Red Flag Over Greenlight Re

Hedge fund manager David Einhorn has found an intriguing way to tap into Wall Street's sudden interest in hedge fund IPOs.

Earlier this week, Greenlight Capital Re, a small reinsurer backed by Einhorn, filed for a $175 million initial public offering. But the Cayman Islands-based firm isn't much of a reinsurer. The two-year-old company didn't even begin underwriting policies until last April.

In fact, most of the $39.6 million in profit Greenlight Re generated last year came from its investment activities. And those investments were managed by DME Advisors -- the very same investment adviser that manages Einhorn's $4 billion Greenlight Capital hedge fund empire.

In essence, Greenlight Re looks a bit like a slimmed-down version of Einhorn's Greenlight Capital hedge fund. An investor who buys a share of the reinsurer is really banking on Einhorn's advisory firm making the same kind of shrewd investments it does for the hedge fund.

On the surface, this sounds like an appealing situation. A Greenlight Re investor gets to invest in a hedge fund without needing a million dollars in the bank.

But the real winner in the Greenlight Re IPO is Einhorn.

The 38-year-old hedge fund manager is largest owner of the reinsurer's Class B shares, which have greater voting power than the Class A shares that Greenlight Re intends to sell to investors. And after the IPO, Einhorn will be entitled to buy even more Class B shares, further solidifying his control.