Maverick Capital

Lee Ainslie’s Maverick Capital used to be one of the biggest, baddest hedge funds around. But recently it hasn’t been doing so well. In 2011, his Levered Fund was down 30.7% and this goes to show you just how tough of a year 2011 was for hedge funds.

According to Ainslie, his fund under-performed because:

While the environment for fundamental investing was certainly unfavorable last year, such factors do not fully account for our results. Maverick’s poor performance was primarily driven by a handful of individual mistakes and insufficient risk constraints.

And according to Market Folly, Maverick has implemented a new risk management system to improve their performance:

In order to address risk management, they’ve implemented MavRank, a quantitative system driven by fundamental inputs that helps make recommendations for position sizing. While Ainslie stressed that all decisions will still be made by humans, the full implementation of quant tools is interesting.

Lee Ainslie Expects Volatility

One thing Ainslie noted is that volatility is becoming a huge factor in the market (with the recent performance of the VIX not withstanding.) He mentions that he expects much greater volatility in the future and will try to keep the volatility of Maverick lower with his new risk management system:

This leads to our conclusion that volatility spikes are likely to continue to occur more frequently, and, therefore, future levels of equity volatility are likely to be higher than those seen in the past. As a result, going forward we will seek to continue to maintain volatility in the 10-12% range in our core funds, even though we expect this level of volatility is likely to be less than half of the equity market’s volatility. To help achieve this objective, we have lowered our long-held gross exposure target to 225% from 250%(our long-term average gross exposure has been 248%), among other steps. (We have also decided to maintain our 1.5:1 long/short ratio, which translates to a slight reduction in our target net exposure from 50% to 45%.)

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