4 Lesson’s From Hedge Fund Manager Lee Ainslie III
Mckinsey conducted an interview with Lee Ainslie III, the managing partner of venerable long short equity hedge fund, Maverick Capital. During the interview the investor shared several insights into how his firm approaches investing in companies both on the long and short side. Four key insights from the interview are discussed below:
Focus On The Business
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“First and foremost, we’re trying to understand the business”. At Maverick, the focus is on initially getting a grasp of what exactly the company does. How and why they grow, whether its sustainable or not, and how they utilize the capital that they generate. The goal at Maverick, according to Mr. Ainslie is to know more about each one of the companies they invest in than any non-insider does. In order to achieve this, the hedge fund typically has fewer than five positions per investment professional, which is lower than the average hedge fund. The hedge fund also employs a sector approach, which enables its analysts to develop expertise in a particular domain over time.
Think Long Term
While a lot of hedge funds are short-term focused, Maverick’s average investment horizon is one to three years, though the firm constantly re-evaluates their positions. This is an important point, as the ability to realistically envision the future has proven to be one of the most common traits of successful investors. To quote Warren Buffett’s mentor Benjamin Graham, “in the short run, the market is a voting machine, but in the long run, it is a weighing machine”. Thinking long term is hugely important.
Be Flexible With Valuation
As far as valuation methodologies go, Maverick generally focuses on comparing the enterprise value of a firm to its “sustainable free cash flow”. Lee Ainslie however noted that this approach is not always appropriate and that its important to be flexible as valuing a financial company and retail and technology company with the same approach would be a mistake. Ainslie believes that part of the art of investing is to be able to recognize which approach is the most appropriate for which situation over a period of time. In general Maverick focuses on stocks they believe will outperform (or under perform on the short side) the market by 20 percent on an annualized basis.
Develop A Relationship With Management
he hedge fund spends an “inordinate” amount of time trying to understand the quality, ability and motivations of the management teams that run the companies that they are involved with. Ultimately owning a stock is making a direct bet on the managerial abilities of the management teams, so developing relationships and understanding the abilities and motivations of these individuals, is just common sense.
Maverick Capital, one of the first tiger cubs, is also one of the most successful hedge funds of all time, with annualized returns of over 12% since its founding in 1993.