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.

“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 conflict began, Greenlight was already running with relatively low exposure, citing what it viewed as stretched valuations. Einhorn said Greenlight has made few adjustments, trading around index hedges and adding a long position in October oil futures. That bet has risen only modestly, as markets largely expect any supply disruption to be temporary.

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.

Disclosure: Versant Media is the parent company of CNBC.