VideoEditor'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 differentÂÂÂ…. 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.
What are the best pieces of information that CFOs can give you?
The most common is to think about incremental returns on invested capital and how that compares to the cost of capital. We spend a lot of time trying to make sure that the incremental returns on invested capital definitely exceed the cost of capital and we spend a lot of time trying to understand how sustainable that will be.
CFOs often view hedge funds with some trepidation. Should they be concerned?
They should have concerns, but at the same time they need to recognize that hedge funds account for a very significant percentage of trading volume. And it's really shortsighted not to have positive interactions with the larger, more thoughtful fundsÂÂÂ…. Fortunately, [at Maverick Capital] once we've had some of those interactions, management teams quickly realize that we've done a great deal of work, that we're going to focus on some critical issues, and, perhaps most important, that we can be helpful from time to time.
How should the CFO deal with a hedge fund that's taken a large position in his company?
It's only prudent to [determine] if this fund is going to be a partner or if it is going to have a more antagonistic approachÂÂÂ…. At Maverick, for instance, we think it's awfully important to view these relationships as partnerships. When we come across situations where we think it's in the shareholders' interest to have change, we're quick to express those views, but we try to do so in a way that is private and appropriate.
There is a concern, however, about the aggressive tactics some hedge funds use to gain information. How can companies avoid running afoul of Reg FD?
My best advice is to be as straight-forward as possible because we will cross-check information with peers within the company as well as competitors, suppliers, and customers. We certainly respect the need to comply with Reg FD and do not want to see a company’s adherence [put] in question. Now, unfortunately, we have no way of monitoring what a company has disclosed in a public forum and therefore it really is the company’s responsibility to maintain consistent disclosure. But if someone says, look it, I’d love to discuss this in more detail but unfortunately I can’t because of Reg FD, we certainly respect that response.
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