Here are the highlights of David Einhorn's latest letter and his biggest winning positions

Published Thu, Apr 15 20212:24 PM EDT

David Einhorn's Greenlight Capital posted a flat quarter following its best three-month period ever at the end of 2020. In a letter to investors obtained by CNBC, the hedge fund manager broke down his biggest winners in the first quarter and the reasons for the mediocre performance. The Greenlight Capital funds lost 0.1% from January to March, compared to a 6.2% return for the S & P 500, the hedge fund said in the letter. Einhorn also detailed his outlook for inflation, economic recovery as well as the retail trading mania earlier in the year that in part led to his underperformance. Here are the highlights from the letter. Higher inflation "For a quarter in which we made only a handful of portfolio changes and essentially broke even, a lot happened. In general, the investment environment – especially from mid-February through the end of the quarter – was favorable as value outperformed growth, and interest rates and inflation expectations rose," the firm said in the letter. Einhorn has been calling for a pick-up in inflation since the middle of last year as the economy embarked on its road to recovery. His inflation bet has only firmed after the Federal Reserve signaled that it will let price pressures overshoot to ensure a full and well-rounded recovery. "We believe inflation is only going one way — higher — and we are optimistic about our prospects. The wind is now at our backs. The economy is in full recovery mode," Greenlight said. "While the Fed says it has the tools to fight inflation, it remains to be seen if it will have the stomach to use them when the time comes. That is a discussion for another day. Right now, we remain positioned for rising inflation and inflation expectations." Breaking even Einhorn's funds gained 25% in the fourth quarter boosted by the company's long positions, enjoying the best quarter for the hedge fund since its inception. These long positions continued to perform well in the first quarter, helping offset the hit from the fund's short side. Life insurance company Brighthouse Financial , which rallied 22% last quarter, benefitted from rising interest rates, the hedge fund said. Einhorn also made a good bet on the newly public Danimer Scientific , which rallied more than 60% in the first quarter. Change Healthcare and AerCap Holdings also rose by double-digits each amid M & A activities. Concentrix and Resideo Technologies were big winners for the hedge fund, gaining 52% and 33%, respectively, last quarter. Performance drag Einhorn said there were two factors that offset the strong gains from the top performers. First, Greenlight's biggest position Green Brick Partners doubled in share price in 2020, resulting in an excess weighting in its portfolio. The hedge fund sold about a quarter of its holding in the stock at a discount in January. "It took a while for the market to digest the shares and, as a result, GRBK underperformed its peers, which generally advanced over 20% during the quarter," Einhorn said. Green Brick Partners has gained nearly 10% this year after rallying 100% in 2020. The homebuilder stock has benefitted from a boom in housing prices amid a shortage in home inventory, and the company was able to raise prices faster than costs, the hedge fund said. "The company is now planning for a multi-year housing boom, of which it believes we are still in the early stages," Einhorn said. "While the position is still our largest, we are currently comfortable with the sizing." Short performance 'unacceptable' The hedge fund said its short portfolio was affected in the massive short squeezes driven by retail day traders earlier this year. Greenlight didn't reveal which positions. "Despite having a diversified portfolio, a number of our positions fell into this group and experienced sudden, sharp rises," Einhorn said. "We adjusted to the dynamic by reducing our exposure to single name shorts, both in number and sizing. To mitigate the potentially uncomfortable net long bias that would have resulted, we added macro hedges of market index and index option shorts." In late January, a band of retail investors coordinated trades on social media platforms and created monstrous short squeezes in a slew of names with elevated short interest. GameStop , which was at the center of the storm, rallied 400% in a week. The trading mania forced Robinhood and some other brokers to limit activities in certain stocks, and sparked regulatory scrutiny and investigation. "While we do not expect this to be a permanent change, we will evaluate and modify as we go. The performance of our short portfolio in 2020 and in early 2021 was unacceptable, so change is certainly needed," Einhorn said. "If we swing a little less hard, we should hit more balls. We have also revised our internal analyst incentive structure to fully emphasize alpha creation."

David Einhorn

Andrew Harrer | Bloomberg | Getty Images

David Einhorn's Greenlight Capital posted a flat quarter following its best three-month period ever at the end of 2020.

In a letter to investors obtained by CNBC, the hedge fund manager broke down his biggest winners in the first quarter and the reasons for the mediocre performance.

The Greenlight Capital funds lost 0.1% from January to March, compared to a 6.2% return for the S&P 500, the hedge fund said in the letter.

Einhorn also detailed his outlook for inflation, economic recovery as well as the retail trading mania earlier in the year that in part led to his underperformance. Here are the highlights from the letter.