Greenlight Capital Q4 Letter To Investors.
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Just like Charlie Brown missing the football – and a tearful Minnesota Vikings kicker Blair Walsh missing a season ending field goal — hedge fund founder David Einhorn had a difficult year. Einhorn manages near $4.05 billion of investment capital at Greenlight Capital using what is known as a “long / short” strategy. The offshore fund’s average annual return since its founding in 1997 is 16.49%. But in a letter to investors out Wednesday, he considers market environments relative to his own performance in 2015 and notes with disappointment a similarity to his son’s favorite NFL team, the small-town contender Green Bay Packers.
The Packers started 2015 with a loss in the playoffs and the same result befell them recently, succumbing to the Arizona Cardinals. So, too, Einhorn’s strategy of simultaneously buying and selling different stocks lost -20.2% last month.That happens when a fund manager has sold short powerful momentum plays such as Netflix and Amazon, which moved higher in value all year long.
Long / short investors hope short side loses are made up for on the long side of the investment method, betting stocks move higher in value. This side of the ledger found difficulty, however, with the fund long CONSOL Energy and previous high flyer Micron Technology Both were among the top ten losers in the S&P 500 in 2015.
Einhorn “failed to monetize nice gains” on energy play SunEdison and tech darling Micron. After moving from $5.47 November 16, 2013, the stock price doubled, then doubled again and again until it reached $36.49 on December 5, 2014. Often times when stocks make such significant price moves in short expanses of time, quantitative analysts might expect to see “mean reversion,” or the stock moving lower in price to find fair value. That happened and, in part, it hurt Einhorn’s success in 2015 – along with the Green Bay losses.
Greenlight Capital letter dated January 19th 2016
The Greenlight Capital funds (the “Partnerships”) returned (3.8)%1 , net of fees and expenses, in the fourth quarter of 2015, bringing the full year net return to (20.2)%. Since inception in May 1996, Greenlight Capital, L.P. has returned 1,902% cumulatively or 16.5% annualized, both net of fees and expenses. 2015 began with David’s favorite football team, the Green Bay Packers, blowing the conference championship game and a chance at the Super Bowl despite looking like the better team on the field, and holding the ball with a 12-point lead with less than 5 minutes to go. The Packers ended 2015 by getting blown out by the Arizona Cardinals 38-8 in a game where they looked like they didn’t even belong in the league. Our year felt a lot like that. Let’s get some of the gory facts out of the way: ? We lost money every quarter. '
We had six positions that each cost us more than 1%, but only one position that made more than 1%. ? We were short the top two performing stocks in the S&P 500 (Netflix (NFLX) and Amazon (AMZN)). ? We were long two of the ten worst performing stocks in the S&P 500 (CONSOL Energy (CNX) and Micron Technology (MU)).
We didn’t own any of the 50 best performing stocks in the S&P 500. ? We had four shorts taken over. ? We surrendered a lot on a few other shorts either by covering right before they fell, or declaring victory right before they fell much further.
We failed to monetize nice gains in MU and SunEdison (SUNE) at what now look to be great prices. There are lots of simple theories about what went wrong and what we can or should do about it. Everyone wants to help. Even one of David’s children suggested, “Dad, why don’t you just short your longs and long your shorts?” If only it were that easy... For the year our longs lost 17.2%, shorts made 0.4%, and macro lost 1.6%. The S&P 500 returned 1.4%. As we see it, the problem boils down to two things:
Greenlight Capital on worst performers
First, our worst performing investments were among our biggest positions. These aren’t our first big losses nor are they likely to be our last, and while our goal is to minimize them, they come with the territory of running a concentrated portfolio. In 20 years we’ve had 21 instances of a position costing us more than 3% of capital in a calendar year. Other than the awful bear market of 2008, when we had five losers of this magnitude, we’d have to go back to 2002 to find a year when we had as many as two. Most years we’ve had none or one. This year we had three (CNX, MU and SUNE). Nothing distinguishes these from our other large losers in prior years. What’s unusual is that they all happened at around the same time. Having three in a single year is both unfortunate and too many for us to be able to succeed. Second, we had very few winners. Here is what the year looked like, including and excluding the three big losers:
The point of this chart is not to show what would have happened without those losers (we believe that all the results count), but to illustrate that nothing else performed. We have never had a year where so little went right. While we had a few shorts that did well, we couldn’t seem to find winning longs. ISS A/S was up 43% and was the only long position that sustained a material gain for the full year. We also preserved gains in Altice and Marvell by selling them at prices far above where they ended the year. When we add up all of the losing positions in the portfolio, the percentage detraction to our total return for 2015 was only moderately worse than a normal year. In contrast, all of our profitable positions in 2015 added up to only 19%. Our 20-year average contribution from winners is 51%, and the previous worst year was 31%.
Greenlight Capital - tough enviroment
It has been a difficult environment for value stocks. This is the fourth time in our history where we’ve had a period of outsized losses, and in each of the prior periods, the macro environment was unfavorable to value investing:
In 1998, the market was led by large capitalization growth stocks like CocaCola and Gillette, and value suffered. After losing 11.7% over the prior six months, we entered November down 3.2% while the S&P 500 was up 14.6%. ? From February 1 through March 10, 2000, the Nasdaq rose 28%, the S&P 500 was flat, and we were down over 10% as investors sold value stocks in order to pour every dollar they could find into the top of the tech bubble.
In July through October 2008, we lost 26.5% despite very conservative longshort positioning. During that environment, where nearly everything fell, our problems were amplified by short squeezes in the most overvalued industrial company in the market (Volkswagen) and