Greenlight Capital chief David Einhorn unloaded his stake in Yahoo Inc just months after building a sizable position, swallowing a modest loss after an ownership dispute tarnished the Internet company's prized Chinese assets.

Greenlight told investors saying it was exiting the investment after it emerged that China's Alibaba -- of which Yahoo owns about 40 percent -- had transferred its highly valued online-payments business to a separate company controlled by Alibaba founder Jack Ma.

That move marked the latest blow to Yahoo, which CEO Carol Bartz is struggling to get back on a growth track. Its Asian assets, including its slice of Alibaba, are deemed the most valuable portion of the company.

Yahoo shares were down 1.5 percent at $15.57 in afternoon trading Friday.

The partnership bought Yahoo earlier this year based on a sum of the parts analysis which included putting substantial value on its Chinese assets, Einhorn wrote in a July 7 letter to investors obtained by Reuters on Friday.

Shortly after the purchase, the value of the Chinese assets came into doubt as the CEO of the Chinese unit 'hived off' a valuable subsidiary into a corporation that he personally controls.

From there the finger-pointing started going in every direction, the hedge fund manager wrote. This wasn't what we signed up for. We exited with a modest loss.

FINGER-POINTING

Einhorn, head of the $7.8 billion hedge fund firm, told investors on April 29 that Greenlight had taken a significant long position in Yahoo stock at $16.93.

But on May 11, Yahoo said Alibaba Group had transferred ownership of its online payments business, Alipay, to a firm controlled by Jack Ma, Alibaba's chief executive. Yahoo shares tumbled more than 7 percent that day.

This year has been one of Einhorn's toughest, according to the investment results of Greenlight Capital Re Ltd, a reinsurer that invests its premiums with the hedge fund manager.

Einhorn was down 2.9 percent in June, leaving him 5.2 percent lower for the first half of 2011, Greenlight Capital Re disclosed recently on its website.

Last year, Einhorn generated 11 percent returns, Greenlight Capital Re data show.

Einhorn's sale of Yahoo stock was first reported by zerohedge.com.

(Reporting by Alistair Barr; Editing by Andre Grenon and Phil Berlowitz)

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