Hedge fund wunderkind David Einhorn and futurist Elon Musk are locked in a zero-sum contest. Einhorn is betting big, in reputational capital if not actual dollars, that Musk’s Tesla Inc. is doomed to fail.
“We believe that right here, right now, the company appears to again be on the brink,” Einhorn declared on Friday in a letter to investors in his fund, Greenlight Capital, citing lack of demand, price cuts, layoffs, service center closings and cuts to capital expenditures as signs that Tesla is in trouble. This isn’t the first time, Einhorn added, contending that “Musk never admits the crisis in real time.”
If Einhorn is right, it won’t just be Musk who gets hurt, of course. Roughly 40,000 employees and more than 300,000 car owners are counting on Musk. And don’t forget the investors who paid a fortune for the company’s stock, hoping it will become a titan of the car industry. Tesla’s price-to-book ratio is 9.5, and its enterprise value-to-earnings before interest, taxes, depreciation and amortization is 37.4. That compares with 3.4 and 13.4, respectively, for the S&P 500 Index, which is no bargain to begin with.
If Einhorn is wrong, however, it could be devastating for him and have broader reverberations. Greenlight has been betting against — or shorting in trader speak — Tesla’s stock for at least three years. While the size of the wager isn’t clear, Einhorn has spent considerable energy promoting his bet against Tesla, and most of his recent letter is devoted to the subject. If it fails, it could deliver another significant blow to long-short investing, for which Einhorn has long been a proponent.
He is no stranger to high-profile wagers, of course. He shorted the stock of Lehman Brothers in July 2007, telling the Value Investing Congress in November 2007 he thought that Lehman had a huge exposure to illiquid real estate investments and that it was improperly accounting for them. Lehman collapsed less than a year later, sparking the global financial crisis in September 2008.
The stakes are higher this time. When Einhorn wagered against Lehman in 2007, his reputation as a stock-picking prodigy was unquestioned. Greenlight returned an astonishing 26 percent a year from its founding in 1996 to 2006 — a period that began when Einhorn was in his late 20s — outpacing the HFRI Equity Hedge Total Index by 12 percentage points a year and beating the S&P 500 Index by 17 percentage points, including dividends.
But the years since haven’t been as kind. Even after accounting for Einhorn’s prescient Lehman bet, Greenlight has returned just 1.1 percent a year from 2007 to 2018, lagging the HFRI index by 1.8 percentage points a year and the S&P 500 by 6 percentage points. The fund was also down 34 percent in 2018, its worst year on record.
Ever the incurable performance chasers, investors are fleeing the fund. Greenlight’s assets dipped below $3 billion this year, down from $12 billion five years ago. Suffice it to say, now would be a bad time to lose a high-profile battle with Musk.
And like Musk, Einhorn is playing for more than just himself — and perhaps more than Greenlight’s employees and investors. Given his outsized success in the 1990s and 2000s, Einhorn has long been a standard-bearer for long-short investing. It’s a heavy burden; shorting is notoriously difficult. Not only do investors have to be right that a stock is poised to decline, which is hard enough, they have to be right fairly quickly because shorting is expensive. As the Wall Street adage warns, “The market can stay irrational longer than you can stay solvent.”
For Einhorn, this market has been irrational for an unbearably long time. Tesla shares rose 46 percent in 2017 and 6.9 percent in 2018 before declining 18 percent this year through Tuesday. And it’s not just Tesla. The most expensive and least profitable companies — traditional fodder for short-sellers — have been the best performers in recent years.
The pain is evident far beyond Greenlight. The HFRI index returned just 2.9 percent a year from 2007 to 2018, down from 17 percent a year from 1990 to 2006. But just as Einhorn’s fame helped popularize long-short investing during its golden age, it’s likely to invite skepticism about the investing style if his recent stumbles continue. More than cars are riding on the feud between Einhorn and Musk.
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Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
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