Hedge-fund manager David Einhorn reduced bets that stocks will rise as equities climbed to a five-year high while U.S. economic growth halted.
“As the market continues to advance, even as the economy doesn’t, we tend to become less enthusiastic,” Einhorn said on a conference call today held by his Greenlight Capital Re Ltd. reinsurer. “We took some gains in our long portfolio and added to our shorts.”
U.S. gross domestic product shrank at a 0.1 percent annual rate in the fourth quarter, the first decline since 2009, as a plunge in defense spending swamped gains for consumers. The Standard & Poor’s 500 Index has surged 7.3 percent this year through yesterday after corporate profits reached a record. The benchmark gained 13 percent in 2012.
Einhorn, 44, said long positions, or bets on rising asset prices, exceeded short wagers by 29 percentage points as of Jan. 31, down from 39 percentage points at the start of the year.
Greenlight Re’s profitable long positions, or bets on rising stocks, in 2012 included Apple Inc., General Motors Co. and Sprint Nextel Corp. Apple and GM are among the firm’s largest long holdings, he said.
Short positions hurt Greenlight Re’s performance last year, he said. The portfolio returned 7.1 percent in 2012, lagging behind gains in U.S. stocks and corporate bonds.
“This was a disappointing result in a generally favorable investing environment,” Einhorn said. “Our investment returns were pedestrian.”
Einhorn and his hedge fund Greenlight Capital Inc. are known for shorting Lehman Brothers Holdings Inc. before it collapsed in September 2008.
Results last year were hurt by a bet that Moody’s Corp. would fall. The provider of bond ratings jumped 49 percent in 2012. Still, Einhorn is wagering that legal scrutiny of rival Standard & Poor’s, part of McGraw-Hill Cos., makes both McGraw-Hill and Moody’s vulnerable to declines. He’s short both companies, he said today, and has also bet against Green Mountain Coffee Roasters Inc. and companies sensitive to a decline in iron ore prices.
Einhorn’s pessimism on U.S. stocks contrasts with bets by Ray Dalio’s $140 billion hedge fund Bridgewater Associates LP. Bridgewater, the world’s biggest hedge fund, is bullish on stocks, oil and commodities, as it expects cash to shift to riskier asset classes amid increased economic confidence. David Tepper, who runs the $15 billion hedge fund Appaloosa Management LP, and Carlyle Group LP co-founder David Rubenstein have said they’re positive on the U.S. economy.
Investors, who pulled almost $300 billion out of stock funds since the market bottomed, pumped $37 billion into equity funds in January, the most since 2004, estimates from the Washington-based Investment Company Institute show. Technology companies and financial institutions received the biggest inflows, according to data from Birinyi Associates Inc., the Westport, Connecticut-based investment adviser.
Still, profit growth moderated after a three-year increase. Quarterly earnings grew 3.6 percent on average in 2012, compared with 28 percent the previous two years, data compiled by Bloomberg show. Analysts project a 1.5 percent contraction in first-quarter profits and 6.7 percent growth for 2013, according to estimates tracked by Bloomberg.
“The domestic economy has slowed down,” Einhorn said today. “U.S. GDP went negative in the fourth quarter and earnings growth has all but come to a halt.”
The S&P 500 dropped 1.2 percent at 4:05 p.m. in New York, the biggest fall since November. Greenlight Re fell 1.4 percent to $24.57 after posting a fourth-quarter loss yesterday as investments faltered and superstorm Sandy fueled catastrophe claims. The company has dropped about 2.8 percent in the past 12 months.
Einhorn also commented on a Bloomberg News article published yesterday reporting how hedge fund managers can reduce taxes by directing investments through reinsurers. The article highlighted John Paulson, whose Bermuda reinsurer has no employees and sells far less coverage than the industry norm.
Greenlight Re is “a real reinsurance company,” Einhorn said today. “We have lots of people working in multiple countries, in the Cayman Islands and in Ireland, actually reinsuring actual risk in substantial size. And as a result, we don’t believe that there is any new reason or particular reason to worry on this topic.”
Reinsurers share risks and premiums with primary carriers.