GREENLIGHT CAPITAL PROFILE

David Einhorn is the CEO, co-founder and the chairman of Greenlight Capital. He founded the value-oriented research driven hedge fund in 1996, and for the first 10 years from 1996 – 2006, the firm capably realized annual returns of 29% owing to the firm’s extensive focus on value added research. Greenlight Capital, as of December 31^st, 2010, had assets under management of $4.8 billion across 38 holdings. Einhorn, along with Greenlight Capital, manages other affiliated fund of funds and private equity fund, Greenlight Private Equity Partners and Greenlight Masters. Moreover, he is also in charge of the operations of Greenlight Capital Reinsurance, which is a property/casualty reinsurer.

David Einhorn being a value investor highly emphasizes on intrinsic value in order to realize high returns. He also maintains a margin of safety to safeguard his capital from unexpected market downturns. The higher than average returns of Greenlight Capital could be owed to the scuttlebutt approach of research adopted by Einhorn. Greenlight Capital, like every other value-oriented hedge fund, seeks out undervalued or mis-valued stocks in the market and mostly adopts a long position rather than short.

Manager Biography:

After David Einhorn graduated with a degree in Government from Cornell University in 1991, he joined as an investment banking analyst at Donaldson, Lufkin & Jenrette. During his junior year in college, he had experience working in the field of finance as he interned at the Office of Economic Analysis at the SEC. After working 2 years at Donaldson, Lufkin & Jenrette, he was invited to interview for Siegler, Collery & Company (SC) by a head hunter. Einhorn was successful and joined SC where he met Jeff Keswin.

Much of his experience and expertise could be owed to his years at Siegler, Collery & Company where he was put under the mentor Peter Collery. Under Collery’s supervision, Einhorn learned how to determine the economic value of companies and identify congruence of interest between stakeholders and company. At SC, Eihorn would spend days or rather weeks researching on companies, analyzing SEC filings, creating analytical financial spreadsheets, and interviews various company management and related analysts before discussing findings with his supervisor. Peter Collery would then further facilitate his research for more in depth information by providing Einhorn with additional list of questions to research on. This very experience later served Einhorn in easily adopting the famous scuttlebutt approach of investment opportunity identification and analysis when he started his own firm, Greenlight Capital, in 1996.

Einhorn and Keswin started the hedge fund by renting a 130 sq ft space from Spear, Leeds & Kellogg. Einhorn was the portfolio manager while Keswin took charge of marketing and the overall business. Their initial few investments include MDC Holdings, which they still currently own, EMCOR, U.S. Trails’ bonds, Tylan General, and Microwarehouse. They were long-positioned for all stocks but Microwarehouse which had to be shortened as the company stock collapsed due to systems problems. However, other stocks reaped high gains such as U.S. Trails’ bonds which were bought at 77% and were called back in a matter of a month at 100%. In the first year, they realized returns of 37.1% without a single down month, and increased their capital from $9 million to $13 million with more than 25 clients. In the second year, the firm realized 57.9% return and managed to steeply increase their amount under management from $13 million to $75 million with more than 50 clients. By the end of 2001, the company had $825 million under management and currently, after a decade, the total value of the firm is reported as being $5168 million.

His current portfolio which is worth $5.17 billion, as of end of the first quarter of 2011, has 41 stocks across 10 sectors with technology, financials, consumer services and health sector making up the largest portions of the portfolio. He is heavily invested in the technology industry which makes up 20.7% of his total portfolio. Financial sector investments make up 15.5%, Consumer services stocks make up 14.6% and 13.5% is invested in the health industry. As of now, the fund’s largest 10 positions include Ensco, Pfizer, CIT Group, CareFusion, Apple, Cardinal Health, Sprint, Market Vectors Gold Miners, Microsoft, and NCR. According to the quarter ended 31^st March 2011, Einhorn had added 7 new stocks to his portfolio which are Best Buy Co, Inc., Yahoo! Inc., CVS Caremark, General Motors, HCA Holdings, Seagate Technology and Amdocs Ltd.

When talking about Einhorn’s portfolio, it is worth noticing that he maintains a concentrated portfolio with a single idea/investment oh his making up 20% of his portfolio. The top five holdings usually accounts for 30 to 60% of the total Greenlight Capital portfolio. The rationale behind such focused investment is that Einhorn believes in realizing and investing in some of the best prospects and there are not many similar investment opportunities, therefore, holding 8 to 10 stocks in different sectors of the economy is enough to diversify risk contrary to the traditional concept of investing in numerous stocks.

The investment approach of David Einhorn is quite unique as he does not initially determine if the stocks are undervalued or mispriced, instead he starts by questioning why a security could be mispriced or undervalued and then extends his research to find out if the stock or security is actually mispriced/undervalued. He believes in investing in companies over which he has an analytical edge. Despite the fact that he is known as a short-seller, his hedge fund maintains a portfolio which is more long-positioned than short and he sells short to make money to stay consistent with the main goal of Greenlight Capital: make money or at least preserve capital. His famous shorts are Lehman Brothers in 2007 and Allied Capital in 2002.

Fooling Some of the People All of the Time, is a book authored by Einhorn which elaborates on his investment style and provides the readers with extensive details about various historical events that took place in his life. The book also presents the detailed account of the multi-year fight among Allied Capital, Greenlight Capital and the SEC. It also subtly criticizes Jim Chanos through the discussion regarding America Online stocks.

In 2002, Einhorn, at the Ira w. Sohn Investment Research conference suggested shorting of Allied Capital stocks as he believed the company was indulged in fraudulent lending practices which were cheating the Small Business Administration and consequentially the U.S tax payers. Allied Capital in return accused Einhorn of market manipulation and went to the extent of accessing his phone records. The SEC was involved as well as Einhorn accused them of mishandling of matters concerning Allied Capital. The battle lasted almost 6 years before the SEC announced in 2007 that Allied Capital broke security laws concerning the accounting and valuation of the company’s illiquid securities.

Moreover, during 2007 and 2008, David Einhorn again came under the spotlight for betting against and short selling Lehman stocks. His blunt and very public commentary on Lehman Brother’s company financials overshadowed Lehman to an extent that most believed the sudden decline in their stock prices was due to Einhorn’s vocal accusations regarding the transparency of Lehman Brother’s company management. He publically expressed his views about Lehman, presented detailed analysis of the company and made available the transcript of the speech at Ira Sohn Conference online.

In 2010, Einhorn overtly criticized the Federal Reserve and predicted another financial crisis for the U.S. He addresses the current budget deficit issue in The Sunday Telegraph stating that the government would most likely “over-borrow and fall into a debt trap” if interest rates are not raised. However, according to him, “if interest rates ever do go up again, you have another crisis.” Therefore, the Federal Reserve needs to find a solution for the $1.3 trillion budget deficit without damaging, or rather further damaging, the economy.

He also made headline in 2010 when he purchased minority shares of Mets for $200 million. Einhorn, being a devote baseball fan, purchased approximately 49% stake of one of the top baseball teams giving Einhorn the title of preferred partner of Mets franchise. Most consider his rather irrational investment of $200 million as a way for Einhorn to secure top preference position when Wilpons decide to sell the team. Evidently, David Einhorn does not limit his activities to just his hedge fund and its affiliates. He is the Director of BioFuel Energy Corp. and Scivantage, Inc. He was also the director at New Century Financial Corp. for a brief period of time from 2006 to 2007.

Quotes:

“Both President Obama and Chairman Bernanke have said that the problem with AIG was that greedy people put a hedge fund on top of an insurance company. As I see it, AIG failed precisely because it was not a hedge fund, but a highly regulated, AAA rated insurance company. Call it the curse of the Triple A. The market incorrectly believed that regulators and rating agencies carefully monitored its risk profile and activities. As a result, AIG was able to abuse its access to unlimited cheap financing without its counterparties performing any additional credit analysis or demanding any collateral. Hedge funds can’t abuse the system in the same way, particularly in the aftermath of Long Term Capital Management, as lenders pay much more attention to hedge fund counterparty risk and collateral requirements. Had AIG been a hedge fund as President Obama and Chairman Bernanke claim, none of this could have happened.” (Marketseer)

“What I like is solving the puzzles. I think that what you are dealing with here is incomplete information. You’ve got little bits of things. You have facts. You have analysis. You have numbers. You have people’s motivations. And you try to put this together into a puzzle — or decode the puzzle in a way that allows you to have a way better than average opportunity to do well if you solve on the puzzle correctly, and that’s the best part of the business.” (Value Investing World)

“We start by asking why a security is likely to be misvalued in the market. Once we have a theory, we analyze the security to determine if it is, in fact, cheap or overvalued. In order to invest, we need to understand why the opportunity exists and believe we have a sizable analytical edge over the person on the other side of the trade.” (InsiderMonkey)