Greenlight's Einhorn says inflation could surge even more. Here is how he's hedging surging prices

Published Tue, Apr 19 20221:28 PM EDTUpdated Tue, Apr 19 20226:12 PM EDT

Greenlight Capital's David Einhorn said inflation could still surprise to the upside, even with the Federal Reserve tightening monetary policy. The star hedge fund manager revealed Tuesday in an investor letter that his firm has added a number of new positions to hedge against surging prices during a market-beating quarter for Greenlight. "We remain bullish on future upside surprises to inflation," Einhorn said in the letter obtained by CNBC. "If the Fed was SERIOUS about stopping the inflation problem, it would be as aggressive and creative in tightening as it was when it was easing." Prices that consumers pay for everyday items surged a whopping 8.5% in March , the highest levels since the early days of the Reagan administration. To combat inflation, the Fed has begun raising interest rates and is expected to continue doing so through the remainder of the year and into 2023. Those pressures have been driven in part by soaring energy prices, and Einhorn believes energy prices could go even higher from here, keeping inflation elevated. "The U.S. government has chosen to subsidize demand by granting gas tax holidays and releasing strategic oil reserves, while continuing to thwart supply by demonizing producers, criticizing windfall profits, stifling investment in energy infrastructure and threatening extra taxes," Einhorn said. "Energy prices feed into food prices. Agriculture is quite energy intensive and natural gas – which is at elevated prices and in short supply – is a key input into fertilizer." During a volatile first quarter in which the S & P 500 fell 4.6%, Greenlight's main hedge fund outperformed with a 4.4% gain. The outperformance was driven in part by short positions and index hedges, the manager said. In the middle of January, Greenlight added more index hedges and increased its macro positions in corporate credit default, while directing its research efforts to focus on short ideas, Einhorn said. Greenlight's long portfolio lost 7% during the quarter, and the firm had no large additions during the quarter. However, Greenlight built a slew of small new positions to play the trend of hot price pressures. International Seaways Greenlight added a stake in International Seaway , an owner and operator of oil tankers and product carriers. "Demand for oil fell during the pandemic, leading to a prolonged period of low charter rates for tankers," Einhorn said. "Management has been a good steward of capital, acquiring ships during low points in the cycle and repurchasing shares at attractive prices." The stock is up 44% this year. Ryanair Holdings The hedge fund also added Ryanair Holdings, the largest low-price European airline that trades in Ireland. Einhorn said that, during the pandemic, the company expanded on its low-cost position by upgrading and improving the fuel efficiency of its fleet and by reducing its airport costs. "RYA has created a competitive advantage by hedging near-term fuel prices," the investor said. Southwestern Energy Southwest Energy is another new add for Greenlight. It is the second-largest producer of natural gas in the U.S. "The company is well-situated to satisfy growing domestic and export demand. Over the short, medium and long term, Europe now intends to reduce its reliance on Russian energy and increase its use of U.S. LNG," Einhorn said. The energy name has rallied more than 70% this year. Weatherford International Einhorn also built a new stake in Weatherford International , a global oilfield services company that provides drilling tools required to produce oil and gas. "WFRD now has the wind at its back as many years of underinvestment in exploration and production have left the world structurally short of oil," Einhorn said. "The company stands to benefit from the significant increase in exploration and production capex that is underway." The stock is up nearly 40% this year. — CNBC's Michael Bloom contributed to this report.

David Einhorn speaking at the 24th Annual Sohn Investment Conference in New York, on May 6, 2019.

Adam Jeffery | CNBC

Greenlight Capital's David Einhorn said inflation could still surprise to the upside, even with the Federal Reserve tightening monetary policy.

The star hedge fund manager revealed Tuesday in an investor letter that his firm has added a number of new positions to hedge against surging prices during a market-beating quarter for Greenlight.