Greenlight Capital Performed Worse Than Greenlight Capital’s Monkey Portfolio

We have been telling people that small investors can imitate hedge funds’ top positions and perform better than index funds. During the second quarter imitators could have beaten not only index funds but also some of the most famous hedge funds around. Reuters today reported that Greenlight Capital lost around 2.5% during the second quarter. Last week we calculated the returns for Greenlight’s large-cap positions. Greenlight Capital had 14 stocks that are constituents of the S&P 500 index. These 14 stocks returned 3% during the second quarter (See the top 25 hedge funds in Q2 2011).


Investors who imitated David Einhorn‘s 14 large cap positions beat the S&P 500 index by nearly 3 percentage points. Those monkey investors also managed to top David Einhorn’s actual returns by more than 5 percentage points during the past 3 months. Why? Because these investors didn’t have to pay any management and performance fees. Also, these investors don’t have any short positions that hedge the long exposure. Clearly Einhorn’s short positions returned more than his longs despite the fact that his net exposure was around 30-40%. At the beginning of the second quarter Einhorn had an average exposure to
equities and fixed income (excluding credit derivatives, gold and foreign currencies) of 106% long and 68% short.

We know that it isn’t always possible to imitate hedge funds with a low tracking error. However in several cases we believe investors would be better off by imitating hedge funds rather than investing directly in these hedge funds. Many successful hedge funds are closed to new investors anyway.