Over the weekend, when reporting on David Einhorn's latest monthly performance, we said that "every month this year we have said it couldn't possibly get any worse for David Einhorn's Greenlight, and the very next month we are proven wrong." The reason: in June, Einhorn's Greenlight tumbled another 7.7% bringing the YTD loss to -18.7% after an 11.3% drop in 2017, an unprecedented collapse for the fund whose longs have slumped, but whose "short basket" has ripped amid what recently was a record short squeeze.
We concluded by saying that:
"the worst news for David Einhorn is that for Greenlight's LPs enough may be enough, and after losing 28% since the end of May, "investors have bolted", pulling almost $3 billion out of the firm in the last two years. With only $5.5 billion in assets, Greenlight, like Pershing Square, is now well less than half the hedge fund it was at its peak."
Now, according to the WSJ's Greg Zuckerman, the worst case scenario for Einhorn is starting to unfold, as one after another prominent LPs are either pulling their capital, or warning they "will exit if results don’t rebound." But what is most surprising, is that they are doing so on the record, with a series of quite embarrassing - for Einhorn - soundbites. Here are some examples:
“My patience is wearing thin,” said Morten Kielland, chairman of investment-management firm Key Family Partners SARL and an early Greenlight investor, who said he has withdrawn much of his firm’s money from the fund. “This is unbelievable.”
For his part, Einhorn is unhappy: "We are obviously frustrated by our results,” Greenlight admitted in its latest letter to investors, and yet the Greenlight founder hasn’t clearly explained the losses, "pointing to the market’s shift away from the less expensive value stocks he favors."
“It is difficult to explain what caused the results,” he said in an April investor letter. “To some extent, this quarter’s result stems from the continued extreme outperformance of growth over value.”
Pragmatics know that this divergence, which is shown in the chart below...
... is the direct result of central bank intervention in capital markets, which has made a mockery of traditional, fundamental investing while forcing investors to chase after either growth, momentum or bad balance sheet stocks, as those are the only strategies and factors that outperform in a time in which the Fed is fully intent on perpetuating zombie companies with low interest rates, while making the cost of capital for growth companies virtually nil, allowing them to capture market share from legacy businesses.
According to Zuckerman, some attribute Mr. Einhorn’s troubles in part to his unconventional ways, such as "sticking to value stocks, for example, and keeping clients at a distance—which he hasn’t changed even as investors bolt."
“He’s stubborn,” said Peter Weiss, a Boston-area investor who said he withdrew hundreds of thousands of dollars this year. “He’ll never admit he’s made a big mistake…It just makes me crazy.”
When clients asked Mr. Einhorn for his views on investments, he often chafed, several investors said. While he revealed the firm’s five largest “disclosed long positions” monthly, he wouldn’t say whether there were other large positions or significant bearish bets in the portfolio, nor would he give midmonth updates as many funds do, these investors said.
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Once, Greenlight wouldn’t tell an investor what shares it was buying, only for the investor to learn days later what it was doing in a media report, frustrating him. “You call them and try to have a substantive conversation,” the investor said, “and they’re almost obnoxiously closed-door.”
For his part, Einhorn said in a statement that "when we recognize a mistake we exit the position and own up to it in our quarterly letters." Many seem to disagree, but have little choice due to the fund's draconian lock ups:
Greenlight could be difficult to deal with, some current and former investors said. While most hedge funds let clients withdraw money once a quarter, Greenlight in 2005 began requiring a three-year commitment with one chance a year to withdraw after that.
And yet, despite his famous poker face (Einhorn is also a pro-tour poker player) the pressure of Einhorn's underperformance and the redemption requests appear be getting to the one-time investing wunderkind, according to the WSJ:
With the media, Mr. Einhorn was soft-spoken and generous with his time. Behind closed doors, he sometimes showed a darker side. At “idea dinners,” where he and other hedge-fund managers regularly met to debate stocks, he could be insulting to those who questioned him, some participants said.
Meanwhile, perhaps with the aid of some disgruntled LPs, the WSJ digs far back in the past to disclose embarrassing incidents such as this one:
In 2001, John Burbank, who was starting a research service and later became a hedge-fund manager, pitched Mr. Einhorn on refiner Valero Energy Corp. , said a person familiar with the meeting. Mr. Einhorn dismissed the idea and spent half an hour lambasting him for not doing his homework.
“You really should go for better businesses,” Mr. Einhorn said, according to this person, telling Mr. Burbank to steer clients to one of Greenlight’s largest holdings at the time, WorldCom Inc., the person said. A year later, WorldCom declared bankruptcy. Valero’s stock more than doubled over the next three years.
Which is not to say that Einhorn is a bad manager: he is far better known for his hits than his misses, which is also why iInvestors have tolerated his "quirks": results were great, and annual gains were as high as 58%.
Some of his biggest hits came from public battles with companies whose stock he shorted, betting against them by selling borrowed shares. In 2002, he began a protracted spat with Allied Capital Corp., a lender he said was overvaluing its holdings. Allied called his claims unfounded, but its shares fell and it was acquired in 2009 at a fraction of its 2002 price, resulting in millions in profits for Greenlight.
In May 2008 at a conference, he criticized Lehman Brothers Holdings Inc.’s accounting practices, asking why it took only a $200 million write-down on $6.5 billion of collateralized debt obligations. Lehman filed for bankruptcy that year.
"Kind David", as he was also known during his better days, also had a bit of a nightlife habit:
Einhorn and his employees gained reputations among some investors for enjoying themselves after hours. His team gambled in Atlantic City, N.J., annually and sometimes hit New York nightclubs until early morning, spending thousands of dollars a person on food and drinks, said people who attended some such events. Greenlight hosted an annual Friday-night poker tournament for employees, friends and clients, where alcohol flowed and thousands of dollars changed hands.
Einhorn flew with staffers to Las Vegas each year, sometimes in a private jet, for the World Series of Poker, visiting nightclubs and spending as much as $20,000 each, said one of the people who attended such events. In 2012, Mr. Einhorn finished third in the tournament, taking in $4.35 million, and another time won nearly $660,000, all of which he donated to charity.
“We worked hard and played hard,” said the WSJ source. “There was a celebratory feel.” Indeed there was, and until 2013, Greenlight seemed unstoppable, as it moved into investments such as gold, derivatives and debt, gaining 19.8% that year. Einhorn ported over his success into 2014, when things started to change: maybe his fame and fortune started getting to his head:
In 2014, for the first time in years, Mr. Einhorn opened Greenlight to more investors, some of his clients said, drawing $1 billion in new cash and increasing assets under management to $12 billion.
That year, he bought a small piece of the Milwaukee Bucks basketball team. In 2015, he became chairman of the board of the Robin Hood Foundation, the hedge-fund industry’s unofficial charitable arm. He often coached baseball and softball teams for his three children, said former employees.
This is the time when some investors showed early signs of "becoming wary of Mr. Einhorn’s methods, including Gregory Horn, who runs Persimmon Capital Management LP."
Mr. Horn said he worried that Mr. Einhorn’s public appearances to promote his holdings could make him a possible target of rivals hoping to drive up stock prices.
“We like our managers investing, not promoting,” said Mr. Horn, whose firm says it pulled its money from Greenlight in 2014. “We didn’t like him going out to the press and were concerned about people picking off his trades.”
That is also the time when things started going south.
Einhorn’s downturn hit mid-decade. Greenlight dropped more than 20% in 2015, hurt in part by a 74% collapse in shares of solar and wind producer SunEdison Inc., one of Greenlight’s largest holdings at the time; the S&P 500 returned 1.5%. Investors hoped it was a blip, and Mr. Einhorn seemed to take it in stride.
At his annual investor dinner that winter, he featured a slide of the now-imprisoned pharmaceutical executive Martin Shkreli, who had once unsuccessfully pitched the firm on an investment. Mr. Einhorn’s message: It could be worse—Greenlight could have invested with Mr. Shkreli. Many in the room laughed, said a person who was present.
However, the downward streak was just starting, and as Greenlight’s tumble accelerated, so did concern among investors about Einhorn’s value-oriented approach, which avoided popular tech stocks that were part of what he called a “bubble basket” that he predicted would fall.
He told investors in an early 2018 presentation, one investor said, that he had been shorting stocks including Amazon.com Inc., Athenahealth Inc. and Netflix Inc., stocks that are up more between 19% and 103% this year—a short position loses value when the underlying stock rises. Brighthouse Financial Inc., Greenlight’s second-largest holding as of March 31 according to its securities filings, is down 31% this year.
We shows previously what happened next: it wasn't pretty:
According to Zuckerman, some investors caught a case of Loeb envy, saying they wished Einhorn had embraced high-growth stocks as did Third Point's Daniel Loeb, and which bought two million shares of Netflix last year.
But Einhorn had bigger problems on his mind, chief among which a divorce:
Adding to distress among some investors is Mr. Einhorn’s pending divorce. “If someone goes through a divorce, I usually get out,” said Mr. Kielland, Mr. Einhorn’s early backer. “I made an exception with David, but I made a mistake…He has to be distracted: I’m convinced that’s 30% to 40% of” why Greenlight has been underperforming.
Kielland said he has withdrawn three-fourths of his firm’s money and may take out the rest. Several other investors said they withdrew, or are considering withdrawing, money in part because of the divorce. Einhorn countered:
“This Europe-based investor has almost no contact with me and has no basis for his statement. Our investment team and I are solely focused on the portfolio.”
Of course, the final chapter of the story has not been written, and Einhorn could very well have the final laugh: after all, his bet is merely one against central bankers, and readers know well, the world's central banks begin to drain liquidity in earnest in just a few months time; at that moment - when the tech bubble has a high chance of finally bursting - all of Einhorn's pain may be validated:
Some rivals say Mr. Einhorn’s avoidance of expensive stocks could prove prescient. General Motors Co. shares, among Greenlight’s largest holdings, gained 10% last month on news of an investment from SoftBank Group Corp.’s SoftBank Vision Fund, though GM remains down 5% this year.
In the end of the day, those who have stuck with Einhorn, have made their money, and supporters point to Greenlight’s stellar annual returns since inception: 15% versus 8.7% for the S&P 500 and 7.5% for the average stock-focused hedge fund, according to HFR.
Zuckerman concludes that, for better or worse, Einhorn is showing no signs of changing his ways.
At an April conference, he unveiled his latest bearish pick, Assured Guarantee Ltd., warning that its business was more challenged than investors realized. Einhorn's warning didn’t move the stock much that day, but he remained hopeful.
“Bubbles do pop, you know,” he told the crowd. “Or at least they used to.”
We, for one, are hopeful that even if he is wrong on everything else, "King David" will be right with that prediction.