Investing.com -- Greenlight Capital's 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. "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."

Greenlight's funds returned 6.5% in the first quarter, outperforming the S&P 500's 4.4% decline. Einhorn said the firm has kept relatively low gross and net exposure.

"Even the most cautious are investing with a Sammy Hagar inspired mentality: one foot on the brake and one on the gas," he said in the letter. "Nobody wants to miss the V- or even the checkmark-shaped recovery."

As the U.S.-Iran conflict began, Greenlight was already running with relatively low exposure, citing stretched valuations. Einhorn said Greenlight has made few adjustments, trading around index hedges and adding a long position in October oil futures.

Performance in the quarter was driven by gains in gold, Acadia Healthcare, DHT Holdings and Core Natural Resources, according to the letter. Greenlight also initiated a medium-sized position in Versant Media Group and smaller stakes in Crocs and SLM Corp.

The S&P 500 has erased the losses suffered since the Iran war began.