David Einhorn is one of our favorite hedge fund managers. His fund, Greenlight Capital, has returned roughly 20% per year since its inception in 1996. Now, these returns aren’t in the ballpark of Jim Simons circa early nineties, but they’re impressive nonetheless. One of Einhorn’s most redeeming qualities is that he’s open to sharing his top stock picks with investors through keynote speeches and interviews (read our interview with Einhorn).
Interestingly, his most public stock picks – like those made at the annual Ira Sohn and Value Investing Congress conferences – have displayed a tendency to outperform both the market, and most of the other positions in his portfolio.
At the moment, we won’t go as far back as his bearish predictions about Lehman Brothers made in the summer of 2007, but we’ll take a closer look at his picks over the past two years.
In 2010, Einhorn publically challenged Bruce Berkowitz and his Fairholme fund, disclosing a short position in The St. Joe Company (NYSE:JOE), a Florida-based real estate developer. Berkowitz disagreed and upped his stake in the company by a significant amount. In the time since, shares of JOE underperformed the SPDR S&P 500 (NYSEARCA:SPY) by around 40 percentage points.
One year later, Einhorn presented his bullish thesis for Microsoft Corporation (NASDAQ:MSFT) at the Ira Sohn Conference in May; shares of the tech giant have gained about 16% since then (vs. 10.7% gain for the SPY). In the fall of that same year, Einhorn revealed perhaps his most noteworthy short position: Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). The stock has lost nearly 60% of its value since his disclosure. At the end of the third quarter Apple Inc. (NASDAQ:AAPL) and Seagate Technology PLC (NASDAQ:STX) are the two largest positions in Greenlight Capital’s 13F portfolio. Einhorn also made some bullish comments about Apple at the 2012 Ira Sohn Conference but the stock lost about 5% since then.
Taking these past successes into consideration, we can see that David Einhorn is a particularly skilled investor whose predictive capabilities outweigh those of most of his peers. This advantage allows him to generate alpha, both on the short side and the long side of his portfolio. Thus, it’s safe to say that Einhorn deserves the above-average hedge fund fees that have helped him to become a billionaire.
So far we’ve presented anecdotal evidence of this, but Greenlight Capital’s 13F filings since 1999 allow us to delve into the details a bit more. We can statistically analyze Einhorn’s long positions to estimate just how much alpha he’s generated on the long side, and whether it makes sense to imitate his stock picks.
David Einhorn’s Huge Secret Is Revealed Through 13F Disclosures
Imitating 13F filings, which most hedge fund managers file with the SEC on a quarterly basis, has some advantages and disadvantages. Unfortunately, these filings disclose holdings at only one point in time, there is a 45-day delay, and we don’t see the hedge funds’ short positions. On the positive side, we don’t have to pay 2% of our assets and 20% of our returns to the fund manager. We also don’t have to worry about other restrictions imposed by hedge funds, or risk investing in potential Ponzi schemes and other illegal activities.