Complete Third Point Third Quarter Investor Letter

Tyler Durden's picture

Dan Loeb has released his complete Q3 investor letter in which he discusses his net and beta-adjusted exposure ("we only gradually increased our exposures near the market bottom and thus underperformed during the dramatic rise in October. While we have not generated significant gains this year, we have protected capital and exhibited materially lower volatility than the markets.") which we applaud, as it proves the fund manager does not simply chase the crowd but actually thinks before he jumps off the cliff; explains the risk transformations to the fund's portfolio ("Beginning in mid?February, we started reducing our long equity exposure primarily due to the “Arab Spring” revolutions, which prompted concerns about potential disruptions in oil supply. We reduced our exposure to cyclical and leveraged investments, including in semiconductors, financials and truckers. This wave of selling, which continued through the Japanese tsunami and earthquake crisis, resulted in relatively defensive net exposure. Later in the Second Quarter, we diminished risk by adding single name equity shorts, taking that portfolio from $600M to $1.6B. Through September 30th, our long and short portfolios netted nearly the same amount despite long dollar exposure of 3x more than short dollar exposure."); answers the critical question everyone is asking ("The main question on every investor’s mind is when we will start to significantly increase market exposure....we have taken small advantage of the optimism regarding the European situation that drove October markets sharply higher. We remain patient and cautious for the moment until we determine it is time to deploy our dry powder decisively."), and provides details on the fund's entry into the reinsurance business.

Other notable observations include 3rd Point's fat tail exposure:

We have about 50?75BPS of true “tail” positions. These trades are designed to protect against massive global shocks. As a result, they are very inexpensive and the chances of payouts are remote – but if the worst comes to pass, they should return 10?20x on average. These include trades such as a depegging of a Middle Eastern currency or a spike in the demand for delivery of physical commodities.

... its foray into macro:

While we do not do this often, we will occasionally identify attractive discrete macro trades, which are more often short opportunities than long. A recent example of this was our decision to short copper prices during the last quarter due to weakness in Chinese demand.

... reentry into credit:

The silver lining of the recent equity market sell?off was the emergence of new opportunities in the credit space. We had a brief window to capture credit at levels attractive enough to start rebuilding our “Bank of Third Point” credit portfolio in a meaningful way for the first time in 12+ months.

 

It appears that credit focused funds (and perhaps funds with broader mandates but too much capital) may have repeated the mistakes of the last credit cycle and traded down in terms of credit quality and liquidity in pursuit of yield. We are seeing early signs of potential stressed selling that we surmise are emerging from these and other sources. We are gratified that our discipline and patience in maintaining low corporate credit  exposure will be rewarded. If past credit cycles are any guide, continued patience is advisable. We remember quite well how seemingly savvy and elegant the early prints in 2008 appeared – when certain private equity firms purchased with leverage bridge loans at 10 and 20 point discounts – only to see these investments wiped away when the other shoe dropped. We are looking forward to increasing our exposure as absolute value emerges.

Full letter: