Maverick founder points to passive investors’ outsized impact on Wall Street

Maverick Capital enjoyed a successful run in 2019, and if early 2020 is any indication the future remains bright for one of the hedge fund industry’s elite shops. Legendary Tiger Cub Lee Ainslie III has weathered many market trends since the early 1990s and 2019 was no different with the Tiger Global (Onshore) fund returning 32%, according to an investor letter obtained by Alternatives Watch. According to the Tiger team, 2019 saw some substantial profits in its long-only book driven primarily by technology plays with holdings in Microsoft, Facebook and Alibaba. But also shares in SoftBank Group and Apollo Global drove portfolio returns too. But in the face of a whopping 30% gain in the U.S. stock market, Maverick did lose money in its short book for the year all while outperforming the overall equities market. In the last quarter, the market soared and with it Maverick’s portfolios’ returns on the whole. Ainslie wrote in his annual letter to investors: “I believe seeing larger price changes in compressed timeframes for individual positions may become more common in the future.” He pointed to the growing trend of passive investing and the fact that the actual amount of money allocated to actively managed mutual funds in 2007. The wall of money in this space shows a market driven less by fundamentals than sheer momentum of market capitalizations and weightings. “In the short term this creates dynamics that can be very frustrating as the impact of such critical fundamental factors is dampened as a smaller and smaller portion of invested assets are focused on such factors,” he wrote. “However, over time this can lead to a widening disconnect between a stock’s underlying fundamental value and the value reflected in the equity markets creating attractive investment opportunities.” Of course, hedge funds have been hostage to this dilemma for years now with many wondering aloud what Apple’s valuations are actually based on. For his part, Ainslie said that we are seeing stocks gap up or down more commonly in response to events or news that highlight “the delta between market value and fundamental value.” His investment team in turn has an average of 2.6 investments per investment professional and that allows the firm to keep its capital concentrated and the managers themselves are very selective as a result, he said. In maintaining a concentrated book, Maverick is able to maintain a low correlation to the overall market, Ainslie maintained.Others have not been so fortunate and long/short equity portfolios in general have been challenged since the end of the financial crisis. And Maverick to be sure does manage a long only and long-only enhanced portfolio too. The statistics are sobering though. The ratio of total assets invested in fundamental long/short hedge funds relative to the market cap of the S&P 500 has fallen by more than 40% since the financial crisis, according to Maverick.Going into 2020, there are a number of new stock plays, the Maverick team is likely considering as it keeps an eye on technology trends. Those include keeping watch on the upheaval in the media and cable industries at the hands of streaming services such as NetFlix, Hulu and new roll-outs such as Quibi and Peacock. A secondary interesting trend is the impact of technology on rising inflation. Here Ainslee points to deals such as PayPal’s acquisition of online shopping and rewards tool Honey Science that scans the web for the best pricing options. Technology, he added, is also helping the biggest companies to get bigger via massive R&D budgets. The Maverick team’s research though will continue to center on consumer internet, software, financial technology and disruptive consumer trends.

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