Institutional Investor's Alpha Magazine - November 2007 - (Page 36)

Maverick Capital more enlightened conversations with people,” Kapp adds. Increasingly, other hedge funds are using the same research methods as Maverick’s. “We were one of the first hedge funds to use data from IMS [a London-based company that collects and analyzes information from hospitals, doctors and pharmacies],” says Kapp. “Looking at this data gave you an edge.” Now most health care investors use IMS information. Shorting presents its own unique set of problems. Ainslie says that is why Maverick’s core funds have always had a long bias. Short-sellers, he explains, face several inherent challenges, not least of which is the long-term upward trend of the market and the potential for unlimited losses when a short goes against them. Cheap credit and the boom in private equity deals made shorting all the more difﬁcult, as troubled companies that were potentially good shorts became targets of buyout speculation, which drives up their prices. By 2003, Ainslie felt he was being stretched too thin. Bringing in Galbraith to help focus on the portfolio day to day was an acknowledgment that Maverick had grown too big for one person to oversee. As former CIO of a global investment bank, Galbraith brought a fresh perspective to — CAROLINE GILLESPIE, Maverick. He had lived in the MANAGING DIRECTOR, U.K. and spent considerable COMMONFUND ASSET time in Hong Kong and Latin MANAGEMENT CO. America, and has a more macro view of the world than does Ainslie. He is used to thinking about the impact that economic forces have on individual companies and industries. Although only one year separates him and Ainslie, the gray-haired Galbraith looks the part of the older, seasoned Wall Street executive. “I’m one of the old men,” jokes Galbraith, one of the few investment professionals at Maverick who regularly wears a suit and tie. Although Maverick managed to beat the S&P 500 in 2004 — it was up 14.1 percent, versus a 10.9 percent rise in the index — the next year it was barely in the black, up 0.3 percent. Some investors and market participants started wondering if Maverick and Ainslie had lost their touch. “From our perspective Maverick at the time had gotten too big,” says Caroline Gillespie, a managing director of Commonfund Asset Management Co., a money management ﬁrm and fund of hedge funds that specializes in investing for foundations and endowments, and a longtime Maverick investor. “They have grown big, and they have hired a lot of people,” agrees Michael Hennessey, co-founder of Morgan Creek Capital in Chapel Hill, North Carolina, which manages $7 billion for mostly high-net-worth individuals and small institutions. Size wasn’t the only problem. One of Maverick’s biggest failings was that it had not been sufﬁciently international and had missed the huge run-up in European markets from 2003 to 2005. Although Maverick has always had an international component — Hobson had been very good at investing in Latin America — it was never a truly integral part of what the ﬁrm did. Galbraith in particular recognized that Maverick needed to become more global. He got up at the 2006 partners’ meeting and admonished his own ﬁrm for not moving more quickly. “I said, ‘We have the same level of international investment we did when it was Lee Ainslie and the pizza delivery guy,’” Galbraith recalls. EARLIER THIS DECADE, Maverick was a favorite among the initial wave of institutional investors looking to invest in hedge funds. They included the Knight Foundation and the endowments of UNC, Duke University, the University of Texas and the University of Virginia. Maverick also had been a staple among funds of hedge funds offered by firms like Commonfund, Lookout Mountain and Morgan Creek. But by 2006 many of these investors had started scaling back their commitment to Maverick, often after becoming concerned about the impact that the ﬁrm’s size was having on performance. The partners at Maverick have always carefully studied the question of growth. Ainslie closed Maverick Fund USA to new money from all but strategic investors in 1997. A year later he offered a levered version of the same fund for investors looking to take on more risk. Maverick was also early to implement staggered redemption fees as a means of controlling growth and rewarding long-term investors. Today, investors locking money into Maverick’s main fund for two years pay a 2 percent management fee and 20 percent performance fee. Three-year lockups carry a 1.75 percent management fee and 17.5 percent performance fee, and a ﬁve-year lockup charges 1.5 percent and 15 percent. In 2002, Maverick started a fund of hedge funds called Maverick Stable to enable Ainslie and his partners to diversify their own investments. The fund, managed by former Maverick media and telecom analyst Bates Brown, was opened to outside investors in 2005. That same year Maverick launched two market-neutral funds as well as a longonly strategy and a 150/50 fund, all of which rely on the same investment research as Maverick Fund USA. For Ainslie, who sets high standards for himself and is always looking for ways to improve, Maverick’s investment performance in 2005 was especially frustrating. At Maverick, he has always emphasized hard work and dedication and discouraged complacency. “At times it felt like we were zigging when we should have been zagging,” says Kapp, who has known Ainslie since they were classmates at UNC. “We had put on too many investment positions and lost some focus.” In December 2005, Ainslie brought together Maverick’s senior partners, including the six sector heads and Galbraith, and asked them to answer, in writing, two “Smart people don’t get stupid overnight. There was always a sense that Maverick would sort out their issues.” 36 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2007

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2007

Institutional Investor's Alpha Magazine - November 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Patriot State The Good Guys: College Connection Interview: Currency of Change Cover Story: Comeback Kid Strategies: Masters of Art Research Center: Alpha Awards: Top Technology Providers Top Analysts Alpha Bytes: Critical Choice Unhedged: Commentary: Banking on a Bubble

Institutional Investor's Alpha Magazine - November 2007

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