Who is David Einhorn
David Einhorn has long been considered one of the most successful and closely followed hedge fund managers in the financial industry.
Einhorn is the president and co-founder of Greenlight Capital Inc. He was born on November 20, 1968, in Demarest, New Jersey and earned a BA from Cornell University’s College of Arts and Sciences in 1991.
BREAKING DOWN David Einhorn
David Einhorn started his career with the hedge fund Siegler, Collery & Co. in 1993. In 1996, Einhorn founded Greenlight Capital Inc. with Jeffrey Keswin. The firm began with less than $1 million, and as of 2017, the firm had close to $10 billion assets under management.
However, as of July 2018, after more than ten years of winning on Wall Street, investors estimate that Greenlight Capital has shrunk to about $5.5 billion in assets under management, reported the Wall Street Journal. Frustrated clients are pulling their investments from the firm.
Greenlight Capital uses the long-short equity strategy. Long-short equity is an investing strategy which takes long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline.
The firm implements the long and short position strategy depending on whether an asset has been pinned as undervalued or overvalued. Einhorn himself is best known for his short selling strategies, though he works with long positions as well.
David Einhorn & the Einhorn Effect
The markets react significantly to Einhorn’s public comments on stocks. The term “Einhorn Effect” was coined based on the significant effect his comments on companies had on investors. The term is now used to describe the sharp drop in a publicly traded company’s share price that often occurs immediately after Einhorn himself publicly shorts, or bets against, that company’s stock. Conversely, Einhorn’s positive pronouncements about companies don’t tend to push their share prices upward.
One of Einhorn’s most famous shorts occurred in 2002. David Einhorn accused Allied Capital, a private finance firm, of accounting fraud. Einhorn had a short position in Allied Capital, and at the time he publicly claimed that the firm deceived its shareholders by cooking its books and inflating the price of their assets. Allied's fraudulent practice distorted the real value of its stock. The day after Einhorn released his suspicions to the public, Allied Capital’s share price fell 20%, earning Einhorn a solid win on his short position. Many of the details of the Einhorn-Allied affair are detailed in Einhorn’s book Fooling Some of the People All of the Time.
Some market participants have frequently accused Einhorn of employing the sinister “short and distort” strategy. This approach involves shorting a stock and then spreading rumors to discredit the company in order to drive down its value. Einhorn is also referred to as an activist investor, one who tries to effect change in a company’s operations with the intent of protecting the interest of shareholders.
Lehman Brothers, David Einhorn and the Market Crash of 2008
In 2007 David Einhorn recorded his most significant win with his short bet on Lehman Brothers. Einhorn shared his analysis on Lehman’s financial statements, accusing the company of being involved in dodgy accounting practices that covered up the firm’s massive liabilities on asset-backed securities. Lehman announced a loss of almost $3 billion after Einhorn publicly announced that he was shorting the company’s stock. The huge loss publicly validated Einhorn’s allegations against the company, and the company went into a free fall. Lehman Brothers filed for bankruptcy in September 2008 and is one of the stressors for the stock market crash of that year.
Einhorn’s downturn began in 2015. Greenlight dropped more than 20% in 2015, partially explained by the 74% fall in shares of solar and wind producer SunEdison Inc., which was one of the fund's largest holdings at the time, according to historical prices posted on Yahoo Finance.
According to the Wall Street Journal, many investors hoped that drop was a fluke, however Greenlight’s downturn continued. Investors began questioning Einhorn’s value-oriented approach. Some are skeptical as to why Einhorn chose not to embrace high-growth stocks, and have withdrawn their investments.
Younger investors often question Einhorn's strategy. Many credit the downfall to Einhorn's commitment to stick with value stocks instead of high-growth stocks. However, he remains confident in his methods. “We believe our investment theses remain intact,” he wrote in an April investor letter. “Despite recent results, our portfolio should perform well over time.”
The Wall Street Journal wrote that of Greenlight's $5.5 billion in assets under management, less than $3.5 billion belong to outside investors, while some investors say Einhorn personally holds $1 billion in the fund. Investors are also concerned with the firm's absence of communication with its clients and its stricter liquidity terms for investors to commit to investments for three years, with just one chance annually to withdraw after that.