Everybody already knows that David Einhorn is having a flat out terrible year, with Greenlight now reported to be down 15% YTD and down 25% since the end of 2014.
Now the media is starting to amplify the hedge fund manager’s struggles with Institutional Investor asking “What Happened to David Einhorn?” yesterday and today, Bloomberg releasing an article highlighting the manager’s underperformance and questioning whether or not he has evolved properly alongside of the markets to once again ever be successful.
In his defense, a lot of Einhorn’s struggles have come from the fact that the market has changed significantly since he started as a manager. With the Fed committing to lower interest rates, logic and reason – which used to be Einhorn’s key principle of value investing long and in shorting bubbles – has been thrown completely out the window. Stocks no longer trade on fundamentals and if you are a stock picker that focuses only on fundamentals, this is going to significantly alter your investing landscape. If you don’t change with it, you’re going to get run over, and David Einhorn is finding out this the hard way. Bloomberg reported today that he has faced $3 billion in redemptions:
Einhorn, who achieved widespread fame at moments of maximum danger, is no longer the enfant terrible he once was. For starters, he’s turning 50 this year. And, in middle age, he has clung to his old ways even as many in his industry have moved on.
The numbers tell the story. So far this year, his Greenlight Capital has handed its investors a 15 percent loss, bringing the total decline since the end of 2014 to a staggering 25 percent — one of the worst showings among his peers. Investors have bolted, pulling almost $3 billion out of the firm in the last two years.
Despite this, Einhorn seems to be resting on his laurels. The fund manager believes that reason will once again return to the market and that his investment style will eventually be vindicated again. The article continued:
Yet the baby-faced billionaire is unperturbed, no matter that he has been wrong about nearly every one of the top 40 positions in his $5.5 billion portfolio this year. He’s as cocksure as ever — some might say cocky — publicly and in conversations with colleagues. “We believe our investment theses remain intact,” he wrote in an April investor letter. “Despite recent results, our portfolio should perform well over time.”
Einhorn’s this-too-shall-pass attitude puts him in an interesting spot in a $3.2 trillion industry invented back in the day on strategies that don’t work so well now — after a decade of historically low interest rates and the rise of passive investing and quant trading. The Einhorn modus operandi of buying the beaten-down stocks of companies he expects to grow and selling those that are overvalued has fallen out of favor.
The article makes examples of his peers, too, noting how they have “evolved” – even noting that some short sellers have simply just given up:
Not surprisingly, many in Einhorn’s circuit have switched up approaches, at least on the margins. Lee Ainslie and Steve Cohen have added machine learning or other quant models to help in stock picking. Dan Loeb owns Facebook Inc. and Netflix Inc., even though in his early days as a value investor he would have never bought shares with such high prices relative to earnings.
On the short side, some no longer bet against bubbles. They’re careful about identifying catalysts that might move a stock or have stopped shorting individual stocks all together, using options on indexes instead.
And they’ve all performed better than Einhorn in the past few years.
“He’s chosen to stick with his approach in a massively shifting landscape, and I can’t help but admire his conviction,” said Brad Balter, who runs Balter Capital Management and is a long-time hedge fund investor. “But how do you survive when investors and the market are telling you they want you to change? It needs to turn into his kind of market fast.”
Despite his underperformance, Einhorn is stringent in his belief that at some point, at least some normalcy will return to the market:
Einhorn’s view would be that we’re due for value to assume the leadership mantle again soon. And many of his long-term investors agree there is reason to hang tough. Just consider: If you put $100,000 into Greenlight in 1996, you would today have $1.9 million. People who are sticking with the fund use basically the same language to defend their loyalty, something like: “David Einhorn is a smart guy — he didn’t go dumb overnight.”
For those who have lost faith, explanations vary. Some, for example, said they were put off because Einhorn allowed the firm to get too big — $12 billion at its peak — forcing it out of less-trafficked, smaller and mid-cap stocks where he originally made money and into larger cap names like General Motors and Bayer AG where it’s harder to have an edge.
We recently wrote about Einhorn‘s underperformance in the first quarter of 2018.
In the first quarter, the pain for David Einhorn’s Greenlight Capital reached unbearable proportions, as the iconic hedge fund manager lost 14%, one of the worst quarters in the fund’s history; paradoxically, as a result of Einhorn’s “bubble basket” which is a short basket consisting of high PE tech names, Einhorn should have had a great quarter as a result of the recent clubbing of the sector. Instead, the opposite happened.
In a letter to an investor that we reported on in early April, he confirmed the deplorable performance and explained what happened.
In a nutshell, it was not only an abysmal quarter, but one in which the billionaire fund manager still can’t figure out what exactly went wrong. As Einhorn writes in the investor letter, “in our history, we’ve had five other quarters with a greater than 5% loss. In four of those, there were clear world or market events that provided a simple explanation, and in one, a few positions in our portfolio went wrong at the same time. This period has not been like any of these.“
Instead, as Einhorn noted, there were “no events or individual positions” that stood out; instead the fund’s “losses were broad throughout the portfolio, but generally shallow. We had nine positions (six longs and three shorts) that each cost more than 0.5% and only one (Micron Technology) that generated a gain of over 0.5%, despite our portfolio having a decent earnings season.”
It appears that what did go wrong, is that both Greenlight’s longs and short lost money. But where it gets truly vexing, is that Einhorn’s long positions lost money despite posting positive earnings, while his shorts climbed despite earnings.
And so, Einhorn doesn’t even seem to have luck on his side right. Even worse, he’s battling the Fed. This is literally a “David versus Goliath” story, as Einhorn has ignored the evolution of the markets and continues to dig his heels in with the strategy that made him into the household name that he has become.
In the fight of Einhorn versus an irrational market and insane monetary policy, we think he’ll be right in the long term and we want to root for him, but who knows if he has enough time, resources, capital or patient investors to see himself proven right.