July 14 (Bloomberg) -- Greenlight Capital Inc., the $5 billion hedge-fund firm run by David Einhorn, told investors it switched all of its holdings in a gold exchange-traded fund into bullion during the second quarter.

“At a minimum this will provide some savings as the costs of storing gold are less than the fees” for the SPDR Gold Trust, the New York-based firm said yesterday in a letter to investors.

Einhorn, 40, told clients in January he was buying gold for the first time amid the threat of inflation from higher government spending. The firm, started in 1996, held 4.2 million shares of SPDR Gold Trust in the first quarter, making the gold- backed ETF its biggest holding. Gold has climbed 5.8 percent this year.

The firm’s Greenlight Capital LP fund gained 16.3 percent in the second quarter, bringing its return this year to 21.5 percent boosted by investments in Ford Motor Co. debt, according to the letter, a copy of which was obtained by Bloomberg News. The fund lost 23 percent last year.

Hedge funds returned an average 9.4 percent this year through June after losing 19 percent in 2008, according to Hedge Fund Research Inc. in Chicago.

Steve Bruce, a spokesman for Greenlight, declined to comment on the letter.

‘Sparse’ Stock Picks

Greenlight said its investments in stocks it expects to rise were “sparse” in the second quarter, and that it currently has “almost no net long exposure” to equities.

“This comes from our bottom-up inability to find many good opportunities,” the firm said. “We are very cautious of the significant headwinds we still believe the economy faces.”

Greenlight said it had bought reinsurance stocks including Aspen Insurance Holdings Ltd. during the second quarter.

“The reinsurance industry suffered a double whammy last year due to storm damage and investment losses,” the firm said. “This appears to be leading to an improved competitive environment and higher returns on capital.”

Greenlight said its largest holdings at the end of the quarter were Arkema SA, a chemical maker in Paris; Criteria CaixaCorp, a Barcelona-based holding company for Spain’s largest savings bank; the debt of Dearborn, Michigan-based Ford; gold; and Pfizer Inc., the world’s biggest drugmaker.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising prices and participate substantially in profits from money invested.