A calm exterior: Face to Face with Lee Ainslie

Lee S. Ainslie III, the Virginia-raised son of an Episcopalian headmaster, has a sterling lineage in the hedge fund industry. He was recruited straight from graduate school into hedge fund management by Julian H. Robertson, founder of Tiger Management Corp., New York. Mr. Ainslie was recruited from Tiger in 1993 by Dallas-based entrepreneur Sam Wylie, to manage a new hedge fund company, Maverick Capital. In time — after he accumulated more than 2 million frequent flyer miles — Mr. Ainslie decided to move back to New York, where most of the investment team is based. Mr. Wylie is no longer associated with the firm, but Dallas remains the firm’s base of operations.

Mr. Ainslie also is highly regarded by his peers because of his relentless focus on the performance of the firm’s bottom-up, fundamental approach. To maintain performance, the firm’s flagship hedge fund has been closed to most new investors for 10 years. That led Maverick’s senior executives to work to diversify the firm’s asset base through new investment strategies, such as long-only, active extension or 150/50; customized separate accounts for large institutional investors; and a hedge fund of funds.

How did you end up at Tiger Management? I went to graduate school at the University of North Carolina and it was there that I met Julian Robertson. I was deciding whether to return to management consulting (my first career) or to go into investment banking, Julian gave me an opportunity to come to New York to work for Tiger. At the time, Tiger was managing about $700 million, with seven people on the investment team. On paper, it wasn’t necessarily such an easy decision because my professors were pointing out: “Goldman Sachs will be on your resume forever.” But for me, it was a very straightforward decision: Someone I greatly admired was going to pay me to do what I loved.

What was the most important lesson you learned from Mr. Robertson? Julian always stressed the importance of integrity in your personal conduct, in how you represented the firm and in evaluating management teams (of companies you were considering investing in) is critically important. At Maverick, the importance of integrity is constantly stressed. As we grow, our biggest risk is bringing on someone new … we don’t know them as well as the people we’ve worked with for years and years. We invest a lot of time in making sure everyone at the firm understands how important our reputation is.

What differentiates Maverick from its competitors? First of all, we’re a truly hedged fund. In other words, we maintain a balance of long and short investments in every region and every industry in which we invest. We maintain very consistent, low long-short ratios. Our short exposure is achieved by shorting individual stocks, which I think is increasingly unusual these days. But to us, it’s critical, because we want to add value on both the long side and the short side. If you use market-related indexes to create your short exposure, by definition it’s not going to add value.

I would argue that the depth and experience of our investment team is … unusual. Our investment team numbers 53 people with more than 550 years of investment or industry experience altogether. All the efforts of those people are being applied to a relatively concentrated portfolio, with between 160 and 180 primary names. That gives us a ratio of investments to investment professionals of roughly 3-to-1. I think you’ll find that’s a fraction of the ratio at other firms, not only at hedge funds, but also at traditional long-only firms.

We don’t have any magic black-box program that that generates our returns; I wish we did. We don’t have some truth serum to give to management teams. I think our blocking and tackling is probably pretty similar to how other firms go about it from a bottom-up fundamental basis, but we have very talented and experienced decision-makers who have the resources both internally and externally to try … to get very close to the companies in which we invest and to their customers, their suppliers, their competitors.

We probably also have a longer term focus than most hedge funds. I think we’re allowed that, given the stability of our asset base. I would argue in a world where so many funds are so concerned about their returns this month or this quarter, to be able to look out one year, two years or three years really gives us a significant competitive advantage.

Why is your investor base so stable? Partly because many of our investors have known us for a very long time, as we closed the core fund back in 1997. While some of our newer funds are open, traditionally we’ve only accepted new capital from current investors or strategic investors, which we define as investors that can help us make better investment decisions. We have also given incentives to investors to make a longer-term commitment. So now about half of the capital is committed for three years or more. Also, more than 20% of the assets under management comes from Maverick partners, employees or related entities, and we view that as almost permanent capital. I’d say the fact that our core fund has never had a down year and has generated returns with about half the volatility of the S&P 500 has led to a significant comfort factor.

What do you mean by a “strategic investor?” I’m talking about an individual or an institution that would have knowledge or resources that would be beneficial to our investment process. For example, an individual who serves on different corporate boards or has significant industry experience or a corporate pension plan that’s in an industry that we have an interest in is very helpful to us. They can make introductions for us and let it be known that “Maverick is one of our investments so please be as helpful as you can.” We obviously won’t be told anything that other investors won’t be told, but perhaps we’ll get a phone call returned a little more quickly or the meeting we set up will be given a little more time. It’s just nice to have strong relationships.

How much can Maverick manage comfortably? Engineering nerd that I am, I have tried to analyze the “How big could we be?” question by considering our liquidity constraints, the portfolio concentration we want to maintain and the size of the companies we like to invest in. Given these current requirements, you get to a number that’s a large multiple of what we are today. Depending on how you want to tweak these different requirements, you get a ridiculous answer — something in $60 billion to $80 billion range — that we could manage theoretically. But I don’t believe those results.

The only asset we have at the end of the day is people. To keep people challenged and motivated and to give them the opportunity to earn greater financial rewards requires some growth. On the other hand, we believe that if we continue to grow in an unfettered fashion, our size would eventually impair our returns. So we have taken many steps over the years to slow down our growth. The critical question is really: How low can I maintain growth to push that day — when size becomes a real investment constraint — out as far as possible, while at the same time, maintain sufficient growth to keep our very talented people motivated and challenged.