market folly

Dan Loeb's hedge fund Third Point returned 8.6% in the first quarter of 2011 and manages $6.7 billion. Most recently, we noted Third Point's reduced net long exposure. Last time around, Loeb mentioned he would no longer be penning the letter to investors, but we still get some color on their portfolio construction and where they're finding value.

In particular, Third Point is focused on spin-outs as the Q1 letter details:

"At our annual Investor Day in January, we told you that we were enthusiastic about equities in a market poised for a wave of corporate transactional activity on a scale not seen since 2007. A combination of factors including record high levels of cash on corporate balance sheets, highly incentivized LBO firms, the return of cheap debt financing, and anemic top line growth is conspiring to make this an ideal period for the kind of special situation equity opportunities that are a core part of our strategy."

Loeb's hedge fund has focused specifically on the energy sector, owning positions in Williams Companies (WMB), El Paso (EP), and CVR Energy (CVI). We highlighted that Third Point started a position in El Paso in February.

Regarding Williams Companies (WMB), Third Point originally invested in November and has since added to the position as the company announced plans to split itself via an IPO of its E&P business in the second half of the year and a full spin of the remaining business in early 2012.

This is the type of event-driven investing Third Point loves. Besides Third Point, numerous other prominent hedge funds own a position in Williams Companies. You can read an in-depth analysis of WMB by subscribing to our Hedge Fund Wisdom newsletter as we featured the stock in our most recent issue.

Also of note is the fact that Third Point will close to new investors effective June 1st. They believe this is a prudent time and this is not the first time they've done so.

Embedded below is Third Point's first quarter letter to investors (email readers come to the site to read it):



To learn how to invest like Dan Loeb, check out his recommended reading list.