NOTE: This is not David Einhorn’s Q2 or Q3 letter. This is for a different fund, and I am pleased to present it for your reading pleasure. This is an interesting letter, and reveals some info I never knew about. I will try to embed this document in scribd for easier reading:

I will be posting a very exciting shareholder letter from another famous value hedge fund tomorrow. Stay tuned….

Dear Partner,

Greenlight Masters Qualified, L.P., Greenlight Masters, L.P. and Greenlight Masters Offshore returned 0.1%, 0.0% and 0.1% respectively for the first half of 2011, net of fees and expenses.1 For the same period, the S&P 500 returned 6.0%. The flat performance in a rising market was the result of Masters’ cautious net exposure and losses in some of our managers’
short portfolios. The funds’ average net long exposure for the period was about 41%.

One of the prevalent themes we have encountered this year in our conversations and meetings with Masters’ managers is the challenge of running a long/short equity program in a market where rising valuations are not supported by underlying business and economic fundamentals.
While it is inherently difficult to find cheap, attractive longs in overly bullish markets, it can be equally difficult to manage short positions because near term market enthusiasm can test a short seller’s long term conviction. Though longs that move against you become smaller positions and may present opportunities to add, shorts that move against you become larger positions and might force covering for risk management purposes, even if the short thesis remains intact or has improved.

Though many investors might be inclined to ride a rising market, Masters’ managers have collectively done the opposite. From the beginning of 2010 to the midpoint of 2011, while the S&P 500 was up 22%, Masters’ net exposure has come down from about 51% to 38%. With our managers making position by position decisions based on fundamentals and valuation, the collective Masters portfolio has lower exposure due to what our managers view as a less attractive opportunity set. Our managers have also built dry powder to take advantage of market dislocations, such as the one that is in progress as we write this letter.

In absolute terms, our six largest managers in the first half of 2011 had a positive contribution from longs, while Firefly and JMB also had a positive contribution from shorts. Masters’ overall net exposure has remained modest, although this aggregate look-through exposure is comprised of a wide range of positioning among our managers’ portfolios. All of our managers continue to search for opportunities based on bottom-up, fundamental analysis and
valuation, while also weighing macro considerations. Some ways in which our managers incorporate their macro views into their portfolios include gross and net exposures, cash levels, positions in commodities and use of derivatives.

 

The table below offers a snapshot of performance attribution of Masters’ six largest weightings and exposures as of June 30, 2011.

Performance and Attribution for January-June 20112

Performance Attribution3 Net June 30 Exposure
Longs Shorts Return Long Short Net
Greenlight Capital 6.8% -10.9% -5.1% 101% 76% 25%

Firefly 1.9% 4.1% 3.7% 99% 54% 45%

JMB 2.8% 1.4% 3.3% 65% 19% 46%

Pershing Square 4.0% -2.8% 0.3% 87% 6% 81%

Third Point 7.7% -0.9% 6.8% 104% 48% 56%

Valinor 5.7% -4.5% -0.6% 130% 58% 72%

As an example of our managers’ flexible opportunism, Third Point has shown its broad based skill set this year by achieving positive returns in both equities and credit (including distressed debt and mortgage securities). Total net performance so far this year is 6.8%, which includes 3.5% from equities and 3.0% from credit. Third Point has also been our most dynamic manager in 2011 in terms of adjusting its portfolio positioning.

At the start of the year, Third Point was 121% long, 19% short and 102% net. By the end of Q2, Third Point had brought exposures down to 104% long, 48% short and 56% net. The net exposure included more than 30% in equities and more than 20% in credit. Recent exposures have come down further in the August market dislocation, and Third Point is now 87% long, 42% short, and 45% net overall – with only 12% net long equity exposure. In a recent letter to
investors, Portfolio Manager Dan Loeb offered the following commentary:

Generally, we are “bottom up investors.” However we are living in a climate
where…economic and political considerations are at least as – if not more –
important than underlying fundamentals in forecasting investment outcomes.
Given the great uncertainty…and sentiment levels that reflect it, I can foresee
scenarios where securities could trade much higher – or much lower. …We
reduced our net exposures throughout the second quarter. Beginning in April,
we concluded that the equity market no longer offered compelling upside…
Notwithstanding our continued cautious outlook, we have a number of
significantly sized event driven positions which we are confident have upside
drivers regardless of the macro environment.

2 Managers shown here include Greenlight Capital and the next five largest weightings in alphabetical order.

3 Performance attribution may not reconcile to net performance due to fees, expenses and other portfolio gains and losses.

Third Point has continued to strengthen its team this year, adding six investment professionals, bringing the total to 21. These latest additions include the return of former analyst and portfolio manager Munib Islam, who has rejoined Third Point as Head of Equities Research. Third Point is currently closed to new capital.

Some of our managers reflect their macro views through exposures while others take a more agnostic view, reflected in part by more consistent portfolio characteristics. Firefly, for example, has consistently been invested approximately 90-100% long, 50-60% short and 35 45% net. In the first half of 2011, Firefly’s disciplined, bottom-up program has been notably
distinguished by profits from short positions, where it reported a return on invested capital of
about 8% despite the market’s rise. Firefly has had success in particular from its focus on
finding “terminal” shorts – i.e., situations where it believes the equity ultimately has no value.
Some examples in this category have included companies who are weakly positioned in
industries going through significant technological change, such as advertising, photography
and books.

In a recent conversation with Co-Portfolio Manager Ariel Warszawski, he offered some color
on Firefly’s investment program in today’s difficult environment. “Shorting eventual ‘zeroes’
can be a painful game in the short term,” Ariel said. “The volatility can be distracting, so you
need good research, careful risk management and good stock loan partners.” He also
emphasized the importance of having investors who understand the firm’s strategy and have a
long time horizon. A seed deal for Masters,4 Firefly just had its fourth anniversary, manages
more than $450 million and has grown to five investment professionals and four operations
personnel.

In late spring, we visited five of our managers with offices in California. We met with Hylas,
JMB, Lonestar, Philadelphia Financial and Route One Investment Company.

Masters invested with Hylas, another seed deal,4 in September 2010. Since that time, Hylas
has returned about 28% for Masters, with average net exposure of about 36%. For that same
period, the S&P 500 has also returned 28%, meaning Hylas has generated alpha of about
17%. In 2011, Hylas is up over 7% for Masters through the end of June, earning 15% on
longs and losing 6% on shorts.

We met with Hylas Director of Research August Roth and reviewed multiple investment
ideas, as well as latest business developments and plans. From our conversation with August,
we continue to be impressed with Hylas’ research process, which is focused on companies
undergoing significant balance sheet changes. They describe their process as looking for
“credit-focused equities” and “equity-focused credits.” So far in 2011, key longs have
included an oil refiner rationalizing assets and reducing debt, a post-bankruptcy specialty
chemicals company and a pipeline company in the process of deleveraging. Key shorts have
included levered companies with vulnerabilities to factors such as rising raw materials costs
and competition from technological change.

4 In addition to the return on the capital invested in seed funds, the Masters funds directly receive a percentage of
the aggregate profits of the funds.

Since its launch, Hylas’ assets under management have grown to about $150 million. Hylas
currently has four investment professionals, a chief operating officer and a chief financial
officer.

At JMB we met with Partner and Co-Portfolio Manager Cyrus Hadidi. Cyrus conveyed to us
that they perceive a limited bottom-up opportunity set combined with significant
macroeconomic risks. They have an investment policy of “active patience,” which means
they wait and watch carefully for the market to offer especially attractive risk/reward
propositions. In discussing how they are allocating capital in the current environment, Cyrus
explained, “We try to be disciplined about finding event-driven opportunities that are
compelling, and then we try to exit positions when events are achieved. We try to keep our
duration short and harvest gains. We also have our opinion about how the macro issues are
going to play out. We are core deflationists, so we like to go against the trade when people
are concerned about inflation.”

As an example of a short-duration, event-driven investment, one of JMB’s successful
positions this year was the equity of an asset management company. JMB had acquired the
private placement shares in 2010 on the secondary market, where the combination of
illiquidity and some motivated sellers resulted in shares being available at an attractive
valuation. When the shares went public earlier this year, JMB exited at a profit. They have
also recently traded opportunistically in instruments related to the Chinese economy as well
as the stability of European sovereign credits. JMB’s most recent letter cautioned:

[I]t is important for our investors to appreciate we have a growing concern
about the near-term prospect for risk assets. As such, we have positioned the
portfolio in a way to primarily protect capital in a downturn, and not to
participate meaningfully in an equity rally. If we are correct, we will have
better opportunities to deploy our cash at lower entry prices.

At Lonestar we met with Portfolio Manager Jerome Simon. Lonestar’s bearish macro views
are reflected in its July 31 exposure of about 78% long and 71% short. As part of this view,
Jerome described to us his skepticism on the solvency of Chinese municipalities and the
stability of the Eurozone. But he is also wary of being on the “wrong side of the trade” in
terms of macro developments, and wrote in his latest letter to investors:

While we continue to find interesting opportunities in medium and longer term
investments (long and short), we remain caught up in unresolved global
imbalances perpetuated by sovereign and supranational interventions that
make firm positioning a challenge. This prolonged period of “risk on/risk off”
is causing continuous challenges to most long/short equity portfolios. If it
appears that Europe and the U.S. will sort out their near-term solvency issues,
we are likely to take down gross short equity exposure, if only to manage risk
in the short run.

In addition to Lonestar’s macro views, the team remains dedicated to the bottom-up, value
driven research process that has been the core of the portfolio since 1995. Examples of
positions in 2011 have included a long position in an out of favor pulp and paper
manufacturer selling at an unusually high free cash flow yield and at a meaningful discount to
replacement cost; selling credit default protection on a monoline insurer where Lonestar feels
the market is too pessimistic and is pricing in too high a probability of default, while Lonestar
believes the company will remain solvent in the short run; shorts in alternative energy
companies where it believes consensus expectations are too optimistic; and long positions in
the debt and equity of a Japanese utility under stress, where Lonestar felt the market was
excessively pessimistic.

At Philadelphia Financial, we met with Co-Portfolio Manager Jordan Hymowitz. Jordan
expressed a view that while he feels there are a lot of troubled financial companies and the
stock market has been performing better than the economy, he is sticking to the firm’s
tendency to have a net long bias. Philly’s June 30 exposure was 88% long and 62% short, for
26% net exposure. They have become less gross invested and more net long in the August
market dislocation and are now 78% long and 40% short, for 38% net exposure. “Markets
generally go up, and we’re not playing for a 100-year flood,” Jordan told us.

We went through their analysis of multiple individual positions that reflect the team’s many
years of experience in the financials sector. As an example of their expertise applied to
specific positions, their latest letter illustrated the home foreclosure crisis with data showing
the high ratio of foreclosure inventory to foreclosure sales. They wrote, “As stock pickers,
we are short the mortgage processing space which are adversely impacted by this imbroglio.
While we are happy to be making money on these short positions, we are concerned what
their demise will lead to for the broader economy.” Additionally, they have short exposure in
the pre-paid debit card space, with a view that these companies could face increasing
competitive, margin, and regulatory pressures.

At Route One Investment Company (ROIC) we met with founding partners Bill Duhamel and
Rich Voon, CFO Sean Barron, and Head of Investor Relations Will Stegall. Having just
launched in December, ROIC has had more cash in the portfolio than they originally
anticipated, remaining patient and disciplined in the ebullient market. June 30 exposure was
about 65% long and 9% short, for net exposure of about 56%. We talked at length about
multiple long and short positions, and were impressed with the breadth and originality of their
research, which has been global in scope and included positions in countries such as Brazil,
China, Peru and Vietnam.

ROIC aims to find attractively priced businesses with sustainable competitive advantages. To
do so, they watch for favorable market dynamics in sectors with characteristics that include
high returns on tangible capital, stable cash flows, low financial leverage and inherent
inflation protection.

A recent example is an Asian dairy company with a strong market position and a disciplined
management team focused on value creation. ROIC believed the market was penalizing the
stock due to concerns about inflation, when in fact the company will have the pricing power

to protect its profits in real terms. In addition, limits on foreign ownership have created a dual
market in which foreign investors end up paying a premium for the stock relative to the local
price. ROIC was willing to pay the premium because it felt that even adjusted for the
premium, the stock was at a substantial discount to fair value.

Today the universe of talented managers looking for capital is larger than ever. Since 2008,
hedge fund allocators have been reluctant to allocate to funds other than the largest, most well
established firms with “blue chip” reputations, many of whom are closed to new capital. The
result is that Masters has four categories of managers to whom we can allocate: (1) our
existing managers, which include some well established firms that are generally closed to new
investors; (2) well established firms with whom we are not currently invested and who are
generally closed, but would consider an allocation from Masters because they value a
relationship with Greenlight; (3) managers who have built strong investment programs with
demonstrated success but are still actively seeking capital because they have been unable to
gain broad institutional acceptance given the post-2008 industry trends; and (4) new firms
where we can provide seed capital, who are finding there are few investors who are willing to
allocate to a manager at inception, regardless of the merits of the team or the proposed
program. With our team and network, we are evaluating managers in all of these categories.

The Masters portfolio currently has about 9% cash and is closed to new capital. We
appreciate your ongoing support and interest. As always, we welcome your questions,
comments and suggestions.

Best regards,

Greenlight Masters