David Einhorn is the founder and CIO of Greenlight, a US long/short equity hedge fund based in New York. Since its inception in 1996, Greenlight has compounded at 20% per annum with a volatility of 11%. This year, Greenlight is up over 22% on several billion dollars in fund assets following a loss of 16% in 2008.
Einhorn is a relatively unique character in the hedge fund industry; he is vocal about his views (here is a recent speech is a recent speech that is well worth the read). Aside from activist managers, there aren’t many that seek the spotlight to pass on what they are extracting from their research. Lehman is a case in point. Einhorn was one of the few that not only understood what the problems were at Lehman, but that they were not being forthcoming about them (to put it mildly) and was willing to speak out about his concerns. Of course, many will say that this outspokenness was self-serving given that Einhorn had a short on Lehman. But short sellers need to be vocal about what they see as problems in a company, otherwise the problems can grow unchecked.
Lehman’s failure was critical in the ensuing fallout in the global financial markets in the fourth quarter last year. Had it continued taking on toxic debt and over-leveraging itself without restraint, the repercussions would have been even more devastating. Short sellers act as a check-and-balance by seeking out companies that are mismanaged or involved in fraudulent activity. Enron is a good example; two hedge fund managers that I know of, Jim Chanos (short seller extraordinaire) and Oscar Shafer (long-standing member of Barron’s Roundtable), were one of the earliest to expose the fraud at Enron. I’m not sure that the world is a better place with a company that can manipulate the electrical grid for its own profit like Enron did in California.
Here is a quote from the Lehman speech that relates the description of hedge funds by the general population (see earlier article “Hedge funds are evil” for my own views on this topic):
“When I speak of investors I am including hedge fund managers. An author on Investopedia defined hedge funds as “lightly regulated, private investment funds that use unconventional investment strategies and tax shelters in an attempt to make extraordinary returns in any market…these factors have given them a secretive and shady aura in the financial community.” Forbes has called us “The Sleaziest Show on Earth.” Basically, according to some in the media, elected officials, government regulators and individuals, hedge funds are really gambling operations amounting to ticking time bombs with secret plans to destroy the galaxy. Good thing they don’t say what they really think. In truth, hedge fund managers at their core are simply investors.”
As you can see, there exists a real misperception about hedge funds and a fundamental misunderstanding about how they function. |
