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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:

 

 

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Mon, 11/07/2011 - 10:02 | 1852775 Sudden Debt
Sudden Debt's picture

Q4 results overall will be horific here in the EU. These last 2 weeks, everybody is stepping on the brakes.

The metal industry, machine building.... all down bigtime.

 

Mon, 11/07/2011 - 10:09 | 1852791 qussl3
qussl3's picture

We are already off the cliff, just havent realized it yet.

Panic is next.

But the market is so stupid, it may take till lousy earnings before they realise it.

Mon, 11/07/2011 - 10:27 | 1852831 LawsofPhysics
LawsofPhysics's picture

"We are already off the cliff, just havent realized it yet."

 

So long as "mark to fantasy" can be used by the corporate world and loses can be turned into "revenue" by the large banks this can go on for quite a while.

Call it the era of the "flying lemmings".

Mon, 11/07/2011 - 11:11 | 1853002 DarkestPhoenix
DarkestPhoenix's picture

Man, I hope so.  I need aobut two months before I can be financially ready for a collapse.  Right now, I'd be about 75% ready.  I have 30-40% of my PM portfolio where I want it to be, and if it all fell apart today, I could adjust and have about 50-75% of my PM holdings in place....But if it only waits until early/mid-January to fall apart.....I'll be at 100-125% of where I think I need to be.  I look at the green in the market this morning and am torn between disbelief and relief...

Mon, 11/07/2011 - 10:05 | 1852781 SheepDog-One
SheepDog-One's picture

Hey fund guy, theres some better shells a bit further out there on the beach now that all the water has gone out...dont worry just roll your pants up a bit higher when the tsunami arrives you'll be OK.

Mon, 11/07/2011 - 10:21 | 1852818 firstdivision
firstdivision's picture

I wonder how his exposure to USD and copper are currently.  He does seem quite cautious in today's environment, which I do see as a good thing.  With the boat sloshing from side to side, as everyone trys to predict the direction of the market, I hope Dan stays in the middle for the time being.  This shit storm could break either way at this point.  Oil seems to still be pricing in a full on QE3 with it's levitation at the moment. 

Mon, 11/07/2011 - 10:29 | 1852840 qussl3
qussl3's picture

I think it's pricing a shooting war in Iran.

That and the reduced margins.

Mon, 11/07/2011 - 10:21 | 1852821 Tense INDIAN
Tense INDIAN's picture

My update: The dollar is dancing inside a BULL FLAG.. It has touched the upper channel line 3 times and lower channel line 2 times...its near the upper channel line and just going a little low....and so u can see the jump in Global DOW to 1862 ....suddenly ....one more low to the lower channel line is more probable which should take the stock markets wordwide HIGHER.....but then the BULL FLAG flag will work.

Mon, 11/07/2011 - 10:28 | 1852834 LawsofPhysics
LawsofPhysics's picture

Just more opportunity to buy low and sell high.

Mon, 11/07/2011 - 10:31 | 1852845 EZT
EZT's picture

There is a recession in Europa, oil to the moon!

Mon, 11/07/2011 - 10:33 | 1852852 ivars
ivars's picture

Please answer a simple ? question here:

http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&start=840#p34993

 

Today, 1,6 trillion USD of US Treasuries is owned by FED. About 11% of total USA debt.

I have a question to all the clever guys and girls here:

What happens ( some day in future) if the USA treasury defaults only (for a starter) on the treasuries it owes the FED?

As I understand, FED balance sheet will shrink, so will the USA debt.

Will such an "internal" default affect USD value against other currencies?

Thank You in advance.

Mon, 11/07/2011 - 10:35 | 1852860 midgetrannyporn
midgetrannyporn's picture

Loeb is indicative of the terminal sickness of American society and the financial system in general. Non-productive paper shufflers uber-prosper while working folk are driven into poverty by the millions.

Mon, 11/07/2011 - 10:39 | 1852872 FranSix
FranSix's picture

Let's take the opposite view.  Say, for instance that bond prices rallying hard against gold means that the dollar is about to drop drastically, essentially a devaluation.(below its price in the 1990's.)  So what that means is that bond prices keep going up, but that anything and everything priced in U.S. dollars is discarded.

Sick, no?  What you call a monetary crisis.

Mon, 11/07/2011 - 13:51 | 1853834 Grand Supercycle
Grand Supercycle's picture

Latest NASDAQ chart porn suggests fun times ahead:

http://stockmarket618.files.wordpress.com/2011/11/2011-11-05_nas-8_x.png

Mon, 11/07/2011 - 16:11 | 1854429 IMA5U
IMA5U's picture

I like how smug Loeb writes while his fund is not making any $$$

 

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