, mental flexibility and emotional consistency - that last trait is surprisingly important."  These are pretty similar to what Julian Robertson looked for when he was hiring or seeding funds.



This issue also highlights talks with Jim Grant of Grant's Interest Rate Observer, Dr. Kenneth Shubin Stein of Spencer Capital and Geoffrey Batt of Euphrates Iraq Fund

Embedded below is Columbia Business School's latest Graham & Doddsville newsletter:




You can download a .pdf copy here.

For past great issues of this newsletter, check out their interview with JANA Partners as well as one interviewing Li Lu.

Maverick's Lee Ainslie on His Career & Advice

Lee Ainslie, founder of hedge fund Maverick Capital, recently sat down with OneWire to talk about his investing and career advice.

Ainslie attended the University of Virginia for undergrad and then went to the University of North Carolina for his MBA and he did that because he thought business school would refine his skills.

There, he met Julian Robertson of Tiger Management and he went to work there afterwards.  He eventually ran the technology effort at the firm and then decided to start his own firm with money from the Wyly family.  He thought it was a good time to take a risk since he was younger and didn't have kids yet.

As to what his biggest challenge is these days, he said: "The biggest challenge for our business is management of talent."  This just goes to show how there are always 2 sides to running a hedge fund: the investment side and then the management of the business itself. 

He also touched on his advice for those looking to get a career on Wall Street:  He said he'd look to where he can add value on a sustainable basis because Wall St as a whole will be more challenging going forward.

Embedded below is OneWire's interview with Lee Ainslie:

For more hedge fund manager advice, head to Philippe Laffont's career advice as well as Andreas Halvorsen on investment process.

Maverick Capital Exits Bluefly Stake; Clearlake Capital Buys 90% of Company

Lee Ainslie's hedge fund firm Maverick Capital filed an amended 13D and a Form 4 with the SEC regarding shares of Bluefly (BFLY).  Per the filings, Maverick has sold out of its BFLY position and no longer owns any shares.  On May 23rd, Maverick sold its 3,704,101 shares.

Bluefly just announced that Clearlake Capital Partners has purchased 90% of outstanding shares from the company's principal stockholders and also entered into an agreement with the company where they bought additional shares from the company.  Clearlake is looking to re-energize the business.

Per Google Finance, Bluefly is "an online retailer of designer apparel brands and accessories at discount prices."

To see what US stocks Maverick has been buying, head to the just released issue of our premium newsletter.

Hedge Fund Short Positions in Germany: Maverick, Tiger Global, Passport & More

Just yesterday, we posted up a ton of hedge fund short positions in the UK due to new regulations.  Continuing our coverage of EU markets, today we highlight hedge fund short positions in German markets.

More Short Selling Disclosures in EU Countries

What's interesting here is that with the new regulations in EU countries, there are theoretically going to be more filings on shorts than longs.  Public disclosure thresholds now start at -0.5% for shorts while public long disclosure is only required when an investor takes a stake greater than 3% of the company.

Some may argue that this might not be the case due to the fact that more investors go long than short, and typically long positions are sized much larger than short positions due to risk management.  We'll have to wait and see, but so far there's been an onslaught of short filings.


Hedge Fund Short Positions in Germany Revealed

Below is a breakdown of the short positions hedge funds have disclosed as of November 1st/2nd.  The percentage represents how much of the company's stock the fund is short:


Maverick Capital: Short -7.82% Aixtron SE, -0.47% Axel Springer Aktiengesellschaft

Passport Capital: Short -0.61% Nordex SE

Pennant Capital: Short -2.27% Aixtron SE, -0.68% Heidelberger Druckmaschinen Aktiengesellschaft, -0.95% Sky Deutschland, -0.90% TUI AG

Tiger Global: Short -1.99% Asian Bamboo AG, -0.70% SolarWorld Aktiengesellschaft, -0.63% Global PVQ SE

Tiger Management: Short -1.08% Powerland AG

Citadel Advisors:  Short -4.13% Aixtron, -1.82% SolarWorld Aktiengesellschaft, -1.60% Wacker Chemie AG

D.E. Shaw: Short - 0.97% Dragerwerk AG & Co, -.60% Leoni AG


As you can see, numerous funds are short Aixtron, a provider of deposition equipment to the semi-conductor sector.  Maverick's bet against the company is by far the largest we've seen thus far.  We'll continue to track short positions in the German market and will update when appropriate.

For more EU disclosures, head to yesterday's post on hedge fund short positions in the UK.

Lee Ainslie & Maverick Capital's 2011 Letter On Lessons Learned & The Investment Environment

Lee Ainslie's hedge fund firm Maverick Capital finished 2011 with their flagship Maverick Fund down 14.7% for the year. Their Levered Fund was down 30.7% for the year while their Long Fund was down 17.5%.

Today we present excerpts from Maverick's year-end letter where they outline how they've learned from their mistakes and how increased volatility and high correlations have affected them.


On Risk Management

Ainslie said that it was the firm's darkest year. The reason for the underperformance? He writes,

"While the environment for fundamental investing was certainly unfavorable last year, such factors do not fully account for our results. Maverick's poor performance was primarily driven by a handful of individual mistakes and insufficient risk constraints."

In order to address risk management, they've implemented MavRank, a quantitative system driven by fundamental inputs that helps make recommendations for position sizing. While Ainslie stressed that all decisions will still be made by humans, the full implementation of quant tools is interesting.


Lessons Learned

Ainslie turned then turned his focus to volatility, highlighting some interesting datapoints:

"In late October last year the trailing 60 day volatility of the S&P 500 index exceeded 37% for only the fourth time since 1938. The alarming aspect to me is the increasing frequency with which the equity markets have displayed this level of volatility since 1938:

Years that Volatility Exceeded 37%: 1988, 2002, 2008, 2011
Years Since Prior Occurrence: 50, 14, 6, 3

The fact that recent volatility surpassed anything seen in a fifty year period is staggering - especially when one considers that during that time the world suffered through World War II, the Cuban missile crisis, a Presidential assassination, the dollar going off the gold standard, New York City on the verge of bankruptcy, the OPEC oil embargo, US 10 year treasuries yielding over 15%, and the S&L crisis - just to name a few of the events that today's markets might find a tad unsettling.

So why do the markets appear less resilient to such developments today? There are many factors, but I believe globalization, high levels of debt, uncertain regulatory environments, extreme monetary policies, unsustainable fiscal policies and the resulting currency uncertainties all play major roles. The more important question, in my mind, is 'will it continue?' Given that the aforementioned factors are all likely to persist, and in some cases further deteriorate, it is hard to believe the answer is 'no.'

This leads to our conclusion that volatility spikes are likely to continue to occur more frequently, and, therefore, future levels of equity volatility are likely to be higher than those seen in the past. As a result, going forward we will seek to continue to maintain volatility in the 10-12% range in our core funds, even though we expect this level of volatility is likely to be less than half of the equity market's volatility. To help achieve this objective, we have lowered our long-held gross exposure target to 225% from 250%(our long-term average gross exposure has been 248%), among other steps. (We have also decided to maintain our 1.5:1 long/short ratio, which translates to a slight reduction in our target net exposure from 50% to 45%.)"


On the Investment Environment

Ainslie also touched on a subject that many investors have been fixated on: correlation. He writes,

"Last year intra-stock correlations reached all-time highs, surpassing even the levels seen in 1929 and 2008. In other words, stocks moved in tandem with one another to a degree never before seen and were less responsive to idiosyncratic risks, such as fundamental factors, than ever before.

Such an environment is clearly challenging for long/short investors who rely upon stock prices being responsive to fundamental differences among companies. These challenges were evidenced in the small number of positions that generated significant returns for us last year."

Ainslie goes on to point out that January 2012 marked a break in high correlations. However, he still points out that, "equities have maintained correlation above the long-term average for almost six years now, creating a sustained, unfavorable headwind for fundamental investors."

For more from this hedge fund, we've also posted up Ainslie on the impact of fund size on returns.


To read more hedge fund letters, be sure to check out Dan Loeb & Third Point's year end letter, as well as excerpts from Passport Capital's letter.

Why Maverick Capital Owns Amdocs (DOX): Stock of the Week

Continuing the stock of the week series, this time around the focus is on why Lee Ainslie's hedge fund Maverick Capital owns Amdocs (DOX). If you missed last week's, be sure to also check out why George Soros owns Comverse Technology.

The following is written by Tsachy Mishal, portfolio manager of TAM Capital Management:

It often happens that when owning a company, I stumble across one of their competitors or another company in their industry and end up owning them as well. I came across Amdocs (DOX) when researching last week's stock of the week, Comverse Technology (CMVT) as they are competitors. Amdocs is a large position for tiger cub Lee Ainslie's Maverick Capital.

Amdocs makes billing and customer relationship software for telecom companies. They are the leader in their industry with 28% market share, three times the share of their closest competitor. Amdocs generally signs 5 to 8 year contracts with their customers so revenue visibility is high. These long term contracts account for 75%-80% of their business.

DOX trades at less than 10 times this year's expected free cash flow and less than nine times next year's (EV/FCF). Profit growth is expected to be in the mid single digits but with share repurchases EPS growth is expected in the mid teens.

What I Like:

- The valuation is very attractive for a company with such high earnings visibility.
- Amdocs repurchased approximately 10% of their shares outstanding last year and is set to do the same again this year.
- No major contracts are set to renew until 2014, making visibility especially good for the next 2 years.
- There are high switching costs to move to a competitor.
- Amdocs is by far the leader in the industry.


What I Don't Like:

- A single customer, AT&T, accounts for 29% of revenue.
- The business is tied to a single industry, albeit a good one.

I originally looked at Amdocs in order to get a comp for Comverse Technology (previous analysis here) but after studying the company I had little choice but to buy a position in it. A market leading company, with high visibility, that is returning cash to shareholders should not be trading at a single digit multiple (EV/FCF).

For past stock of the week entries, check out why Carl Icahn owns WebMD and why George Soros owns Comverse Technology.

Maverick Capital Focusing on China & Emerging Markets (Investor Letter)

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.

Maverick Capital Reduces Rightmove Position (LON: RMV)

Lee Ainslie's hedge fund Maverick Capital recently reduced its position in UK traded Rightmove (LON: RMV). Due to trading on March 17th, Maverick's position has gone below the 3% ownership stake that requires regulatory disclosure.

The hedge fund could either still hold a small position (<3% of shares) or could have sold out of it completely; it's impossible to discern. We won't know anything further unless they breach the 3% threshold again.

Hedge Funds Gradually Reducing RMV Positions

Rightmove is intriguing because it has garnered interest from many prominent hedge funds. However, these funds have all been reducing their position over time. Steve Mandel's Lone Pine Capital, as of last disclosure, owns 4.99% of RMV's stock. At one point back in December 2008, they held over 10% of shares. We've also detailed some of Lone Pine's recent portfolio activity here.

Additionally, Brett Barakett's Tremblant Capital Group currently own around 3.97% of Rightmove's outstanding shares. While they still own it, they have steadily reduced their position since a peak ownership stake of 14.22% in September 2008. For the rest of our coverage of hedge fund positions in UK markets, check out Eton Park Capital's recent activity.

Per Google Finance, Rightmove is "a United Kingdom-based company that operates in a residential property industry, connecting people to properties. The Company is principally engaged in the operation of the Rightmove Website, rightmove.co.uk, which is the residential property portal. Its customers include estate agents, rental agents and home developers, who pay fees for the right to display properties on the Rightmove Website, which provide home hunters with property details to search."

For more from Ainslie's fund, check out Maverick Capital's year-end letter discussing the impact of fund size on returns.

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.

Lee Ainslie's Maverick Capital Sells Cardiovascular Systems (CSII) Warrants

Lee Ainslie's hedge fund firm Maverick Capital just filed a Form 4 with the SEC regarding Cardiovascular Systems (CSII). Per the filing, we see that the hedge fund sold CSII warrants on November 30th. They sold warrants expiring in September 2013 with an exercise price of $9.28 that represented 134,790 shares. Additionally, they sold February 2014 warrants representing 519,798 shares and a conversion price of $8.83.

As detailed in their most recent 13F filing, Maverick Capital also owned 1,366,817 CSII common shares as of September 30th. So while it's a little unclear if they still hold these shares, they no longer own warrants. (The rest of Maverick's portfolio is analyzed in our latest issue of Hedge Fund Wisdom).

Maverick has returned 14% annualized since inception in 1995 and we posted up their third quarter letter here. Ainslie currently thinks technology stocks are cheap and Maverick has its highest net long technology exposure ever.

Per Google Finance, Cardiovascular Systems is "a medical device company focused on developing and commercializing minimally invasive treatment solutions for vascular disease. The Company’s primary products, the Diamondback 360 PAD System (Diamondback 360) and the Diamondback Predator 360 PAD System (Predator 360), are catheter-based platforms capable of treating a range of plaque types in leg arteries both above and below the knee and address many of the limitations associated with existing treatment alternatives."

Lee Ainslie & Maverick Capital's Third Quarter Letter

Lee Ainslie's hedge fund Maverick Capital is out with their third quarter investor letter and year-to-date for 2010, they're up 8.2% and have now seen 14.1% annualized returns since inception in 1995. Their Levered fund is doing even better this year, up 17.3% and has seen 22.3% annualized since inception. In total, the firm now manages over $12 billion across their various investment vehicles.

These returns are pretty solid but Q4 might be off to a bumpier start considering that one of their larger holdings has been Apollo Group (APOL), the for-profit education play that's down over 23% in the past month. But on the converse side of things, their stake in Commscope (CTV) is up almost 40% over the past month on news of potential buyout talks. At the recent Value Investing Congress, Ainslie said he believed that technology stocks are cheap. The cheapest, he argues, that they've been in 20 years.

Maverick's Exposure Levels

Given this stance, it should come as no surprise that Maverick has a large allocation of capital to technology stocks. At the end of September, Maverick was 11.7% net long technology. And at the Value Investing Congress, he revealed that Maverick has its highest technology exposure ever.

At the end of September, other notable net long exposure include financials at 13% and the consumer sector at 12.6%. In terms of notable net short positions by geography, they are net short emerging market technology, European technology, emerging market industrials, and Japanese media & telecom. Maverick seems to be betting on US companies and hedging it via shorts in foreign companies to some extent.

Maverick's Portfolio

Regarding portfolio construction, Ainslie's firm currently has 67 longs and 80 shorts. Their largest long represents a 4.7% position whereas their largest short is 2.9%. Overall, Maverick's average position size is 2.1%. As we've detailed in our profile of Maverick Capital, Lee Ainslie implements strict position sizing rules and has a solid focus on risk management. The hedge fund's top 10 investments currently represent 29% of the portfolio.

We detailed Maverick's second quarter positions in our newsletter, Hedge Fund Wisdom. The next issue (released in a few weeks) will detail Ainslie's third quarter portfolio holdings. In the mean time, we know Maverick has been long Commscope (CTV), Marvell Technology (MRVL), and Adobe (ADBE). Dell (DELL), Intel (INTC), and Microsoft (MSFT) were others he recently talked about. Be sure to subscribe to our newsletter to see what top hedge funds are investing in once our next update comes out.

Bond Market Inflows/Equity Market Outflows

Embedded below is Lee Ainslie and Maverick Capital's third quarter 2010 letter to investors. In it, Maverick's Steve Galbraith talks about the potential bond bubble where he argues that government bonds are essentially trading at a P/E equivalent to 40x. He also addresses a noticeable change in investor sentiment as they prefer bonds to stocks in a knee-jerk reactionary maneuver:

"Since 2007 over seven hundred billion dollars has flowed into fixed income funds while nearly two hundred billion dollars has left equity funds. These flows are staggering; they suggest the (potentially lethal) combination of driving 100 miles per hour while looking through the rear view mirror because the scenery just past looks so good (bonds outperformed stocks by record levels in part of this period), but also being too afraid to look forward in fear that, well, there is no there there."

Here's the letter:



You can download a .pdf copy here.

Be sure to also check out Lee Ainslie's presentation from the Value Investing Congress just a few weeks ago for some more of his recent thoughts. To see what stocks Ainslie owned in Q2 (and in Q3 in our upcoming issue), head to our Hedge Fund Wisdom publication.

Lee Ainslie of Maverick Capital ~ Quote of the Week

Continuing our 'quote of the week' series here at Market Folly, we turn this time to Lee Ainslie of hedge fund Maverick Capital on the topic of buy/sell/hold:

"There are no 'holds.' Everyday you're either willing to buy more at the current price, or, if you aren't, you should redeploy the capital to something you believe does deserve incremental capital."

~ Lee Ainslie

The topic of incremental capital is one Ainslie has repeatedly focused on over the years. Essentially, he wants Maverick to always be allocating capital to investments trading at compelling prices. Ainslie will be presenting investment ideas on October 12th at the Value Investing Congress in New York City. You can save on registration by clicking here. Also, if you want to take an in-depth look at Maverick Capital's portfolio, we've detailed their positions in our brand new quarterly newsletter: hedge fund wisdom.