David Einhorn’s 3rd Quarter From Hell

Through the third quarter, Greenlight Re’s portfolio was approximately 17% net long. This is the lowest net long quarterly waiting we’ve maintained. We made the mistake of thinking that our significant short portfolio would protect a fairly fully invested long portfolio, that we estimated to be attractive and cheap. In hindsight, we should have been more conservatively positioned from a gross invested standpoint and we took measures to bring down overall exposures in September, as global financial markets deteriorated further.

In September, the US Government took an unprecedented action by banning the short selling of approximately a thousand financial firms, in order to prevent the systemic collapse of the financial system. The stocks that Greenlight Re was short withstood the center of the problem from financial industry are the same stocks that investors believed to be direct beneficiaries of government actions.

While the short selling ban failed to prevent a decline in the overall market, it did support the short term share prices to certain companies. During the quarter, our long portfolio underperformed the S&P, which declined about 9%, while our short portfolio only made a minimal gain. Our long portfolio suffered from analytical errors and a couple of names, and from the wide spread deleveraging occurring across the globe. Greenlight Re generally does not employ leverage in its investment portfolio because we want to be able to withstand systemic shock and not be put into a position to be forced to sell longs or (inaudible 00:06:23) shorts that we believe to be long term attractive investments because of temporary dislocations.

We entered our October with a small positive net exposure. Despite this positioning, our investment portfolio sustained a further loss of 0.7% during the month. The biggest contributor to the loss was our long position in Helix Energy Solutions, an energy company that was hurt by both declining oil prices and the recent hurricanes in the Gulf of Mexico.

The second biggest loss came from a relatively small position we held in the Porsche Stock, whereby we were long Porsche stock and short in Porsche’s ownership in Volkswagon stock. As has been widely reported, both Heiman shares appreciated over 350% in two days after Porsche announced that it cornered the market in Volkswagon shares and invited short sellers to “close their positions unhurriedly and without bigger risks.” Even though this was not a large position, a move of this magnitude did create an outside loss.

I’d like to talk a bit about how Greenlight Re’s portfolio is positioned today and where we stand going forward. Our portfolio is more net long than at the beginning of October. As Greenlight Re has been a net buyer in the global equity market’s collapse in the first half of October, while our short exposure decreased at the same time. We remain long cash-flow positive companies with generally unlevered balance sheets that we believe have already priced at a severe downturn.

We continue to be short companies that we believe will be challenged given the real and present headwinds our economy faces today. Mainly we continue to be short large financial institutions with levered balance sheets, thought to be the best of brief companies that are being severely impacted by the contraction of credit. We are also short companies with optimistic assumptions that are exposed to a weakened consumer. There are plenty of opportunities to evaluate and we think that there will be an expanded opportunity set in the future, although we currently remain in a conservative posture and plan to be patiently opportunistic.

The most important ongoing concern at Greenlight Re is preservation of capital in generating positive risk adjusted returns. Although our investment portfolio hasn’t accomplished this goal recently, we believe our investment approach and discipline will allow us to generate positive risk adjusted returns to our shareholders in the long term.