David Einhorn's Greenlight Capital Returning 22% Annualized (Investor Letter) ~ market folly

Friday, January 22, 2010

David Einhorn's Greenlight Capital Returning 22% Annualized (Investor Letter)

David Einhorn has sent out his hedge fund's investor letter for the fourth quarter of 2009 and we get a peek as to what Greenlight Capital has been up to lately. Their six largest disclosed long positions are now Arkema, Boston Scientific, CIT Group, Ford Motor Company debt, gold, and Vodafone Group. Over the course of the quarter, they added 'significant' new long exposure via Boston Scientific (BSX), Delta Lloyd (Netherlands: DL), and Vodafone Group (UK: VOD). Greenlight's exposure levels were 95% long and 63% short (excluding credit derivatives, gold and foreign currencies).

For 2009, Greenlight's various hedge funds were up 36.9%, 33.7%, and 30.6%. See how Greenlight stacks up to other major funds in our 2009 hedge fund performance numbers post. We also want to point out an intriguing fact from the letter: "Since inception in May 1996, Greenlight Capital, L.P. has returned 1,397% cumulatively or 22% annualized, both net of fees and expenses." Amazing stuff.

Over the course of the quarter, Greenlight sold out of "some real dogs" (their words, not ours). They sold their longs in Criteria Caixa, Echostar Holding Corp.-A, Nokia OYJ, Nyrstar, and IHOP Franchising 7.0588%. They also covered their short in International Bancshares Corp as losses in construction loans were not quite what Greenlight expected.

Heading into 2010, their portfolio is conservative and their long portfolio is invested in mainly stable, less cyclical businesses. They are short businesses that are fundamentally challenged in a difficult economic environment. Also, they have been moving out of successful debt investments that only have limited upside potential left. Where have they deployed that capital now? Well, into long equity positions, of course. Yet again, we see that hedge funds have been very net long equities. This also ties in with Bank of America's recommendation of overweighting equities and underweighting bonds.

Einhorn's letter also highlights that they are still short Moody's (MCO) and have been on the losing side of this play. However, it sounds like this is a position they will be in for a while as Einhorn writes, "We agree that the litigation will take time to play out, but doubt that the situation will prove 'manageable' for MCO." You can see his original short thesis here.

Also, we make note that Einhorn has been long gold (via storing physical gold) for a while, and he continues to maintain this large position.

Embedded below is David Einhorn's Greenlight Capital Q4 2009 investor letter:

You can download the .pdf here.

For other notable portfolio activity out of David Einhorn's Greenlight Capital, we've covered their recent new position. To get a better idea as to how Greenlight constructs and researches their investment themes, we highly recommend checking out Einhorn's book Fooling Some of the People All of the Time: A Long Short Story. Typically, Greenlight approaches things by identifying mispricings in the markets and then proceeding from there. We've covered Greenlight in-depth for quite some time now and will continue to bring you future updates.

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