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Billionaire Dan Loeb Grows Bearish on the Market As Short Positions Outpace His Conviction Buys

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Billionaire investor Dan Loeb, the founder of activist hedge fund Third Point LLC, discussed the performance of his investment firm, including the broader market conditions and opportunities, in a conference call held by Third Point Reinsurance Ltd (NYSE:TPRE) earlier this month. Third Point Reinsurance’s investment portfolio, which is managed by Third Point LLC and accounts for 13% of its assets under management, posted a net-of-fees negative return of 8.7% in the third quarter. The billionaire hedge fund manager blamed the disappointing performance on “concerns about the slowdown in China, hedge fund deleveraging, U.S. presidential election and weaker U.S. economic data”. However, the Third Point Equity portfolio performed even worse than Third Point Reinsurance’s portfolio during the latest quarter, so let’s proceed with a discussion of what caused its poor third quarter performance, how Dan Loeb and his team reacted to the increased volatility, and the long-term bets of the billionaire investor.


Professional investors like Dan Loeb spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge funds on the whole have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned 102% and beaten the market by more than 53 percentage points since the end of August 2012 (see the details).

Dan Loeb
Dan Loeb
Third Point

Getting back to our discussion, the Third Point Equity portfolio lost 14.1% on average exposure in the third quarter, primarily due to “several concentrated positions in the healthcare sector”. Dan Loeb asserted that his Third Point LLC had reduced its net equity exposure even before the August sell-off, and was in the process of decreasing its exposure even further. Most importantly, the billionaire hedge fund investor claimed that “we remain bullish on our high conviction ideas”, so on the next page of the article we will lay out his top four stock picks as of the end of the end of the third quarter.

At the same time, Dan Loeb’s Third Point LLC has built short positions that started to bear fruit, according to the billionaire. “Single name shorts have proved important to our strategy and we generated alpha from shorts in every sector during the quarter”, said Loeb during the recently-held conference call. In fact, the well-known hedge fund firm had more equity short positions than long ones, which clearly suggests that Third Point has a bearish view on the market at the moment. Although Dan Loeb and his colleagues did not disclose their short-selling candidates, John R. Berger, Chairman and Chief Executive Officer of Third Point Re, stated that “there are certain industries that we see that are deteriorating where we have made some bets”. Most importantly, the CEO said that “there has been some real sloppiness in accounting and this move towards using adjusted EBITDA and adjusted earnings has produced some companies that I think are trading on valuations that are not supported by the real numbers”. All in all, it’s a pity that the U.S. Securities and Exchange Commission does not require hedge funds to disclose their short positions.

Let’s now head to the next page of the article, where we discuss the four largest equity positions of Third Point LLC as of the end of the third quarter.

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