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This is unbelievable: A hedge-fund star dims, and investors flee

The Wall Street Journal. logo The Wall Street Journal. 7/5/2018 Gregory Zuckerman

For years, David Einhorn’s investors didn’t seem to mind his unusual ways—the aloofness toward clients, midday naps, unpopular stock picks, late nights on the town. Until the billionaire hedge-fund manager fell into a slump.

After more than a decade of winning on Wall Street, Mr. Einhorn’s Greenlight Capital Inc. has shrunk to about $5.5 billion in assets under management, his investors estimate, from a reported $12 billion in 2014, and his investments are struggling.

“My patience is wearing thin,” said Morten Kielland, chairman of investment-management firm Key Family Partners SARL and an early Greenlight investor, who said he has withdrawn much of his firm’s money from the fund. “This is unbelievable.”

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Some frustrated clients have pulled out of Greenlight over the past three years, and some others say they will exit if results don’t rebound.

Mr. Einhorn’s story emerges from The Wall Street Journal’s discussions with more than a dozen current and former investors and employees. Greenlight doesn’t publicly report its results. Investors in the firm shared with the Journal the performance data in this article.

The value of an investment in Mr. Einhorn’s main fund was down 11.3% at the end of 2017 from 2014’s end. The S&P 500 grew 38.3%, including dividends, in the same period. The average stock-focused hedge fund gained 18.3% in the period, according to HFR, a firm that tracks hedge funds.

The fund dropped 7.7% in June and is down 18.7% for the year, compared with a rise of 2.65% for the S&P 500 and 1% for stock hedge funds. “We are obviously frustrated by our results,” Greenlight said in a letter to investors when it revealed its June returns. ​

Mr. Einhorn, 49, hasn’t clearly explained the losses, sometimes pointing to the market’s shift away from the less expensive value stocks he favors— those considered inexpensive relative to earnings and other metrics.

“It is difficult to explain what caused the results,” he said in an April investor letter. “To some extent, this quarter’s result stems from the continued extreme outperformance of growth over value.”

People familiar with the fund attribute Mr. Einhorn’s troubles in part to his unconventional ways—sticking to value stocks, for example, and keeping clients at a distance—which he hasn’t changed even as investors bolt.

“He’s stubborn,” said Peter Weiss, a Boston-area investor who said he withdrew hundreds of thousands of dollars this year. “He’ll never admit he’s made a big mistake…It just makes me crazy.”

Mr. Einhorn said in a statement: “When we recognize a mistake we exit the position and own up to it in our quarterly letters.”

Mr. Einhorn started Greenlight in 1996 with a reported $900,000—the name came from the green light his wife gave him to open the fund—focusing on undervalued stocks. Early results were strong, and the fund attracted wealthy investors.

Greenlight could be difficult to deal with, some current and former investors said. While most hedge funds let clients withdraw money once a quarter, Greenlight in 2005 began requiring a three-year commitment with one chance a year to withdraw after that.

When clients asked Mr. Einhorn for his views on investments, he often chafed, several investors said. While he revealed the firm’s five largest “disclosed long positions” monthly, he wouldn’t say whether there were other large positions or significant bearish bets in the portfolio, nor would he give midmonth updates as many funds do, these investors said.

Once, Greenlight wouldn’t tell an investor what shares it was buying, only for the investor to learn days later what it was doing in a media report, frustrating him. “You call them and try to have a substantive conversation,” the investor said, “and they’re almost obnoxiously closed-door.”

Mr. Einhorn told some investors he couldn’t share much information about his moves because he also manages the investments of publicly traded Greenlight Capital Re Ltd., which invests in the same holdings as his hedge fund, said people familiar with the policy. Disclosing such information, Mr. Einhorn told them, might violate securities laws.

With the media, Mr. Einhorn was soft-spoken and generous with his time. Behind closed doors, he sometimes showed a darker side. At “idea dinners,” where he and other hedge-fund managers regularly met to debate stocks, he could be insulting to those who questioned him, some participants said.

Mr. Einhorn said in the statement: “I am always respectful of my peers during what can be passionate conversations.”

In 2001, John Burbank, who was starting a research service and later became a hedge-fund manager, pitched Mr. Einhorn on refiner Valero Energy Corp., said a person familiar with the meeting. Mr. Einhorn dismissed the idea and spent half an hour lambasting him for not doing his homework.

“You really should go for better businesses,” Mr. Einhorn said, according to this person, telling Mr. Burbank to steer clients to one of Greenlight’s largest holdings at the time, WorldCom Inc., the person said. A year later, WorldCom declared bankruptcy. Valero’s stock more than doubled over the next three years.

A Greenlight spokesman declined to comment on the episode.

Investors tolerated the quirks because returns were sweet. Less than a decade into the fund, Greenlight had annual gains as high as 58%.

Investors developed a nickname for Mr. Einhorn: King David.

Some of his biggest hits came from public battles with companies whose stock he shorted, betting against them by selling borrowed shares. In 2002, he began a protracted spat with Allied Capital Corp., a lender he said was overvaluing its holdings. Allied called his claims unfounded, but its shares fell and it was acquired in 2009 at a fraction of its 2002 price, resulting in millions in profits for Greenlight.

In May 2008 at a conference, he criticized Lehman Brothers Holdings Inc.’s accounting practices, asking why it took only a $200 million write-down on $6.5 billion of collateralized debt obligations. Lehman filed for bankruptcy that year.

Mr. Einhorn was involved in almost every Greenlight investment decision and treated most employees with respect, forging loyalty, said former employees. But he was uncomfortable delegating authority and disliked opposing opinions, said one of them.

“We encourage and engage in rigorous debate about all investments,” Mr. Einhorn said in his statement, adding: “however, as portfolio manager I am responsible for final decisions.”

Most days, Mr. Einhorn napped at about 2 p.m. on a couch in his office, said a former employee familiar with his routine, and sometimes fell asleep in midday meetings. Mr. Einhorn said he had a sleep disorder and often woke at 3 a.m. to work, the person said.

​Mr. Einhorn and his employees gained reputations among some investors​ for enjoying themselves after hours. His team gambled in Atlantic City, N.J., annually and sometimes hit New York nightclubs until early morning, spending thousands of dollars a person on food and drinks, said people who attended some such events. Greenlight hosted an annual Friday-night poker tournament for employees, friends and clients, where alcohol flowed and thousands of dollars changed hands.

Mr. Einhorn flew with staffers to Las Vegas each year, sometimes in a private jet, for the World Series of Poker, visiting nightclubs and spending as much as $20,000 each, said one of the people who attended such events. In 2012, Mr. Einhorn finished third in the tournament, taking in $4.35 million, and another time won nearly $660,000, all of which he donated to charity.

“We worked hard and played hard,” said the person. “There was a celebratory feel.”

Mr. Einhorn said: “I am lucky to have friends and colleagues willing to support and root for me on their own time and own dime while I compete on my vacation.”

The Greenlight fund lost nearly 23% in 2008, hit by the financial crisis, before rebounding in 2009 with a 37% gain. Both years, it topped the S&P 500.

Through 2013, Greenlight seemed unstoppable, as it moved into investments such as gold, derivatives and debt, gaining 19.8% that year.

In 2014, for the first time in years, Mr. Einhorn opened Greenlight to more investors, some of his clients said, drawing $1 billion in new cash and increasing assets under management to $12 billion.

That year, he bought a small piece of the Milwaukee Bucks basketball team. In 2015, he became chairman of the board of the Robin Hood Foundation, the hedge-fund industry’s unofficial charitable arm. He often coached baseball and softball teams for his three children, said former employees.

Some investors showed early signs of becoming wary of Mr. Einhorn’s methods, including Gregory Horn, who runs Persimmon Capital Management LP. Mr. Horn said he worried that Mr. Einhorn’s public appearances to promote his holdings could make him a possible target of rivals hoping to drive up stock prices.

“We like our managers investing, not promoting,” said Mr. Horn, whose firm says it pulled its money from Greenlight in 2014. “We didn’t like him going out to the press and were concerned about people picking off his trades.”

Mr. Einhorn’s downturn hit mid-decade. Greenlight dropped more than 20% in 2015, hurt in part by a 74% collapse in shares of solar and wind producer SunEdison Inc., one of Greenlight’s largest holdings at the time; the S&P 500 returned 1.5%. Investors hoped it was a blip, and Mr. Einhorn seemed to take it in stride.

At his annual investor dinner that winter, he featured a slide of the now-imprisoned pharmaceutical executive Martin Shkreli, who had once unsuccessfully pitched the firm on an investment. Mr. Einhorn’s message: It could be worse—Greenlight could have invested with Mr. Shkreli. Many in the room laughed, said a person who was present.

Greenlight’s tumble continued, and concern grew among investors about Mr. Einhorn’s value-oriented approach, which avoided popular tech stocks that were part of what he called a “bubble basket” that he predicted would fall.

He told investors in an early 2018 presentation, one investor said, that he had been shorting stocks including Inc., Athenahealth Inc. and Netflix Inc., stocks that are up more between 19% and 103% this year—a short position loses value when the underlying stock rises. Brighthouse Financial Inc., Greenlight’s second-largest holding as of March 31 according to its securities filings, is down 31% this year.

Some investors said they wished Mr. Einhorn had embraced high-growth stocks as did his friend Daniel Loeb, who runs the hedge fund Third Point LLC, which bought two million shares of Netflix last year.

Greenlight’s restrictions on when clients can withdraw funds have become harder to swallow, said P. Justin Pearlstone, who is on the board of a charity that invests in Greenlight and has placed the fund on an internal watch list for possible withdrawal in January 2019.

“The liquidity terms are onerous and out of the norm today,” Mr. Pearlstone said. “Investors would be more comfortable with those terms if the returns were better.”

Adding to distress among some investors is Mr. Einhorn’s pending divorce. “If someone goes through a divorce, I usually get out,” said Mr. Kielland, Mr. Einhorn’s early backer. “I made an exception with David, but I made a mistake…He has to be distracted: I’m convinced that’s 30% to 40% of” why Greenlight has been underperforming.

Mr. Kielland said he has withdrawn three-fourths of his firm’s money and may take out the rest. Several other investors said they withdrew, or are considering withdrawing, money in part because of the divorce.

Mr. Einhorn said: “This Europe-based investor has almost no contact with me and has no basis for his statement. Our investment team and I are solely focused on the portfolio.”

Greenlight has said 18% of the money it manages—or about $1 billion—is from the reinsurance company it controls, while some of his investors say Mr. Einhorn personally has more than $1 billion in the fund. Those figures suggest that, of Greenlight’s $5.5 billion in assets under management, less than $3.5 billion is outside investors’—a sign of how much it has shrunk.

Some rivals say Mr. Einhorn’s avoidance of expensive stocks could prove prescient. General Motors Co. shares, among Greenlight’s largest holdings, gained 10% last month on news of an investment from SoftBank Group Corp.’s SoftBank Vision Fund, though GM remains down 5% this year.

Supporters point to Greenlight’s stellar annual returns since inception: 15% versus 8.7% for the S&P 500 and 7.5% for the average stock-focused hedge fund, according to HFR.

Mr. Einhorn is showing few signs of changing his ways. At an April conference, he unveiled his latest bearish pick, Assured Guarantee Ltd., warning that its business was more challenged than investors realized.

An Assured spokesman directed inquiries to its earlier statement that Mr. Einhorn “demonstrates a fundamental lack of understanding of our business model and the municipal debt markets.”

Mr. Einhorn's warning didn’t move the stock much that day, but he remained hopeful. “Bubbles do pop, you know,” he told the crowd. “Or at least they used to.”

Last month, Mr. Einhorn was back in Las Vegas, playing poker in a high-stakes tournament.

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