Daniel Loeb Expects Market Dislocations in the Second Half of 2016

By Hedge Fund Insight staff


Daniel Loeb, Chief Executive Officer of Third Point LLC recently* discussed the performance of the investment portfolio of Third Point Reinsurance, in the course of which he shared some of his expectations for the remainder of 2016. 

Our investment portfolio (managed by Thirthird-point-logod Point LLC) produced strong results in the second quarter after a challenging first quarter. In the second quarter our investment portfolio was up 4% and year-to-date through July we were up 4.6%.

The Third Point Reinsurance investment portfolio managed by Third Point LLC was up 4% in the second quarter of 2016 net of fees and expenses versus returns for the S&P and CS event-driven indices of 2.5% and 2.1% respectively for the quarter. The account was up 1.9% year-to-date through June net of fees and expenses. The Third Point Reinsurance account represents approximately 14% of assets managed by Third Point LLC.

Significant market volatility in the first half of 2016 was due primarily to continuing global macro economic uncertainty. During the second quarter we continue to position our portfolio opportunistically to mitigate downside and remain nimble buyers in challenging markets.

We benefited from our decision to reverse positioning mid way through Q1 by increasing long exposure to several high yield energy credits and to equity investments in cyclicals, commodities, industrials and emerging markets. These shifts along with successful navigation of the period following Brexit contributed to strong performance in Q2.

The Third Point equity portfolio returned 2.6% on average exposure during the second quarter. We posted positive results in almost every sector with healthcare and industrials and commodities leading the portfolio.

We generated returns in both our long and short portfolios in several sectors. Our corporate credit portfolio returned 15.1% on average exposure in Q2, significantly outpacing the Iboxx high-yield index return of 4.8% during the same period.

Performance was largely driven by positive returns from performing credit investments in the energy sector. We maintain minimal distressed credit exposure at present. Structured credit was up 2.6% on average exposure, rebounding after a period of limited liquidity at the onset of the year. Our sovereign credit portfolio continued to add value and our Argentine government bonds and returned a 11.7% for the quarter and 20.4% for the year.

During the second half of 2016 we expect continued periodic market dislocations. We believe we are well positioned to proactively take advantage of such dislocations and invest in compelling risk adjusted situations across the capital structure.


Investment in Didi – China’s Uber

We’ve been investing in private companies since 2000 or even before. So our investment in Chinese private company Didi in the 2Q is not our first. I would just differentiate, on the basis of where Didi, China’s leading ride‐sharing platform, is in it’s corporate development. Didi is a relatively late-stage private company. This wasn’t like a start-up or series A, it was fairly late-stage. We look at this as sort of a bridge equity investment to an IPO which we expect to take place next year. Didi’s already announced its merger with Uber which will take a enormous amount of risk out of the investment.

You know, irrespective of the country risk in China, this is a tremendous opportunity to be at the forefront of a technology in transportation, in the biggest market in the world. So we’re very excited about it.

We don’t disclose the size of the position – but the Didi holding is appropriate given that it’s a private company.


Investment Team Developments

We have moved away from an investment team at Third Point populated by generalist event‐driven investors to a firm of sector specialists focusing on three distinct areas of equity investing: event‐driven situations, constructive/activist situations, and value compounders. In a market with low growth and fewer events, having more depth of knowledge in each sector and more types of equity investments available to us has resulted in better stock picking^. We’ve been adding to the team and have a lot of new talent in particular in financials, technology, consumer, risk arbitrage, and healthcare.


So we’re just beefing up the team that we already have. But this doesn’t represent any kind of a new development. As far as the culture goes, everything is consistent with the way we’ve done things. We’re very team-oriented, and we have a collaborative, transparent culture. We work together very well and there is no segregation of portfolios of sectors or investment strategy. That may work for other firms, but we’re not a silo-based firm.


*Q2 2016 Results Earnings Conference Call.

^Third Point 2nd-Quarter 2016 Investor Letter