David Einhorn photoDavid Einhorn, the hedge-fund manager who compared the Greek bailout to a surrealist painting, recast a bet against sovereign debt in a way that reduces risks posed by government regulators and big banks.

Greenlight Capital Re Ltd., a publicly traded insurer controlled by Einhorn, held credit default swaps on $667 million of sovereign debt as of June 30. During the third quarter, the company exited about half of those swaps, designed to pay off should a government default, and entered into short sales on non-U.S. sovereign bonds, according to a regulatory filing.

By replacing the swaps with short sales, Einhorn maintained his ability to profit from a sell-off in government bonds while avoiding potential pitfalls that he identified in a July 7 investor letter. Greenlight wrote that regulators were seeking to prevent a triggering of credit default swaps tied to sovereign debt, in part because the payouts could devastate European banks that had agreed to provide the insurance.

“There are at least three or four fairly large funds that have done exactly the same thing as David Einhorn,” said Gary Swiman, who heads the asset manager and brokerage division at ICS Risk Advisors, a New York-based consulting firm. “You go from a private market that is unregulated at this time to publicly issued government sovereign debt that is transparent.”

The net amount of swaps written on France, Greece, Italy, Portugal and Spain declined to $66.8 billion at Dec. 2 from $74.5 billion at Jan. 7, according to data from the Depository Trust & Clearing Corp., a New York-based central repository for credit swaps. The largest reduction was for Greece, which had $3.4 billion of net credit swaps on its sovereign debt at Dec. 2, down 46 percent from $6.3 billion at Jan. 7.

Prices Soar

Einhorn, 43, the president of New York-based Greenlight Capital Inc., invests in companies he deems undervalued and also makes wagers against those he considers overpriced, ranging from Lehman Brothers Holdings Inc. in 2008 to Green Mountain Coffee Roasters Inc. earlier this year.

In addition to running hedge funds, an affiliate of his firm helps invest the assets of Greenlight Re, a Cayman Islands company that provides reinsurance to insurers by assuming some of their policy risk in return for a share of premiums. Greenlight Re’s holdings mirror those of Einhorn’s hedge funds, according to a person familiar with the matter, who asked not to be identified because the information isn’t public.

Greenlight Re reported in an Oct. 31 filing with the U.S. Securities and Exchange Commission that it sold credit swaps on sovereign debt with a face value of $294.6 million during the third quarter. The firm also sold short $153.8 million worth of non-U.S. sovereign debt, according to the filing.

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