David Einhorn was right to worry about valuations.
The value-driven hedge fund manager’s Greenlight Capital posted a 1.2 percent gain in February and is now up 5.2 percent for the year, according to someone who has seen the results. This is much better than the broader market. The S&P 500 was down 1.42 percent in February but rose 1.24 percent for the year; the Nasdaq Composite fell 4 percent last month and is down 2.4 percent this year.
We don’t know exactly what drove Greenlight’s performance last month or for the year so far. However, given that most of the largest longs were down last month, it is safe to assume the hedge fund benefited from its short book and/or its macro strategy.
Indeed, last year when Greenlight lagged the overall stock market with a 7.2 percent rise, the macro book contributed the same 7.2 percent to performance. Gains from longs more or less offset losses from shorts, including index shorts, according to Greenlight’s fourth-quarter client letter, obtained by Institutional Investor.
“We continue to be concerned about the overall valuation of the market and have maintained a lower-than-average net market exposure,” Greenlight wrote in its January 21 letter. At year-end, the firm was just 90 percent long and 54 percent short, for a net long exposure of 36 percent. “In fact, our daily correlation to the S&P 500 last year was 0.01,” the letter said. “Cyclically and interest rate–adjusted valuations are as high as we can remember.”
Greenlight also noted that the market equity risk premium versus bonds is now zero or slightly negative: “As such, we don’t think accepting a lot of market exposure makes sense.”
In February, Greenlight enjoyed mixed results among its largest longs.
Green Brick Partners, the diversified homebuilding and land development company, dropped 1.3 percent last month. At year-end, it accounted for more than 27 percent of Greenlight’s U.S.-listed long portfolio. No. 2 long Core Natural Resources dropped 18 percent for the month.
On January 14, CONSOL Energy, which had been Greenlight’s second-largest long at year-end, completed its merger with Arch Resources, creating Core Natural Resources, which is now a metallurgical and thermal coal company.
No. 3 U.S.-listed long Brighthouse Financial, the insurance and annuities marketer, was down about 4 percent for the month.
Greenlight’s two other stocks among its five largest longs are foreign-listed and enjoyed mixed results in February. Lanxess, a German specialty chemicals company, climbed 9.2 percent. In the fourth quarter, it became one of Greenlight’s five largest long positions for the first time. Solvay, a Belgian chemicals company, declined by 4.4 percent last month.