David Einhorn signals caution as his hedge fund Greenlight prioritizes capital protection

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Hedge fund manager David Einhorn said he is focusing on capital protection as markets rally on geopolitical optimism, warning that investors may be underestimating potential downside risks.

“It probably won’t surprise anyone that we are again putting capital preservation at the top of our priorities,” Einhorn said in his latest investor letter dated Monday and obtained by CNBC. “With so little downside priced in, we are willing to risk missing out on a possible recovery to position ourselves to play more offense, should one of the downside scenarios materialize.”

U.S. stocks have rebounded violently with the S&P 500 entirely erasing the losses suffered since the Iran war began. The market is building on the recent gains this week even after U.S.-Iran negotiations over the weekend broke down, as investors remained optimistic that a deal between the two countries was still possible.

Greenlight’s funds returned 6.5% in the first quarter, outperforming the S&P 500′s 4.4% decline. Still, Einhorn said the firm has kept relatively low gross and net exposure, reflecting caution about valuations and the broader macro backdrop.