Dan Loeb's Third Point Q3 Letter 2011

Dan Loeb's hedge fund firm Third Point just sent out their third quarter letter to investors for 2011. In it, they talk about their low net exposures and how they've protected capital through the volatility.

This morning we pointed out how Third Point increased exposure in October. Their letter says that they've "added some beta back to the portfolio, primarily by covering shorts, nibbling at credit, and adding to select long positions." Third Point has had a lot of dry powder and has been waiting to deploy it.

Asset Backed Securities

We've often mentioned Third Point's exposure to asset backed securities, but this past quarter's letter gives us some color as to their positions:

"Our portfolio still consists primarily of dented prime “Re‐Remic” securities, which are priced at a mid‐teens yield, and seasoned subprime securities, which are priced at a high‐ teens yield. We have a small number of CMBS bonds and student loan ABS. The cash carry on our mortgage portfolio is about 60‐70 BPS per month."

Embedded below is Third Point's Q3 letter (email readers click the link to come read it):



For activity from this hedge fund in October, head to our post this morning on Third Point's Lehman Brothers position.

Dan Loeb's Third Point Shows Lehman Brothers as a Top Position

Dan Loeb's hedge fund Third Point updated investors on their latest holdings and exposures for the end of October. Third Point lists Lehman Brothers Holdings as a top position this month, one that previously has not appeared in the upper echelon of their portfolio.

Third Point's Top Positions

1. Yahoo! (YHOO)
2. Gold
3. Delphi Corp
4. Lehman Brothers Holdings
5. Sara Lee (SLE)

Also worth noting is that Sara Lee has taken the place of Technicolor from last month as their fifth largest stake. The company recently sold its North American coffee business, something the hedge fund anticipated when we highlighted Third Point's Sara Lee investment thesis.

Third Point's top three positions remain unchanged from last month. You can view Loeb's bull case for YHOO here.


Increased Equities Exposure

Third Point was up 0.8% in October and 0.9% for the year at that time. Equities rallied furiously in October as the S&P 500 was up 10.9% and last month it seems Loeb's firm was hurt by their low net exposure which we've highlighted previously.

And speaking of exposure, Third Point did increase their net long position in equities to 22.9%, up from 15.6% net long the month prior. They have their largest net long exposure to the technology and energy sectors.

In credit, they are 18.4% net long as they continue to have their largest net long exposure in asset backed securities and continue to be net short government issues. Their overall net long exposure in credit increased 2.8% from last month.

Geographically speaking, Third Point is net long the Americas by 57%, net short EMEA at -5% and net short Asia at -2%.

David Einhorn Buys Gold Miners, Sells Some Physical Gold

David Einhorn of hedge fund Greenlight Capital recently spoke on the conference call for the reinsurance company he's associated with, Greenlight Capital Re (GLRE). Einhorn manages the reinvestment portfolio and gave some comments on his latest portfolio positioning:

Greenlight Buys Gold Miners

The most notable change was a shift in his gold related investments. Back in 2009 we highlighted Einhorn's physical gold position. This time around, Einhorn has been re-allocating some of his physical gold stake into gold miners. He's been buying miners via GDX the exchange traded fund.

The rationale for such an adjustment: "Throughout the course of this year, a substantial disconnect has developed between the price of gold and the mining companies. With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk adjusted returns even if gold does not advance further. Of course, since we believe gold will continue to rise, we expect gold stocks to do even better."


Greenlight Increases Equity Exposure

Einhorn also mentioned that he boosted net long exposure to 35%. On the markets in general, the hedge fund manager still sees pockets of opportunity, saying, "Many equities, especially in large capitalization companies appear quite attractive. This is balanced by the continuing impact of dangerous macro policies. Most of our portfolio is assembled from the bottom up and we continue to see reasonable opportunities on both sides of the portfolio."


Einhorn Sells Pfizer (PFE), Adds to Other Longs

Another notable move from Greenlight in the past quarter was the sale of their longstanding position in Pfizer (PFE) due to better investment opportunities elsewhere. During the volatility and market dip, Einhorn was covering some shorts, adding to existing long positions, and starting new stakes in the technology and auto sectors.

We also detailed Einhorn's presentation on shorting Green Mountain Coffee Roasters (GMCR) from the Value Investing Congress as he outlined the company's accounting gimmicks.

For all aspiring fund managers out there, be sure to check out David Einhorn's recommended reading list.