David Einhorn is the respected founder of hedge fund Greenlight Capital which manages around $5 billion. Einhorn came to fame in the midst of the Global Financial Crisis (GFC) when he shorted stock in Lehman Brothers after he discovered discrepancies in the investment bank's accounts which did not make sense to him and which he could not get straight answers too.
In Greenlight's recent Quarterly Letter to Partners it was revealed that during the March quarter the fund closed-out at a loss its short position in iron ore miner Fortescue Metals Group Limited (ASX: FMG). Greenlight had previously shorted the stock at $4.41 however after a 20% move against it Greenlight covered its position at $5.59
In commenting on the thesis behind the decision to short-sell the iron ore miner, Greenlight stated that Fortescue, "was able to lower its costs more than we had originally envisioned."
The comment suggests that Greenlight was perhaps more concerned about Fortescue's capital expenditure plans and costs of production than the iron ore price level per se. Recent reports that Chinese demand for iron ore is weakening and that the Chinese authorities are reigning in the sector due to concerns over lending practices are not only weighing on the iron ore price, but have has also pushed Fortescue's share price down to $5. Einhorn may no doubt be watching these events and wondering if his fund covered the short too early?
Foolish takeaway
Shorting is a tough gig and a strategy which many investors have avoided yet they have still managed to produce exceptional returns. One Australian-based hedge fund manager which has produced good results while employing a long-short strategy is Platinum Asset Management Limited (ASX: PTM).
While hard commodities are often used by hedge funds when creating their short book, when it comes to long-only investing in resource companies, an accurate assessment of commodity prices is even more essential. One of the problems of investing in single mine or single commodity exposed miners such as Fortescue is the risk around your assumption on a single input for your analysis, namely commodity price. For this reason it's no wonder the diversified mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are so popular.
