David Einhorn: the “Long-Short” Strategy of Greenlight Capital
Published: October 6, 2021 by Andrew
David Einhorn is a major US investor, president and co-founder of Greenlight Capital, a hedge fund created in 1996, which in a few years has become of primary importance in the diverse landscape of Wall Street.
The investment strategies used by Einhorn have always stood out. He is not a trader who follows the crowd, far from it. Often his operations go against the grain and in the course of his career he has become famous for predicting the collapse of Lehman Brothers before the famous financial crisis.
Recently he has been heavily criticized for his insistence on his downside positions against some large American companies, but we will talk about this later in our guide.
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David Einhorn – Summary
|💡 Who is?||Investor and trader|
|💸 Personal Equity||$ 1,4 billion|
|💰 Investment Fund||Greenlight Capital|
Who is David Einhorn?
David Einhorn’s career started with the hedge fund Siegler, Collery & Co. in 1993 but the real consecration reached it three years later, with the founding of Greenlight Capital Inc., which he founded together with Jeffrey Keswin.
The company starts with less than $ 1 million in funds but in a few years it grows significantly and in 2017 reaches the sizable figure of $ 10 billion in managed assets.
Einhorn, as well as one of the most famous Wall Street traders is very prepared, graduated with honors from Cornell University and immediately made himself noticed for his incredible intuition and for not letting himself be influenced.
He has always evaluated companies very carefully without being influenced by the brand. If he noticed something “strange” in the fundamental analysis, which did not correspond to the price of the shares, he had no qualms about selling short.
Invest like David Einhorn
David Einhorn’s comments and statements leave their mark on the markets even if his heritage is certainly not that of Ray Dalio or Carl Icahn.
Yet the “Einhorn effect” is quite popular on Wall Street and these words currently indicate a steep drop in the share price of a publicly traded company, which often occurs soon after Einhorn declares it has opened a short position on that society.
In 2002, this trader had no qualms about publicly stating that he suspected that Allied Capital, a private finance company, had altered the books. The stock collapsed and David, who was doing a short sale, took a hefty nest egg.
Not everyone likes this attitude, and Einhorn has often been accused of “distorting reality” for his own benefit. But others believe his intent is to protect shareholders.
To invest like David Einhorn you need:
- A great knowledge of the markets
- An excellent theoretical preparation
- Effective operational strategies
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David Einhorn and the 2008 crisis
David Einhorn’s fame went global when he pointed down against Lehman Brothers in 2007.
Einhorn argued that the American bank had hedged its huge liabilities by altering balance sheets and had been cheating shareholders and customers for years.
After publicly showing his analysis and declaring the “short” position on the title, his skepticism prevailed.
But when the bank announced a nearly $ 3 billion loss following Einhorn’s announcement, many began to change their minds.
Lehman Brothers filed for bankruptcy in September 2008 and effectively kicked off the financial crisis we all know. David Einhorn had foreseen it.
David Einhorn book
In David Einhorn’s life there has always been little space to write and spread his thoughts, yet in the book “Fooling Some of the People All of the Time: A Long, Short Story” this trader tells the world of hedge funds in a original and transparent.
The book is about his first big short sale, the one against Allied Capital in 2002.
In a public conference he declares that that was his best trading idea than him.
The book details Allied and its fraudulent behavior towards shareholders. This book shows all of David’s indignation towards those who cheat investors.
It is not the usual economics treatise, it is intriguing because it reveals the backstory of Wall Street and shows a cynical and unscrupulous world.
This investment philosophy can be found throughout the career of David Einhorn, who has always balanced investments between bullish and bearish positions, without caring too much about the opinions of his illustrious colleagues.
David Einhorn Greenlight Capital
Allied Capital initiated the development of Greenlight Capital Inc., the fund of David Einhorn and Jeffrey Keswin.
Thanks to that downward “bet” and a few other secondary investments, the hedge fund has grown 10 times in just a few years.
Unfortunately, short selling has costs and you often have to wait a long time before the long-awaited drawdown occurs. This expectation has led to a sharp reduction in the assets managed by Greenlight Capital.
Total assets under management shrank by nearly half in 2018, from roughly $ 10 billion to $ 5.5 billion within a year!
The market tends to grow, this is well known, and the obstinacy in holding down positions against giants of this magnitude can lead to squandering assets.
But Einhorn thinks he’s right and doesn’t give up. If he is right, Greenlight Capital would probably become the largest hedge fund in the world. But how long will he still have to wait?
David einhorn Tesla
David Einhorn’s fight against Tesla and his leader Elon Musk, with whom he often clashed verbally, deserves a separate focus.
Even if Einhorn got some great “Big Shorts” right, it doesn’t mean Tesla will be one of them too. Yet the famous trader does not hear reasons and although the Tesla title continues its upward race, almost undisturbed, David does not give up his “bet”.
In fact, there are many who believe that Tesla is among the most overvalued stocks, but that does not mean that he will collapse in the short term. He could carry on in this speculative bubble for years!
Einhorn is unlikely to hold up for that long, but he’s proud and sure he’s right, so we don’t know if he’ll ever give up.
David Einhorn portfolio
In the table below we have included the main equity holdings of the Greenlight Capital portfolio. The various bearish bets are missing, which represent an important share of the operations of this hedge fund:
|GRBK – Green Brick Partners||Consumer goods||$396.1M||24.86%|
|BHF – Brighthouse Financial||Financial||$165.78M||10.41%|
|AAWW – Atlas Air||Industrial goods||$103.18M||6.48%|
|TECK – Teck Resources||Commodities||$93.2M||5.84%|
|CC – Chemours Company||Commodities||$81.14M||5.06%|
|CHNG – Change Healthcare||Technology||$79.51M||4.99%|
|CNXC – Concentrix||Services||$62.7M||3.94%|
|DNMR – Danimer Scientific||Commodities||$52.81M||3.31%|
|GPRO – GoPro||Consumer goods||$42.7M||2.68%|
|REZI – Resideo Technologies||Technology||$42.63M||2.68%|
Trading Strategy go David Einhorn
The trading strategy that has always characterized David Einhorn’s operations is called “long-short”.
In practice, this strategy balances bullish positions with others that are bearish. It is Einhorn’s opinion that you can earn as much from buying shares in growing companies as you can from short-selling stocks that are collapsing or are about to do so.
This strategy is very risky even if it can be extremely profitable.
David Einhorn is always looking for undervalued and overvalued stocks, because they allow him (both) to make investments with a high probability of profit.
Einhorn’s trading strategy has often been questioned. According to some, the decline in the assets managed by his fund is caused by the stubbornness of the trader, who focuses too much on stocks with solid fundamentals and little on high-growth ones.
On the contrary, it is often common for the latter to point downwards if it believes they are excessively overvalued.
David Einhorn is an out of the ordinary investor but some of his trades could lead him to ruin if he doesn’t decide to change his mind about some bearish forecasts that have lasted too long.
The CFD Brokers that we have proposed to learn theories and operating strategies allow you to aim both upwards and downwards, without paying commissions. So they are the ideal intermediaries to invest like David Einhorn, but be very careful, he has his back covered by a billionaire fund!
Here are the links to access the Demo accounts of the best online brokers:
He is a US investor co-founder of the Greenlight Capital fund.
According to the latest estimates, David Einhorn’s net worth is $ 1.4 billion.
Use the Long-Short strategy, buying undervalued stocks and selling overvalued ones.
Just use a CFD Broker like eToro, which allows you to bet both up and down without paying commissions.