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.
In April, we reported that Einhorn’s main hedge fund ended the first quarter with a 1.9% slump in March, bringing it down to -14% for the year, which we said that while superficially was not that bad (as it outperformed the S&P’s 2.5% March drop), that would hardly enthuse Greenlight’s long-suffering LPs who have been patiently waiting for Einhorn to have another home run, and which failed to happen despite the March tech bust, which Einhorn was expecting with his “short basket”.
“In other words”, we said “David will be sending another letter to his clients explaining why this all “must be frustrating to you.”
One month later, the deterioration continued, and Greenlight Capital fell another 1.1% in April, extending the total loss this year to a unprecedented – for Einhorn – 14.9%. In a letter to investors sent out in early April, Einhorn said that he had “encountered the perfect storm in the market”, where he lost money on both his longs, which slumped, and his shorts, which spiked, resulting in a roughly 14% loss in the first quarter. Indeed, as we reported two months ago, Einhorn’s, 20 biggest long positions fell 5.6%, while his 20 largest shorts jumped, leading to a double whammy -5.5% in P&L.
Then, at the start of May, Einhorn reiterated his disappointment on a conference call for Greenlight Capital Re, the Cayman Islands-based reinsurer which he chairs. He repeated that Greenlight’s gains from his Micron long Tesla short did little to offset broader losses, led by an investment in General Motors and a short against Netflix. GM dropped 11.3% in the first quarter, while Netflix surged 54%.
Quoted by Bloomberg, Einhorn said that “the quarterly result was one of our worst. Despite a good earnings season for our portfolio, in which most of our largest positions recorded fundamentals that were consistent with our investment thesis, we managed to lose a bit of money on most positions with no material winners to offset the losses.”
Unwilling to thrown in the towel, Einhorn reiterated his bear thesis against Netflix, saying that while the company managed to pull in more subscribers than expected after spending on marketing, technology and development, free cash flow was deteriorating.
“In our view, Netflix has shown an ability to turn cash into subscribers, but not the ability to turn subscribers into cash.”
Unfortunately, by now none of this is new information to anyone, so – as we said at the start of May – absent the “growthy” story cracking, expect even more pain from Greenlight, until one of two things happens: the market starts trading rationally again, and tech names – i.e., the Greenlight short basket – finally blow up, or Greenlight’s LPs decide they have had enough and flood the fund with redemption requests.
There was some good news in May, when the Fund managed to recover some losses largely thanks to surge by GM – Greenlight’s largest position – on the last day of month, which brought Greenlight’s loss to a more “manageable” -12.2% for the year…
… however, the bounce was not meant to last, and in June, Greenlight’s pain hit epic proportions, when according to the latest performance update from Greenlight the fund crashed another 7.7% bringing the YTD loss to an unprecedented 19%, underperforming every benchmark, including the HFRX Global Hedge Fund Index (which is down 1% YTD), the HFR Fundamental Value Index (+1.8% through May), and of course the S&P itself, which is up 1.7% excluding dividends.
Being stubborn has proven painful for Einhorn, because while the GM surge – on the back of a $2.25 billion investment in its autonomous-car unit from SoftBank Vision Fund – faded fast amid the escalating trade war and potential retaliation on US auto imports, pushing GM stocks into the red for 2018, his infamous “short basket” has continued to rally, and in fact, its surge accelerated subject to what ten days ago we dubbed the biggest short squeeze ever, as the market’s most shorted stock soared in the middle of the month…
… as a result of one or more hedge funds with heavy tech short positions, such as Pelorus Jack, liquidating and forced to close out shorts, and leading to an unprecedented short squeeze starting in May, where the most shorted stocks outperformed the rest of the market by 20%.
In other words, Greenlight has been absolutely steamrolled by his “bubble basket” of tech shorts he is betting against, which is made up mostly of tech stocks including Netflix and Amazon, which have exploded by 104% and 45% respectively, this year. Meanwhile, Einhorn’s long book continues to bleed with three of his biggest four public stock holdings posted double-digit losses as of March 31.
And then there is the future to consider: after all, it is only a matter of time before the Fed will be forced to back off its tightening policy which has so far failed to notably hit US stocks which have again re-emerged as the “cleanest dirty shirt in the world”, and as several Fed presidents have recently hinted the Fed’s rate hikes may soon be over, especially if Trump tells Powell to stop hiking as Larry Kudlow hinted yesterday (and depending on how badly the market is hurt, QE4 may soon follow), which would lead to another burst in the most shorted names, eventually leading to a deadly blow to Greenlight.
But 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, Bloomberg reports that “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.