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Opinion

The ‘self-effacing’ activists

When David Einhorn was sanctioned by the UK’s Financial Services Authority at the end of January he was described in one newspaper profile as “self-effacing”, which was an odd phrase for a hedge fund manager who relishes the spotlight, at least by the standards of the industry.

He made his name as a short-seller of stock and credit who is happy to have a public argument with his targets and does not back away from tussles with regulators. He lost his dust-up with the FSA but that is unlikely to change his approach to trading, as his voluble response to the Punch Taverns insider-trading ruling indicated.

Einhorn’s first high-profile dispute was with Allied Capital, but he is best known for shorting Lehman Brothers stock in 2008 and engaging in a public dispute with then-Lehman CFO Erin Callan over the health of the firm’s balance sheet. She was fired soon afterwards, swiftly followed by Lehman’s bankruptcy, which helped cement Einhorn’s reputation as a prescient investigator of overvalued stocks.

The performance of his Greenlight fund has been mixed since then, in part because of his eclectic combination of short and long positions. Greenlight returned just over 2% in 2011, which was a very slight outperformance of the S&P500, but came after strong late-year results were needed to reverse some earlier problem positions.

Unlike many hedge fund managers, Einhorn is not afraid to admit to shorting European sovereign debt via default swap trades. In a year-end investor letter sent in January he singled out credit default swaps on European governments as a highlight of the year, after his single biggest winner of a short position in First Solar, which was the worst-performing stock in the S&P500 in 2011.

Einhorn noted that he has currency hedges on his European equity holdings, presumably by shorting the euro, and said that he continues to believe that European sovereign bond prices will fall.

Other fund managers seem to be sticking to similar views, despite the sharp rally in European bond prices in January and the continuing strange resilience of the euro.

Alan Howard, founder of Europe’s biggest hedge fund, Brevan Howard, delivered a rebuke to austerity policies in his year-end investor letter that could place him alongside Nobel Laureate Paul Krugman, if Howard’s public image as a tax-shy Geneva-based billionaire did not make them unlikely allies.

"In the US, eurozone and UK, fiscal austerity is being prescribed as the cure following the bursting of the credit bubble and to overcome the malaise following a balance-sheet recession. Unfortunately, there is no historical example of when this approach has been successful," Howard said in his investor letter in January.

Brevan Howard is far bigger than Greenlight and had a stronger 2011, with a return of just over 12%. The fund is known for sharp tactical shifts in its macro positions, which keeps bank fixed-income dealers on their toes, as well as clamouring for business from the fund.

Brevan Howard’s fundamental position has been unchanged for some time, however: it is long interest rate volatility and has been prepared to put on enormous positions gambling on a decline in interest rates whenever policymakers decide to try out rate hikes for size, as the ECB did in the middle of last year.

Alan Howard has also been trying to exploit a side-effect of the Volcker rules in the pre-emptive closure of bank proprietary dealing desks. In his year-end investor letter he noted that the fund hired 13 new traders and three research staff who were spun out of bank prop desks and said that they made a material contribution to results in 2011.

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

That indicates that recruits such as former Goldman Sachs macro prop trading head Karl Devine had a good first year, although Brevan Howard’s experiments in offering a home to bank prop traders away from its core expertise of fixed income have not always been successful. A group of former Morgan Stanley equity specialists were spun back out of Brevan Howard last year after weak performance, for example. One of them, Fabrizio Gallo, was able to land a job as co-head of global equities at Bank of America Merrill Lynch, however, proving that you can go back home again, even in the supposedly risk-off environment of post-Volcker investment banking.

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