David Einhorn's Greenlight Capital Loads Up On S&P500 Puts (13F Filing) ~ market folly

Tuesday, August 18, 2009

David Einhorn's Greenlight Capital Loads Up On S&P500 Puts (13F Filing)

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

The second hedge fund in our series is David Einhorn's Greenlight Capital. This $6 billion hedge fund has a value investing bent with a focus on spin-offs. For whatever reason, Einhorn seems to always appear in the media for his short positions. He of course had a well documented short position in Lehman Brothers back before it collapsed. More recently, he also was caught in the Volkswagen short squeeze that blindsided numerous hedge funds as he detailed in one of his investor letters. Einhorn has also detailed the saga between his fund and Allied Capital, another company he shorted, in his book Fooling Some of the People All of the Time: A Long Short Story. This book is great because it gives you an inside perspective as to how Greenlight constructs and researches their investment theses and we highly recommend it. Greenlight approaches things by identifying mispricings in the markets and going from there. They have seen solid annual returns of over 20% and are a great fund to track. While the information below will track Einhorn's US equity, note, and bond positions, we also highly recommend reading their latest investor letter as it gives you further insight into Greenlight's portfolio.

The following were their long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that they initiated in the last quarter):
SPDR S&P500 (SPY) Puts
Cardinal Health (CAH)
General Electric (GE) Puts
Transatlantic Holdings (TRH)
ATP Oil & Gas (ATPG) - position is less than 0.45% of their overall portfolio
Endurance Specialty Holdings (ENH) - position is less than 0.30% of their overall portfolio
US Natural Gas Fund (UNG) - position is less than 0.02% of their overall portfolio

Some Increased Positions (A few positions they already owned but added shares to)
Everest Re (RE): Increased position by 598%
IPC Holdings (IPCR): Increased position by 132%
Pfizer (PFE): Increased position by 102%
Wyeth (WYE): Increased position by 100%
Aspen Insurance (AHL): Increased position by 74%

Some Reduced Positions (Some positions they sold some shares of)
MEMC Electronics (WFR): Reduced by 50%
EMC (EMC): Reduced by 44%
Echostar Corporation (SATS): Reduced by 37%
Helix Energy (HLX): Reduced by 34%
Harman International (HAR): Reduced by 31%
URS (URS): Reduced by 28%

Removed Positions (Positions they sold out of completely)
SPDR Gold Trust (GLD)* (there is a big asterisk next to this one, so read our summary below to find out why). Target (TGT), Hess (HES), Commscope (CTV), Dow Chemical (DOW), Conway (CNW), Rohm & Haas (ROH), Discover Financial (DFS), Jones Apparel (JNY), Western Digital (WDC), American Eagle Outfitters (AEO), Patriot Coal (PCX), Cadence Design (CDNS), Williams Sonoma (WSM), JA Solar (JASO), Focus Media (FMCN), Carpenter (CRS), Corning (GLW), Supervalu (SVU), Sunstone Hotel (SHO), Bradywine Realty Trust (BDN)

Top 15 Holdings (by % of portfolio)

  1. SPDR S&P500 (SPY) Puts: 24.25% of portfolio
  2. Pfizer (PFE): 6.32% of portfolio
  3. URS (URS): 5.56% of portfolio
  4. Teradata (TDC): 5.11% of portfolio
  5. Wyeth (WYE): 4.56% of portfolio
  6. Cardinal Health (CAH): 4.27% of portfolio
  7. Market Vectors Gold Miners (GDX): 4.25% of portfolio
  8. Allegheny Energy (AYE): 3.75% of portfolio
  9. EMC (EMC): 3.34% of portfolio
  10. Einstein Noah (BAGL): 3.27% of portfolio
  11. Aspen Insurance (AHL): 3.25% of portfolio
  12. Health Management Associates (HMA): 2.49% of portfolio
  13. McDermott (MDR): 2.33% of portfolio
  14. MEMC Electronic (WFR): 2.29% of portfolio
  15. IPC Holdings (IPCR): 1.77% of portfolio

We've got a lot of technicalities to cover here so let's dive right in. Firstly, Einhorn did not get out of gold. Last go-round, we saw Greenlight had amassed a large gold position via the SPDR Gold Trust (GLD). Although GLD no longer is being reported on his 13F filing (they sold out of it), they still own a large gold position. They have started storing physical gold due to cost savings as noted when we looked at Greenlight's recent investor letter. This is the perfect example of why you can't blindly follow SEC filings. You've got to know a manager's rationale and access every resource of theirs you can. And, Market Folly's goal is to bridge that gap with our hedge fund tracking. Through tracking him, we know that Einhorn has been decisively skeptical. If he was so skeptical, then why would he sell out of his gold position on the 13F? The answer: he didn't sell out of it at all, he merely switched investment vehicles. Those following 13F's blindly would not know that. For instance, if we were just 'piggybacking' Einhorn into his gold play last quarter, we would have sold out just now because we no longer see his gold position appear on the 13F. When in reality, he still holds a very large gold position.

Another thing worth noting here is that Einhorn holds numerous securities in international markets. As such, his 'top holding' listed on the 13F filing will not be his top holding in his hedge fund's overall portfolio. Since 13F filings only require institutions to disclose holdings in US markets, we are shielded from viewing the rest of the portfolio. However, by reading Einhorn's letter, you can see what his top holdings are in international markets (and the overall portfolio). So, that's more of a caveat with this summary than anything.

Turning to his 13F activity, we can easily see the main headline here: they loaded up on S&P put options as a brand new position. In his investor letter, we learned that a drop in volatility decreased prices in options markets and it made sense for Greenlight to purchase them given the price. This move further illustrates Greenlight's bearish stance on the economy and at the very least provides some downside protection.

We also want to point out the fact that in reality the puts position is not 25% of their portfolio. That figure was derived by taking the stated value of the puts on the 13F and dividing it by the stated value of their total assets reported on the 13F. The total assets reported was $2.8 billion and that total represents their long US equity, options, and note positions. This does not include their short positions, cash, or holdings in other markets. Their firm in reality manages $5-6 billion and so the percentage of portfolio dedicated to S&P puts is realistically lower. Additionally, the value of the put options on the 13F filing represents the notional amount of the shares underlying his puts. Hopefully that clarifies some.

Additionally, we make note of Greenlight's new position in Cardinal Health that they brought all the way up to their 6th largest holding. Notable sales include selling up to 50% of both their MEMC Electronics and EMC positions. This is slightly interesting since we see that fellow hedge fund manager Bill Ackman has a large EMC position. Einhorn sold completely out of his Target position too (another position Ackman has a large stake in). Wonder if Einhorn has beef with Ackman since he is selling out of all those positions. (We're only joking).

In terms of positions they already owned, we see that Greenlight doubled down on their Pfizer (PFE) and Wyeth (WYE) stakes. They boosted their Everest Re (RE) stake substantially, but it still is only 1.58% of their overall portfolio now.

Assets from the collective holdings reported to the SEC via 13F filing were $2.8 billion this quarter compared to $2.4 billion last quarter, so a slight increase. US equity exposure. This is just one of the 40+ prominent funds that we'll be covering in our Q2 2009 hedge fund portfolio series. So far, we've already covered the holdings of Bill Ackman's Pershing Square Capital Management. Check back each day as we cover prominent hedge fund portfolios.

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