Hedge Funds

Hedge fund manager David Einhorn’s stumble may mean a value investing resurgence is near

Key Points
  • Greenlight Capital's struggles may be a precursor to a move back to value stocks over growth investments, if history is any guide.
  • Value investor Julian Robertson decided to close his Tiger Management fund in March 2000, right before a dramatic decline in high-growth technology stocks.
  • A bull market's winning bets typically narrow to high-growth and momentum stocks, a shift Citi's Robert Buckland noticed in February. "This usually favors growth and momentum trades and has produced bubbles in the past."
David Einhorn, founder of Greenlight Capital.
Adam Jeffery | CNBC

Billionaire hedge fund manager David Einhorn is in a rut.

His Greenlight Capital fund fell 7.7 percent in June and was down nearly 19 percent for the first half of the year, according to a performance update seen by CNBC. At the same time, the S&P 500 was up 1.7 percent.

The down-on-his-luck investor may take comfort in history, however. Fellow value-style champion Julian Robertson of Tiger Management had his own high-profile stumble during the momentum-driven tech stock surge of 1999 and 2000, a period that preceded a big shift back to value investing.

Investors flee from Einhorn's Greenlight Capital hedge fund

That could mean value investing, which has been in the doldrums during the current strong run-up in tech stocks, could be about to come back in style. Investors just have to hang in there long enough.

Robert Buckland of Citi Research said in a note to clients on Wednesday that as a bull market runs its course, its winning bets typically narrow to high-growth and momentum stocks, a shift he saw in the current market in February. "This usually favors growth and momentum trades and has produced bubbles in the past," he wrote. "These can be career-threatening for value managers.”

Four out of Greenlight's five-largest disclosed positions, revealed in the first-quarter investor letter, are down through the end of June. Among them, Brighthouse Financial leads with a 30 percent drop. And Einhorn's bets against high-flying technology and growth stocks, the so-called the bubble basket, have backfired on him.

The weak year-to-date return followed a meager 1.6 percent gain in 2017 versus a 19.4 percent gain for the S&P 500, according to an investor letter.

Greenlight did not respond to a request for comment.

Einhorn isn't alone among out-of-favor value investors. The S&P 500 Growth index rose 6.6 percent in the first half of this year, while the S&P 500 Value index declined 3.4 percent. And the market still favors big tech stocks. Amazon was up 45 percent, Netflix had gained 104 percent and Tesla was up 10 percent so far this year through June.

All are in the "bubble basket" of stocks Einhorn's Greenlight has bet against. If the investor didn't exit those positions, the same basket of stocks likely contributed to the fund's losses this year.

Earlier this year, Einhorn expressed confidence in his fund's stock positions.

"We believe our investment theses remain intact. Despite recent results, our portfolio should perform well over time," Einhorn said in a April 3 letter to clients. "To some extent, this quarter's result stems from the continued extreme outperformance of growth over value."

While Einhorn waits for a shift back to a less extreme imbalance of growth and value, his struggles are reminiscent of those experienced by the most successful value-oriented hedge fund of the 1980s and 1990s.

Back then, Robertson’s Tiger Management posted annual returns of more than 30 percent for 18 years and reached assets under management of more than $20 billion. But then the hedge fund faltered as value stocks went out of favor and internet stocks boomed. Tiger lost 19 percent in 1999, the same year that earlier generation of technology stocks soared.

But Robertson did not wait it out. As investors withdrew $7.7 billion from Tiger, Robertson decided to close his firm after a nearly 15 percent drop in the first two months of 2000.

“The result of the demise of value investing and investor withdrawals has been financial erosion, stressful to us all," Robertson wrote in an investor letter on March 30, 2000. "And there is no real indication that a quick end is in sight."

Robertson said his success had been his steady commitment to buying the best stocks and shorting the worst. "In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much."

Tiger’s closure was right around the peak of the technology-heavy Nasdaq composite, which would turn quickly and drop 46 percent from April to year-end 2000.

When that dot-com bubble burst, value stocks came back into fashion. From April 2000 to year-end 2003, the S&P 500 Value index outperformed the S&P 500 Growth index by 30 percentage points.

History may repeat itself.