Published on: January 17, 2023, 04:08 am.
Last updated: 17 January 2023, 04:08.
David Einhorn’s Greenlight Capital is coming off one of its best annual performances on record, and a possible short position in DraftKings (NASDAQ:DKNG) could have been among the contributors to the hedge fund’s stellar 2022 showing.
In an investor letter, Einhorn said his fund returned 36.2 percent last year, while the S&P 500 fell 19.4 percent. Greenlight’s “bubble basket” — a collection of stocks that hedge funds short — sank in 2022, which was good news for short sellers as growth stocks tumbled amid rising interest rates. The ARK Innovation ETF (NYSEARCA:ARKK) — one of DraftKings’ largest fund owners — is believed to be the inspiration for the bubble basket.
“In early 2021, we also identified an actively managed ETF of so-called ‘innovator’ stocks that we found to have significantly similar characteristics to our bubble names,” Einhorn wrote in the investor letter.
He doesn’t mention the ARK Innovation ETF by name, but given the past year’s declines in the fund’s holdings, including DraftKings, and the performance of the Greenlight bubble basket, it’s likely that ARRK is the exchange-traded fund (ETF) in question.
DraftKings Favorite of some short sellers
DraftKings also wasn’t mentioned directly by Einhorn in the letter to clients, but the stock is held by ARK Investment Management in several of its ETFs, and is the 15th.th-the largest holding in ARKK mentioned above. The ETF is actively managed, which means its holdings can change frequently. DraftKings is currently the holding name of the underlying game.
Assuming Greenlight is or was short DraftKings — Einhorn told investors the hedge fund maintains short positions in some components of the bubble basket — he would join the list of well-known professional market participants who are bearish on online sports betting operator.
In 2021, Kynikos Associates founder Jim Chanos revealed that his firm was short DraftKings, citing, among other factors, a flawed business. He reiterated this bearish view last year. Chanos hasn’t publicly disclosed whether or not Kynikos still has that position, but it’s likely a lucrative one since DraftKings lost more than half its value last year.
Since becoming a public company in its own right in early 2020, DraftKings has been a favorite target of short sellers.
Einhorn does not shy away from risks
Einhorn, himself a high-level poker player, is no stranger to taking risks with both good and bad results.
“We are nothing if not persistent. In March 2021, we once again believed the bubble had burst…correctly this time,” Greenlight said in the letter. “We created the third bubble basket with thirty-one names, totaling 6.5% of the capital. This bubble basket remains in the portfolio, although we have covered a few names.”
Greenlight previously held long positions in some gambling stocks, including shares of companies with exposure to sports betting.