David Einhorn's Greenlight Capital Stores Physical Gold: Portfolio Update & Investor Letter ~ market folly

Tuesday, July 21, 2009

David Einhorn's Greenlight Capital Stores Physical Gold: Portfolio Update & Investor Letter

We love tracking David Einhorn because straight up, he's a smart guy. Besides dominating hedge fund land, Einhorn also dabbles in poker and the picture to the right is of him at the World Series of Poker, where he has in the past donated his winnings to charity. We love reading his investor letters at Greenlight Capital because they often give so much insight and transparency as to some of the movements they are making with their portfolios. And, in his second quarter investor letter, Einhorn reveals a few major new developments at his hedge fund.

While Einhorn is typically a value/event-driven investor, we instead want to turn the focus to his macro plays. First and foremost, the activity most people will talk about is the fact that Greenlight has shifted their gold position from the gold trust exchange traded fund GLD to physical gold, citing cheaper fees for storage than expense ratios for the fund they were previously invested in. This is an intriguing move and we'd imagine other funds will eventually follow suit. After all, literally a ton of hedge funds are invested in GLD. And, most notably, John Paulson's hedge fund Paulson & Co has billions of dollars tied up in a GLD position. It will be interesting to see if other funds shift toward storing physical gold ala Einhorn. And for those of you wondering where gold is headed, check out the video we posted up yesterday regarding gold's current trading range.

Secondly, we also want to touch on Greenlight's Japanese Yen position. In a previous investor letter, Einhorn went long the Japanese Yen for various reasons. However, this time around, he has closed the long Yen position. Now they have moved to purchasing options contracts on higher Japanese interest rates in the coming years. Thirdly, they have also purchased another set of options contracts. Einhorn and company picked up puts on the S&P500, citing a decline in volatility as an attractive entry point for some protection should uncertainty rise again. So, while Greenlight undoubtedly has made interesting moves with their equity positions, we instead wanted to focus on their "macro hedges" as they like to call them, as they paint a bigger picture.

However, their equity positions are obviously still worth focusing on so we'll detail some of the changes we've seen within their portfolio. When we looked at Einhorn's portfolio most recently, we saw their large positions in gold and URS. Since the 13F filings we track do not include foreign holdings, we rely on investor letters to gain insight as to what stocks they like in foreign markets. This time around, we note that Einhorn's largest long positions are:

- Arkema
- Criteria Caixa
- Ford Motor Company debt
- gold
- Pfizer

So, gold is still pretty high up the portfolio ladder along with Criteria Caixa and Ford debt. This update though also brings attention to their positions in Arkema and Pfizer, which had previously not been 'top dog' holdings for them. They added some new positions as well, and they specifically mentioned picking up shares of Aspen Insurance Holdings (AHL). Overall, their portfolios were 78% long and 55% short (based solely on equities and fixed income exposure and excluding their macro plays referenced earlier). But, what is intriguing is that they say they have "almost no net long exposure to equities" due to their "bottom-up inability to find many good opportunities, our willingness to sell fully priced positions into the recent rally and our top-down view that the recent rally has now priced in a solid economic recovery which may or may not materialize." Well, that's encouraging, isn't it? No good opportunities out there... time for a market pullback.

They also listed numerous positions that they closed out over the past quarter. They sold out of the following longs: Adesa term loan, Charter Communications term loan, ConWay, Commscope, Discover Financial, Dow Chemical, Hess, Jones Apparel (we covered their initial activity on that one here), Linamar, Rohm & Haas, Target, Texas Competitive Electric term loan, Westshore Terminal Income Fund, and the Japanese Yen.

They also closed out the following short positions: AutoZone, Exxon, and State Street Financial. So, its good to get a nice look at some of the companies they had been short. At the recent Ira Sohn investment conference, Einhorn also presented the case for shorting Moody's and various ratings agencies. Make sure to check out that article because numerous hedge fund managers in addition to Einhorn presented investment ideas at the conference which we've detailed.

In terms of performance, we see that Greenlight is doing pretty well this year overall. Their Capital LP fund was up 16.3% for the 2nd quarter of '09 and is up 21.5% year to date. Their Capital Qualified LP was up 14.7% for the second quarter and is now up 19.7% for the year. Lastly, their Capital Offshore fund was up 11.9% for the second quarter of 2009 and is now up 17.3% year-to-date all as noted in our June 2009 hedge fund performance numbers post. For more on Einhorn and Greenlight, you can see some of their past SEC filings here and also here.

We find it fitting to end our post with the exact same quote that Greenlight ended their letter with from William Arthur Ward: "The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails."

Stay tuned because tomorrow we'll cover Bill Ackman and Pershing Square's latest movements as per their most recent investor letter. And last but certainly not least, here is Greenlight's letter in its entirety for your enjoyment. Firstly, in downloadble .pdf form (click here to download) and secondly in the form of pictures (.jpg) as a back-up thanks to Todd Sullivan.

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