Greenlight Capital’s Einhorn says fund will ‘continue to underperform’ bull market

U.S. hedge fund Greenlight Capital’s Q3 returns were significantly lower than Wall Street’s benchmark S&P 500 index (SP500), and founder David Einhorn said that the firm was likely to “continue to underperform a rising market.”

Greenlight Capital’s funds returned 1.1% in Q3, compared to the S&P 500’s (SP500) gain of 5.5%. The performance comes at a time when U.S. stocks are taking out fresh records almost every other day.

“There was a lot going on in the world this quarter. Nevertheless, we had a very quiet period, partly because we remained conservatively positioned with very low exposure to equity beta,” Einhorn said in a letter to partners dated Tuesday and viewed by Seeking Alpha.

“The economy remains relatively strong, with nominal annualized growth now running at 5-6%. On the other hand, however, the market isn’t just making all-time highs. It is, by many measures, the most expensive stock market that we have seen since the founding of Greenlight,” the billionaire investor added.

Einhorn founded Greenlight Capital in 1996. He is known for his short-selling, including his famous short of Lehman Brothers before its collapse in 2008.

The 55-year-old manager noted that the run up in equities this year has outstripped the growth rate of companies’ revenues and earnings.

“While we are conservatively positioned with respect to net exposure, we aren’t outright bearish. We are likely to continue to underperform a rising market, as we have all year, but we don’t wish to position ourselves to lose money should the market continue to rise,” Einhorn said.

“Notably, almost all of our return this year has been alpha. While being up 9% year-to-date when the S&P 500 index is up more than 20% over the same period doesn’t feel great, on a beta-adjusted basis we believe we are doing fine. If you happen to be invested in our gold share class, it’s better than fine,” he added.

Notable Moves in Q3

“During the quarter, both our longs and shorts rose marginally less than the market. The macro portfolio had another strong quarter, driven by the sharp rise in the price of gold. We also lost money on equity index hedges.”

Spot gold (XAUUSD:CUR) has been on a tear since the end of 2022, having risen about 13% last year and another whopping 29.3% YTD. In 2023, the precious metal was buoyed by uncertainty over Federal Reserve interest rate cuts and geopolitical risks. In 2024, gold has received an added boost from the Fed finally delivering an interest rate cut.

Greenlight’s other “significant winner” in the quarter aside from gold was Green Brick Partners (GRBK). The Plano, Texas-based company acquires and develops land and builds homes through seven brands of builders in five major markets across three states. Shares of GRBK jumped 45.9% in Q3.

Conversely, Office Depot-owner ODP (ODP) was a disappointment for Greenlight. The office equipment and supply retailer saw its stock fall 24.2% in Q3.

“The short book had a material loser in a housing-related short. We believe this company is structurally unprofitable and faces looming debt maturities that could be challenging to refinance at a reasonable interest rate,” Einhorn said, without revealing the company’s name. “Nonetheless, it was a strong period for all things housing-related as the sector celebrated the move lower in yields,” he added.

Greenlight had no new positions to reveal in Q3. However, Einhorn said that “three new longs” had been identified which will likely be discussed in “the near future.”

Greenlight exited its position in the following companies in the quarter: biotech NeuBase Therapeutics, British banking and insurance firm NatWest Group (NWG), and Irish low-cost carrier Ryanair (RYAAY)(OTCPK:RYAOF).

Thoughts on Buffett

Einhorn in the partner letter also discussed a recent stock selling spree undertaken by Warren Buffett’s sprawling conglomerate Berkshire Hathaway (BRK.A)(BRK.B). In one of the most notable moves, Buffett has been steadily shedding his stake in number two U.S. lender by assets, Bank of America (BAC).

“While Mr. Buffett routinely points out that it is impossible to time the market, we can’t help but observe that he has been one of the best market timers we have ever seen,” Einhorn said.

“One could argue that sitting out bear markets has been the underappreciated reason for his outstanding long-term returns. It is therefore noteworthy to observe that Mr. Buffett is again selling large swaths of his stock portfolio and building enormous cash reserves,” the hedge fund’s founder added.

Greenlight believes that Buffett’s stock moves “are not a prediction that the market will fall next week, next month, or even next quarter.”

“Rather, these stock sales more likely express a long-term view that right now is not a great time to have a lot of equity exposure, and that the opportunity set is expected to be better at some point in the not-so-distant future.”

Greenlight Capital is expected to file its next 13F filing – or regulatory disclosure of its quarterly equity ownership changes – by mid-November.