It's rare to see the words quantitative and fundamental used simultaneously to describe the investment process of a long/short equity hedge fund strategy, but use of the terms has become commonplace at Maverick Capital Ltd., Dallas.
Disappointing returns in 2008 and again in 2011 pushed Maverick's investment team to turn to quantitative research to support the firm's fundamental long/short global equity strategy and improve returns even in down markets, said Lee S. Ainslie III, Maverick's New York-based founder and managing partner.
“We were determined not to endure storms like those again. We needed an early warning system for when risk-off periods were likely to happen,” Mr. Ainslie said, regarding management of the firm's $10 billion under management.
In 2011, Riad Abrahams, managing director and chief strategist, and Jason Wolin, managing director and head of quantitative research, began to pull together the quantitative tools needed to create Maverick's risk management framework.
Those tools include:
• analysis of portfolio exposures to common risk factors;
• performance attribution analysis based on portfolio risk-factor exposures;
• contribution of each sector, region and individual security to the portfolio risk budget;
• outlier reports highlighting potentially aggressive assumptions;
• a proprietary economic activity indexes tracking regional activity on a weekly and monthly basis;
• position-sizing capabilities;
• screens to identify potential long and short investments; and
• information regarding portfolio positioning of the long/short equity hedge fund category.
In January 2012, Mr. Wolin's quantitative team gave Maverick managers the ability to see how their long/short portfolio was likely to behave going forward with a much higher degree of accuracy than was possible using only a fundamental approach to security selection and portfolio construction.
Naming Andrew Warford, managing partner, chairman of the firm's stock selection committee in 2012 has been one of the “biggest drivers of the firm's performance,” Mr. Ainslie said.
Another consequence of using quantitative analysis to inform the fundamental equity selection process was the realization that the Maverick portfolio was too diversified, which hurt performance, Mr. Ainslie said.
Portfolio holdings have been slimmed down to typically be between 100 and 110 positions, the lowest since 1994, when the flagship Maverick Fund held 30% of the potential universe of any stock in the world with a market capitalization of at least $1 billion and daily trading volume of at least $10 million. Today, the fund holds only 3% of potential equity investments.
“We have a very good understanding now of what we hold in our portfolios and where the risk lies,” Mr. Abrahams said.
The result has been outperformance over both equity and hedge fund indexes.
Messrs. Ainslie and Abrahams declined to provide returns of the company's flagship Maverick Fund.
However, a copy of the third-quarter letter to Maverick investors that was obtained by Pensions & Investments from another source showed that for periods ended Sept. 30, the fund returned 2.7% for three months; 18%, nine months; 24.8%, one year; 12.8%, three years; and 12.7% since inception of the fund on March 1, 2005.
By contrast, index returns as of Sept. 30 were Standard & Poor's 500 index (one year, -0.6%; three years, 12.4%; since March 1, 2005, 8.9%); MSCI World index (one year, -5.1%; three years, 8.6%; since inception, 6.5%); and HFRI Equity Hedge index (one year, -2.3%; three years, 5%; since March 1, 2005, 9.7%).
Multiyear index returns are annualized.
The flagship fund also provided positive returns during two particularly deep market declines since 2012 when Maverick implemented its new risk management framework, achieving Mr. Ainslie's goal of down market protection.
The Maverick Fund eked out a 0.3% return during a 12% decline in the S&P 500 index in the five weeks ended Aug. 25, while the HFRI Equity Hedge index dropped 6.4% and the MSCI World index dropped 10.9%, according to Maverick's investor letter.
Over the 19 weeks ended Sept. 29 during which the MSCI World index swooned 13.8%, the investor letter showed that the Maverick Fund returned 5.1% in contrast to the 7.8% decline of the HFRI Equity Hedge index and the 10.9% drop of the S&P 500 index.