Dan Loeb's Third Point Q3 Letter to Investors ~ market folly

Tuesday, December 21, 2010

Dan Loeb's Third Point Q3 Letter to Investors

Dan Loeb's hedge fund firm Third Point is finally out with its third quarter letter to investors. The first half of Loeb's letter focuses on Ben Bernanke and the second half focuses on Third Point's portfolio. The latter portion is what we'll highlight below.

Third Point recently received AR Magazine's award for event driven fund of the year. Third Point now manages $3.6 billion and at the end of the third quarter its Offshore Fund was up 19.2% for the year. The fund now has seen 18.2% annualized returns since inception, an obvious reason to track them. Recall that we've provided commentary and analysis of Loeb's investments in our newsletter. And if you desire to be a successful investor like Loeb, head to his recommended reading list.

Anadarko Petroleum (APC)

Turning to Loeb's recent commentary, he touches on his firm's position in Anadarko Petroleum. We originally revealed this position back in August and he purchased debt securities in June and July due to the opportunity presented as a result of the Gulf oil spill.

Of the investment he writes, "Our analysis was correct and in hindsight, investors could have generated similar returns by investing in anything 'Macondo-related (e.g. RIG, BP and Anadarko equities). However, Anadarko bonds offered similar upside to the aforementioned securities but with effectively zero downside in the event that either our thesis on the severity of the spill was incorrect or there was a material decline in oil and.or natural gas prices, and so we delivered excellent risk-adjusted returns."

In his commentary, Loeb mentions that all oil spill related securities have rallied furiously since the event. He doesn't mention whether or not Third Point still owns these securities and almost makes it sound like he has since exited the position (but that's speculation on our part).

NXP Semiconductor (NXPI)

Loeb also reveals a new position in his letter as Third Point participated in NXPI's IPO. He notes that, "the company is in the final stages of completing a substantial operational and capital structure restructuring, which is driving free cash flow, rapid deleveraging and attractive new opportunities like a leadership position (>50% market share) in Near Field Communications, a fast emerging mobile payment technology being adopted by Google Android, Nokia and Blackberry." The most interesting thing here is that despite the rally in shares, Loeb sees "substantial upside" in this stock.

Top Positions

While not specifically listed in the letter below, we have since seen Third Point's November portfolio update where they list the following as their top positions:

- Gold
- Delphi (multiple securities held)
- Potash (POT)
- Chrysler (multiple securities held)
- Lyondell (LYB)

Of note are the fact that Loeb owns physical gold, not the exchange traded fund. Fellow hedge fund manager David Einhorn of Greenlight Capital stores physical gold and John Burbank of Passport Capital also prefers the physical metal.

Embedded below is Third Point's third quarter letter to investors:

You can download a .pdf copy here.

To see what else Dan Loeb has invested in, be sure to check out our Hedge Fund Wisdom newsletter. And to learn to invest like this hedge fund manager, head to Loeb's recommended reading list.

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