David Einhorn’s Greenlight Capital returned 8.4% for the second quarter, bringing its year-to-date return to 13.2% at a time when most other hedge funds are experiencing negative returns. In his second quarter letter to investors, Einhorn emphasized that they achieved their positive results despite being a net buy in a bear market.
Greenlight is making money in a bear market
He added that their long positions declined, especially in late June, but their short positions fell further, resulting in a significant positive return. The fund didn’t add any new physical longs during the second quarter because it’s a bear market, and they’re building some dry powder for future opportunities.
However, Greenlight added a new location among the top five in July. Einhorn says it’s a short-term investment, and they have a full position. As a result, he broke his usual practice of waiting until the next quarter’s letter to discuss it.
The new long position is Twitter, which comes in lower than Elon Musk, given his attempt to walk away from the $44 billion offer he made to buy it. David has been critical of Musk for years, and he didn’t back down on his letter in the second quarter.
Is Elon Musk above the law?
Note that he did not write about Tesla
However, that has not yet happened, and Greenlight believes that the view that musk is above the law is now a widespread belief. The Tesla chief agreed to pay $54.20 per share to buy Twitter in April, but appeared to change his mind a month later.
Einhorn notes that the law in such a scenario is straightforward. He adds that if it were anyone other than Musk, it would “hinder the odds of a buyer swinging from the deal to well below 5%, or the percentage of bots that might be on Twitter.”
The green light is betting on Musk
However, he is a catcher, so Einhorn believes that many believe the law will never apply again. He cited a comment from a former judge who told CNBC that the court could allow the Tesla boss to walk out of the deal because he would not honor the ruling, embarrassing the court.
He notes that others believe the court may rule against Musk, but Twitter may not be able to enforce the ruling. He added that many people see such results as acceptable or “just the way the world works,” but he hopes it will be different.
Greenlight Capital has created a long Twitter position averaging $37.24 per share. Greenlight’s chief sees $17 per share of potential upside if the social network prevails in court, forcing Musk to pursue his purchase. On the other hand, he sees the potential of $17 per share to be bearish if the trade fails, so he puts 50/50 odds on something that “should happen 95%+ of the time.”
The law will apply to musk in this case
David believes the incentive for the Delaware Chancery Court is to follow and enforce the law in Musk’s case with Twitter. He described the court as “the most prominent and respected business court in the country.” However, if you leave Musk off the hook, it will invite more such lawsuits involving buyer’s remorse.
He explained that cynical buyers could sign a contract with potential acquisition targets and then use the threat of a lawsuit and uncertainty to change the deal. Of course, the Delaware Chancery Court has been working on case law relating to merger agreements for years, leading to a strong precedent and a clear understanding of the contractual obligations of buyers.
As a result, there must be a great deal of predictability in such a scenario. However, it will be up to Chancellor McCormick to follow the precedent and enforce the law against Musk, and Einhorn believes the risk/reward will be attractive.
Michelle Jones contributed to this report.