Editor’s Note: This is an extended version of the interview that appears in print in the October 2006 issue of CFO magazine.
Hedge-fund managers have always been a shy breed. They like to guard their strategies — and their identities — closely. But lately, government regulators have been trying to cast more light on the mysterious ways of hedge funds. Everyone from Congress to the New York Stock Exchange is clamoring for more transparency and regulation. Given the proliferation of funds (9,000 and counting) and the assets under management (more than $1 trillion), the current scrutiny doesn’t surprise Lee S. Ainslie III, managing partner of investment giant Maverick Capital Ltd., with more than $9 billion in assets under management. It’s just one more reason he likes to keep a low profile. (He agreed to an interview, but declined to have his picture taken.) That doesn’t mean he wants to be ignored, though, especially not by companies in which his firm takes large positions.
How does Maverick Capital’s investment style differ from that of traditional hedge funds?
The term “hedge fund” has come to represent so many different styles and strategies that I’m not sure what a traditional hedge fund is. Some [people] associate hedge funds with a great deal of risk or a very-short-term trading orientation, but Maverick is differentÂÂÂÂ . We’ve always been longer-term strategic investors, [and] every decision is supported by a tremendous amount of due diligence. This is an oversimplification, but we tend to look out two or three years in every industry in which we invest and identify what’s winning and what’s losing. Then we [look for] discrepancies between our views and those of the market….. We also spend a lot of time trying to understand the fundamentals of the business. [We look closely at] the management teams: their integrity, their dedication, and their desire to create shareholder value.
Do you specifically evaluate the CFO?
We hope to interact with many levels of management, including the CFO. [And from the CFO’s input] we try to understand the rationale behind what we believe are very, very critical decisions regarding capital allocation. We also [try to] understand the conservancy of accounting treatments and the controls that are in place. And of course, we’re very focused on CFO’s integrity and dedication to create shareholder value. To judge these attributes we find conversations with current and former associates as well as investors to be quite helpful.
What are positives on a CFO’s track record?
Number one is good capital-allocation decisions. We, and other equity investors, have been rather frustrated by the record levels of corporate cash when the real cost of money is as cheap as it’s ever been. Last fall, we had negative real rates in the United States for the first time in 25 years. Yet we also have record-low levels of debt. So when we see an inefficient capital structure and there’s no proactive program to find ways to return that capital through buybacks or dividends, we want to understand why.