Hedge fund manager David Einhorn, founder of Greenlight Capital, has expressed concerns about the stock market following a strong rally and has taken measures to protect his portfolio against potential downside risks. In a letter to shareholders, Einhorn revealed that his hedge fund returned 14.5% in the second quarter, outperforming the S&P 500’s 8.7% return. His portfolio’s biggest winner was Green Brick Partners, a home builder whose shares surged 62% last quarter and 117% this year. Despite initially being bullish, Einhorn became more bearish on the market and added significant portfolio protection through index hedges in the second quarter.
Einhorn’s caution is shared by others on Wall Street, including Michael Burry, known for predicting the subprime mortgage crisis, who has made large bets against the stock market through put options. Einhorn believes that inflation remains a major risk, despite recent data pointing to easing price pressures. While the consumer price index rose 3.2% from a year ago in July, slightly below expectations, Einhorn believes that inflation is stickier and more entrenched than the market currently acknowledges. To mitigate risk, Einhorn has shifted his strategy to include short selling and buying companies with significant buyback programs. He has also added a small position in NET Power, a clean energy company, which he sees as having substantial potential upside.
Overall, Einhorn’s letter reflects a growing sense of caution among investors as the stock market continues to rally. The hedge fund manager is taking steps to protect his portfolio against potential downside risks, particularly in light of concerns about inflation and the overall state of the market.