It was April 23, the day of the 23rd annual Sohn Investment Conference, and David Einhorn was wearing his lucky tie.
Since Einhorn’s Sohn debut 16 years ago at the age of 33, the annual cancer charity conference has arguably become the hottest ticket on the hedge fund circuit, attended by thousands of investors eager for stock tips from the financial cognoscenti. Last month they sat in a darkened David Geffen Hall in Manhattan’s Lincoln Center, waiting patiently as Einhorn, the last speaker of the day, strode onto the stage.
“New suit, same tie,” Einhorn quipped as a photo of himself in 2002 flashed on the slide behind him, showing the gaudy, multicolored piece of silk that had been the least geeky thing about the tousle-headed investor when he had worn it at his first Sohn and wowed the investment world.
Einhorn, a billionaire whose Greenlight Capital hedge fund is one of the world’s most watched, has always been a big draw at the conference. Now 49 years old, he is still a boyish-looking nerd — although his hair is now fashionably spiky, his suit is better cut, and his white shirt boasts a spread collar, not a button-down.
Yet, as many in David Geffen Hall were acutely aware, channeling his past cannot change the hedge fund manager’s flagging fortunes.
This year Greenlight lost 14.9 percent through April, while the S&P 500 was down 0.4 percent — the latest embarrassment for a former star who has not bested the stock market since 2009. Even before this year’s debacle, in 2017 investors had already yanked more than a third of Greenlight’s redeemable capital, a stunning loss of investor confidence that has never before been publicized. From a peak of $11.8 billion in 2014, Greenlight’s assets had shrunk to $6.4 billion by the end of 2017.
Perhaps more surprising, Einhorn has managed to underperform struggling peers like Bill Ackman, whose Pershing Square Capital Management has endured more than three years of losses and even bigger redemptions. Ackman is known for high-profile disaster bets on Valeant Pharmaceuticals International and Herbalife, yet his fund has managed to beat Greenlight since 2009, annualizing at 8.9 percent through April 2018, compared with Greenlight’s 4.7 percent.
Yet despite mediocrity, Einhorn seems to have somehow avoided public censure, unlike Ackman and other former luminaries, such as John Paulson, whose empire has shrunk the most of the three men — from $38 billion to $9 billion, after his Paulson Partners fund lost more than 20 percent in each of the past two years. One Greenlight investor even cautions against writing about the fund’s problems, as if Einhorn were a precocious child who needed to be coddled. “Talking about how shitty he’s doing is not real nice,” he says.
At this year’s Sohn, Einhorn worked hard to polish his image as he harkened to his past — an era in which Greenlight posted mouthwatering returns and Einhorn was considered nothing short of a genius.
Even then, the reality was a bit more prosaic.
Einhorn, who was born in New Jersey and raised in Wisconsin, started Greenlight in 1996, when he was only 27. Over the next decade he boasted annualized returns of 26 percent, far outpacing broader markets with bets on homebuilders, subprime lenders, and other highfliers of the decade.
His first Sohn presentation had been a bet against Allied Capital, a midsize financial company with dicey loans and questionable accounting. While the company was forced to restructure during the financial crisis, Einhorn’s bruising six-year fight only netted Greenlight a profit of $35 million.
But by then Einhorn had taken down bigger prey. He went on the attack against Lehman Brothers in 2007, less than a year before it filed for bankruptcy. That star turn made him a short-selling legend, even earning him a laudatory profile in New York magazine. It also turned his name into a verb used to describe the devastation to the stock price of any company he dared criticize.
Since then, however, Einhorn has been bombing at Sohn and elsewhere. His shorts on a string of companies — Green Mountain Coffee Roasters, Chipotle Mexican Grill, Athenahealth, Martin Marietta Materials, Pioneer Natural Resources Co., Caterpillar, Core Laboratories, Netflix, Amazon.com, and Tesla — are all either trading higher than when he announced he was short or were bought out at a premium, even though some had a temporary downward spike when he unveiled his bet. (He has acknowledged covering, at a loss, Green Mountain and Chipotle.)
Einhorn needed to break his losing streak, and Sohn was the perfect venue for doing so. In a 20-minute talk with 63 slides peppered with cartoons and financials, he laid out his case for a short sale of Assured Guaranty, a debt insurer that is on the hook for some $5 billion in Puerto Rico bonds, which are now in default. Add in the insured interest payments, and the total comes to $8 billion, which is more than the insurer’s capital base.
The story was similar to that of Allied Capital, he argued: “It has fooled its sleepy auditors and regulators, and it lures investors by aggressively returning capital that it doesn’t earn.”
At first the old Einhorn magic appeared to work. The stock fell as much as 6 percent in after-hours trading, and Einhorn strolled into the Sohn cocktail party triumphant, chatting amiably with investors who gravitated to his side.
But by the next morning, Assured Guaranty shares were rising as the company fought back, saying it was “well reserved for its municipal exposures . . . and does not face liquidity risks.” The stock is now down more than 3 percent since his speech. Whether Einhorn is eventually right or not, the stock’s initial movement isn’t anything like what happened with his Allied Capital short, which he had also pitched after regular trading hours. That stock couldn’t even open for trading the next day, and when it finally did it fell 20 percent.
This time around, investors, short sellers, and fellow hedge fund managers could only shake their heads and wonder: What has happened to David Einhorn?
If Einhorn’s poor performance has gone unnoticed until now, in part that’s because as soon as his star began to fade, he quit granting most interviews, preferring to speak from a script from a stage. (He declined to be interviewed for this story and recently spoke “off the record” during a short-selling conference hosted by friend and former hedge fund manager Whitney Tilson.)
What may come as a greater surprise, however, is that former insiders say Einhorn has also pulled back from the type of controversial, colorful statements that made him famous, while sticking stubbornly to bad ideas. As a result, these people say, he is counting on his stellar reputation to carry the day.
Known exclusively as a value investor, Einhorn is a long-short equity manager who makes most of his money on the long side. But it’s his bets against stocks that made him famous and draw many like-minded investors to him. “There is a mythology around him,” says one. Some even believe that his success and theirs are entwined.
“He’s a terrific guy, and I’m sure he’ll come back,” says Mark Spiegel, managing member of hedge fund Stanphyl Capital Management, who got to know Einhorn when the famous manager asked Spiegel to make a Tesla short presentation at the Robin Hood conference in 2016 (instead of making one of his own). Spiegel’s Tesla short, so far, has cost him as it has Einhorn, but he believes the stock will eventually be at zero.
“If David doesn’t come back, then I won’t come back,” says Spiegel.
Einhorn’s admirers point to the decline of value investing and the rise of quants, ETFs, index funds, and momentum stocks as the main reasons he hasn’t done well. That is no doubt part of the story. But there’s another way to look at it: By sticking to his value investing paradigm, and refusing to buy stocks of companies whose prices are above a certain multiple of discounted cash flow, or other value metrics, Einhorn’s stock picks are limited. As a result, “David has found himself with a lot of lower-quality businesses because he wouldn’t pay up,” says an individual close to Greenlight. This person includes General Motors Co., Einhorn’s largest holding at 18 percent of his portfolio, as an example.
Last year Greenlight detoured from its traditional mandate to make a high-profile activist play in GM, proposing it split into two share classes — one that would receive dividends and one that would participate in growth and earnings. “This was pure financial engineering with no long-term operational or strategic value creation . . . done by an inexperienced activist investor,” wrote Ken Squire, the founder of 13D Monitor, which tracks activists’ holdings, in his year-end review. Squire labeled Greenlight’s GM proposal, which was defeated by 92 percent of shareholders, the worst activist campaign of 2017.
Activism may not be Einhorn’s expertise, but what about the short selling that made him famous? That, of course, has become increasingly difficult in recent years for many hedge fund managers, although several activist short sellers have chalked up gains too. Still, many short sellers argue, like Einhorn does, that he will come back when the world comes to its senses.
“Bubbles do pop, you know. Or at least they used to,” Einhorn noted somewhat wryly at Sohn.
But Einhorn’s shorts on Amazon and Netflix — part of what he calls his “bubble basket” of some 20 to 40 stocks — are head-scratchers to those who think those companies are growth machines that are here to stay. “Obviously when we do have a market turn, you’d think those highfliers will get dinged,” says Ben Carlson, director of institutional asset management at Ritholtz Wealth Management. “But they’ve had such a huge gain, they’d have to have enormous losses for him to break even.” Those stocks are up 38 percent and 64 percent, respectively, this year alone. Since the fall of 2015, when Einhorn first mentioned them as shorts, they have tripled.
Other observers are less generous. “I don’t think there is any excuse for shorting Amazon,” says Sahm Adrangi, founder and chief investment officer of Kerrisdale Capital Management, a well-known short seller. Yes, Amazon and Netflix are expensive, adds another. “But beyond that, David doesn’t have any differentiated opinion.”
Yet it’s not just tough times for short sellers and value investors that have driven Einhorn’s woes. One change that close observers believe hurt him is what they see as a desire to avoid conflict — which may seem out of character for the man who engaged in an epic brawl with Allied Capital and alleged that Green Mountain was cooking its books and engaged in channel stuffing.
“In recent years David didn’t want to take any risk, and controls and compliance got more and more restrictive,” says one of several employees who left in recent years.
Greenlight has reason for caution: On January 12, 2012, the firm was hit with an $11 million penalty by the U.K.’s Financial Services Authority for insider trading of Punch Taverns stock.
Einhorn was an investor in Punch Taverns when he learned, on a June 9, 2009, conference call with its chief executive, Giles Thorley, that the British pub was planning an equity offering. according to the British regulator. After a tense discussion with Thorley, Einhorn told one of his traders to sell Greenlight’s Punch shares, the FSA said. Greenlight’s position went from 13.3 percent of Punch’s issued equity to 8.89 percent, avoiding about $9 million in losses when the stock fell after the equity raise was announced days later, according to the regulator.
The case generated scant attention in the U.S., with Einhorn dismissing the charge, saying, “This resembles insider dealing as much as soccer resembles football.” Still, he didn’t contest the finding, which left a black mark on Greenlight’s record, forced some investors to redeem, and prohibits others from even considering Greenlight. (Hedge fund executives and lawyers say it is widely considered best practice to put a stock on the restricted list after a conversation with top executives, to avoid any potential regulatory problems.)
Einhorn’s fixation on compliance around that time struck a chord with Sam Antar, a convicted felon and former CFO of Crazy Eddie, whose prior life has turned him into a fraud investigator. Antar says that in 2012 he met with Einhorn to discuss a company Greenlight was short at the time. “David was obsessed with compliance before going forward,” he recalls.
Since then, people familiar with Einhorn’s operation say, Greenlight’s publicized short research has not been as robust — or antagonistic — as in the past. Adrangi, who is one of the new breed of activist short sellers, says he doesn’t consider Greenlight a short activist because of the paucity of its public research and debate. “A paragraph in a letter is not short activism,” he says.
For example, Einhorn has never laid out a detailed case for shorting Amazon, Netflix, or Tesla. Instead, people who’ve worked with Greenlight believe he is relying on his name to make the case and is resistant to hearing any information that contradicts his short thesis. “He would fall in love with these shorts and he’d stick with them,” says a former insider, who adds: “He feels he can go out there and say, ‘My opinion is X, therefore everyone should think this way because I’m David Einhorn.’”
It takes a certain amount of self-confidence to think you’re smarter than everyone else. That’s especially the case when the markets are telling you something else — as has been the case for a decade with Einhorn.
But for every person who hints that Einhorn might have something of an ego problem — a common affliction of the billionaire hedge fund manager — there are many others who insist he is really the everyman of the hedge fund world. His success at avoiding much criticism, they suggest, is just as much about what one called his “menschy” personality as anything else.
Einhorn simply doesn’t inspire the type of animosity aimed at some of his peers, like, for example, Ackman. (The two were fast friends but had a falling out several years ago.) That may be due to Einhorn’s low-key style, say friends, investors, and former colleagues. While he is in the midst of a divorce, he still lives in Westchester County to be close to his young son and his estranged wife in Rye, New York. (His two daughters are away at college.)
He doesn’t have a luxury Manhattan apartment, nor does he have a Hamptons mansion or a Gulfstream jet. Einhorn’s one personal peccadillo seems to be poker, which regularly takes him to Las Vegas. (Since coming in third in the World Series of Poker in 2012, he’s gotten knocked out early, which he has tweeted about in great detail.)
Einhorn’s poker blues have coincided with his fund’s downturn. After gaining 18.76 percent in 2013, Greenlight opened up to new investors in 2014, raising approximately $1 billion. In 2015 the fund lost 20 percent, leading to a bout of redemptions. After the loss, Freestone Capital Management — a longtime investor in Greenlight — not only redeemed but also shut down its entire fund-of-funds operation, according to people familiar with the Seattle-based firm. (Freestone declined to comment.)
Since the losses in 2015, the fund has continued to perform poorly, which means the new investors who stuck with Einhorn lost more than 25 percent of their capital by the end of April. (Since Greenlight has a modified high-water mark, Einhorn has been able to keep collecting reduced performance fees since then.)
Moreover, those who invested in 2014 agreed to a three-year lockup of their capital, and when investors finally had a chance to redeem last December, it appears many of them did just that. Last year Greenlight’s assets dropped by $1.9 billion, from $8.3 billion to $6.4 billion, in spite of a 1.5 percent gain for the year, as more than a third of redeemable capital came out.
Here’s how the math works out: Some $1.4 billion of total assets was permanent capital from Greenlight Re, a reinsurer whose premium income is invested alongside the hedge fund’s. Another $1.5 billion was partner capital. Greenlight also has a fund of funds called Greenlight Masters that invests in hedge funds like Third Point and Mangrove Partners; it accounted for about $1 billion. That left redeemable capital of around $4.4 billion.
After 2018’s first-quarter decline, Einhorn told investors he couldn’t really explain what had happened, with the pain spread across both his shorts and longs. “No events or individual positions stand out. Our losses were broad throughout the portfolio, but generally shallow,” he wrote in his first-quarter letter. He said Greenlight had trimmed its exposures, leaving the firm 111 percent long and 82 percent short.
That said, Einhorn is not changing anything in his value-investing paradigm. “Our investment theses remain intact,” he wrote. “Despite recent results, our portfolio should perform well over time.”
It has already been a wait. As long ago as 2012, Ritholtz Wealth Management’s Carlson says he noticed an Einhorn tell when the manager penned an article for the Huffington Post called “The Fed’s Jelly Donut Policy.” In it, Einhorn took issue with the Fed’s easy-money policy, comparing it to sugar addiction. He had already been stocking up on gold — which other value investors like Warren Buffett eschew because it’s an asset that doesn’t produce anything. (Einhorn has a locker in Queens to hold physical gold and has offered investors a gold-denominated share class.)
Carlson says this “style drift” was common among hedge fund managers he surveyed while doing due diligence in his previous job as an institutional financial adviser to nonprofits and foundations. The managers were bottom-up stock pickers precrisis, but their 2008 losses amid the financial meltdown turned their worldview upside down, leading them to a macro analysis that for years has been wrongheaded.
“A lot of it came from a misunderstanding of the Fed and what it was doing. They underestimated its power and expected hyperinflation, which didn’t happen,” he says. “The idea of raising interest rates in 2012 wasn’t obvious. It wasn’t clear we were out of the woods yet.”
Fed bashing is still popular among many hedge fund types, who argue it has been fueling a stock market bubble. They think it will burst eventually and they will be proven right. One is David Rocker, a retired hedge fund manager and well-known short seller, who became a Greenlight investor in 2012 and is sticking with Einhorn.
“The bottom line is I’m obviously disappointed in my investment, which has done poorly,” says Rocker. “But it doesn’t diminish my respect for him as an investor and a person. I don’t understand this year’s results, but I think he’s a sound thinker, and I think it’s going to turn around.”
Einhorn’s supporters acknowledge that he has not been a good investor during the last decade’s bull market. Yet the real surprise in the first quarter was that he lost so much money when the market seemed to be starting to go his way. To many, Greenlight’s performance is simply hard to rationalize. As one investor puts it, “Yes, David has fucked up. No question.”
On the record, people are more measured. “The Greenlight brand is as strong a brand as is out there,” says Kerrisdale’s Adrangi. Einhorn has “significant resources at his disposal,” including billions of dollars to hire the best talent, so he should be able to do better, he argues. “There are lots of stocks that outperform the market by a lot. You only have to pick 15.”
It’s now up to Einhorn to prove he can do just that.
