Greenlight’s Einhorn Is Said to Give Up 20% Return TargetSimone Foxman
For almost two decades, David Einhorn has told clients he would aim for annual investment returns of 20 percent. The hedge fund manager has largely delivered with some of the best performance in money management.
Times have changed. The 46-year-old founder of Greenlight Capital told his investors last month at a dinner in New York that he was doing away with the fixed return target and replacing it with relative goals to account for lower interest rates and the record prices of stocks, according to two people with knowledge of the matter. Einhorn’s annualized return fell below 20 percent in 2012.
Einhorn, who oversees about $12 billion in assets, is joining money managers such as Howard Marks’ Oaktree Capital Group LLC and Pacific Investment Management Co. in telling clients to lower return expectations after six years of near-zero interest rates and monetary stimulus sent asset prices surging. Hedge funds have struggled to keep up, trailing U.S. stocks for the past six years, and some of the largest investors are questioning whether the complexity of the funds is worth the cost.
“Equity hedge funds in particular have been more challenged than other hedge funds in generating alpha,” Anurag Bhardwaj, the global head of strategic consulting for Barclays Plc prime brokerage, said in a phone interview. “As a manager, your expectation is that the good stocks go up and the bad stocks go down. The rising tide of interest rates and quantitative easing have, over the last couple of years, essentially taken that out of the equation.”
Jonathan Gasthalter, a spokesman for Greenlight at Sard Verbinnen & Co., declined to comment on Einhorn’s return target.
Instead of targeting a net gain of 20 percent, Einhorn said at the event investors could reasonably expect 15 percentage points of “alpha” -- or returns exceeding certain benchmarks - - and to get 30 percent of the S&P 500’s gains before fees, one of the people said, asking not to be named because the information is private. The new formula won’t force the fund to bulk up on investments that would suffer in a market decline, the person said. In a crisis, the fund would seek to bolster returns through macroeconomic bets, according to the person.
The New York-based Greenlight, which primarily trades stocks, gained 8 percent last year in its main fund, more than double the 3 percent gain in the average hedge fund across all strategies, according to the Chicago-based Hedge Fund Research Inc. These gains trailed the 14 percent return in the Standard & Poor’s 500 Index. Einhorn told investors in a letter referring to the 2014 performance that the firm “would have both liked and expected to do better.”
Einhorn told investors at the dinner that he wants to be ambitious but also reasonable, according to one of the people.
The change to Greenlight’s target comes as Einhorn has called for caution amid rising stock prices driven by monetary stimulus. In an August conference call for his Cayman Islands-based reinsurer, Greenlight Capital Re Ltd., Einhorn said he’d had difficulty picking stocks amid conflicting economic data, global unrest, and the Federal Reserve’s exit from its monetary stimulus program called quantitative easing.
Though the firm said in October that it would reopen its hedge funds to take advantage of opportunities as markets fell in the first part of the month, in early November Einhorn said on another conference call for the reinsurer that the correction was “unfortunately” too short.
“Everyone wants a hedge fund to outperform regardless of the market, but there’s a key word there, which is hedge,” Peter Borish, chief strategist at Quad Advisors, which provides capital to small hedge funds, said in a phone interview. “If there’s been low volatility and the market has gone up, a true hedge fund should underperform.”
Hedge funds across strategies have had their gains narrow in the past two decades. From 1996 to 2005, the first decade in which Einhorn’s fund traded, hedge funds’ yearly return averaged
11.8 percent, according to data compiled by HFR.
During that time, Einhorn’s fund rose 29 percent annually. In the past five years, hedge funds gained 4.7 percent a year on average, while Einhorn’s fund returned 12 percent on average annually.
Einhorn isn’t alone in reassessing his return target. Pimco popularized the term “new normal” after the financial crisis to describe an era of subdued investment returns.
“This is not unique or peculiar, other than the fact that he is a bit late to the party in doing so,” Sam Won, founder of Global Risk Management Advisors, which advises clients including pensions, endowments, and hedge funds on risk management, said of Einhorn’s new investment target.
Marks, chairman of Oaktree, said in December 2012 that his distressed private equity strategies were targeting 15 percent.
“The irony is, of course, that 15 percent sounds like some herculean task,” he said at the time. “It’s the lowest yield we’ve ever targeted.”