Red light for Greenlight

Allowing my stubborn hold to be overcome by a dastardly quarter

By Travis Johnson, Stock Gumshoe, October 26, 2015

Well, today I did what Tradestops told me I should have done a couple months ago: I sold the rest of my Greenlight Re shares. Greenlight Capital Reinsurance (GLRE) is a Caymans reinsurance company Chaired by David Einhorn, the famed hedge fund manager. Its primary reason for being is to give Einhorn a large “captive” investment pool, and to give investors a way to get (somewhat levered, if they underwrite well) exposure to Einhorn’s investing acumen.

Like any insurance company, its performance is tied to two things: How well they underwrite and price risk; and how well they invest their capital and “float” (float is the premiums paid that haven’t yet had to be paid out in claims). Lately, Greenlight has been terrible at both.

Einhorn has had a shockingly bad year investing so far — which is not the end of the world, not even for a fantastic hedge fund manager with a long record of success… it doesn’t mean he has necessarily lost the ability to invest, or that he won’t do well in the future, but his portfolio has been a disaster this year. Most of the awful performance came in the third quarter, when the portfolio was down more than 14%, but for the year to date the portfolio is down 16.9%, with very weak performance from most of the top holdings and no real support from the short side of the portfolio.

Lots of other hedge funds have done poorly this year, particularly over the Summer, but Einhorn’s flameout has been worse than many — others that I’m personally exposed to include Dan Loeb’s Third Point (through Third Point Re, a similar reinsurance company), whose portfolio is down 4%+ on the year, and Bill Ackman’s Pershing Square Holdings (a closed-end publicly traded hedge fund PSH.AS, PSHZF), which is down more than 10% on the year largely (though not solely) because of the collapse of Valeant (VRX).

And though my natural inclination is to be patient with investments that go through a bad patch, I’ve lost some confidence in Einhorn’s portfolio management but also, perhaps as importantly, in Greenlight’s ability to be a viable reinsurer. They have been through bad patches in their underwriting in the last several years and recovered, but this past quarter was another very weak one for underwriting and they have now reached a combined ratio on the year of ...

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