Dan Loeb's Third Point Reduces Equity Exposure in Q2: Investor Letter ~ market folly

Tuesday, September 7, 2010

Dan Loeb's Third Point Reduces Equity Exposure in Q2: Investor Letter

Dan Loeb's hedge fund Third Point LLC is out with their second quarter investor letter. In it, we learn that their Offshore Fund was -4.5% for the second quarter but still remains up 10.1% for the year. Why do we follow Third Point, you ask? Well, how about their Offshore Fund's 17.7% annualized return since inception.

Loeb starts his letter with a tirade on the economy, government and other associated topics. He writes, "(This) leads us to conclude that America faces not only a crisis of confidence among consumers unwilling to spend and businesspeople unwilling to invest, but also a crisis of leadership." He then goes on to talk about the impact public policy has on investing. After all, Third Point sold their stakes in US financials back in January due to regulatory uncertainty, among other reasons.

Additionally, Third Point has vacated a position in the healthcare sector, largely due to regulatory risk as well. He writes, "We have also sold other regulated industries and eliminated our position in an HMO that is a statistically cheap stock owned by several hedge funds, but which we saw as being overly exposed to unpredictable government regulation." If you subscribe to our brand new quarterly newsletter, Hedge Fund Wisdom by Market Folly, you would already know that Loeb is referring to Wellpoint (WLP), a name he exited completely in the second quarter.

The most notable change in Third Point's portfolio as of late has been their reduction of gross and net equities exposure. They started trimming exposure in May and continued to do so throughout the rest of the quarter. This is a theme we've covered previously when we looked at Third Point's portfolio. They exited positions lacking a solid catalyst and are avoiding sectors with the potential for US government intervention. In terms of positions they are fond of, Third Point retains high conviction in their post-reorganization equity plays as well as their mortgage exposure. As of late, they've also been adding to their risk arbitrage plays. While they expect growth in the US to remain 'anemic' for the rest of the year, they think M&A volume has the potential to pick-up.

One other interesting takeaway from Loeb's market commentary is the fact that his hedge fund has put on numerous "Asymmetrical trades using derivatives, options and debt securities to hedge against extraordinary global events." This is essentially an insurance policy as they are only dedicating 1% of fund assets per annum to this protection. We highlight this because it is a rampant trend in the hedge fund industry as of late. We first (and most notably) heard about this when we learned that Baupost Group's Seth Klarman purchased out of the money puts on bonds as a hedge against a potential scenario whereby interest rates rise sharply.

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

You can download a .pdf copy here.

For an in-depth look at Third Point's portfolio, head to our inaugural issue of Hedge Fund Wisdom by Market Folly. And to learn to invest like a successful manager, head to Dan Loeb's recommended reading list.

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