Dan Loeb under performance in the third quarter of 2019 has come to light in his fund’s latest quarterly investment letter. Dan Loeb’s Third Point revealed a loss of -0.2% in Q3, according to the funds Q3 investment letter. It was a bad quarter in an overall good year for Dan Loeb’s Third Point, bearing in mind that fund is up 12.7% since September 30.
Where were Dan Loeb under performance trades in Q3?
A string of trades were caught offside, namely from Argentina’s sovereign bonds and single name shorts.
“The main detractors for the year through September 30, 2019, were a sovereign bond investment in Argentina and single name shorts” wrote Dan Loeb’s Third Point.
“The main detractors for the year through September 30, 2019, were a sovereign bond investment in Argentina and single name shorts”
DAN LOEB’S Third Point
Dan Loeb’s under performance in Q3 also reflected the retreat of bearish sentiment during September and October. There are ongoing talks about Fiscal stimulus by policymakers around the globe. The Fed, the world’s central bank, has abandoned its normalization policy and has returned to asset purchasing of 60 billion dollars a month and is now widely anticipated to lower the Fed fund rates below 1.75%. There is even optimism on the US-China trade negotiation, which could still prove to be misplaced.
Dan Loeb under performance in Q3 was not attributed to the fund’s lack of foresight in anticipating these changes, but instead the rapidity at which those changes would have on asset prices
“We were able to identify many of these shifts in Q3 and provided some protection to the long side of our book through position management, hedging, and directional optionality” wrote Dan Loeb’s Third Point “However, the scale and suddenness of these factors move caught us offsides in certain short positions” added Dan Loeb’s Third Point.
“The scale and suddenness of these factors move caught us offsides in certain short positions”
DAN LOEB’s Third Point
Was it momentum rotation or a Quant Quake in Q3 that consumed the fund’s profits and led to Dan Loeb under performance?
Momentum rotation refers to capital flows from cyclical versus defensive stocks or growth versus value. When rational investors believe that interest rates are going to rise they respond by rotating capital into value stocks away from growth. So the Fed’s sudden policy shift to easing caught a lot of investors offside.
A Quant Quake refers to violent moves in asset prices triggered by the computer-driven investment industry.
Dan Loeb’s Third Point was not alone in experiencing losses in Q3 as other prominent investors, the likes of Steve Cohen, Ken Griffin, and Dmitriy Balyasni also had their profits monkey hammered in the last quarter. But don’t blame the Quant Quake for a turbulent market in Q3, it was just momentum rotation, according to JP Morgan.
Really? Think about it. Trading is a zero-sum game, so Quant Quakes equals crack profits for those on the winning side of the volatility.
“In this vacuum, investor fears spiraled into a massive sell-off in the currency and reserve depletion, making a restructuring inevitable”
– Dan Loeb’s Third Point
Dan Loeb under performance in Q3 could partly be due to being short-changed by the Quant Quakes
But the fund’s sovereign investment in Argentina is what contributed to the bulk of Dan Loeb underperformance in Q3 and consequently the biggest hit to Third Point’s $14.5 billion funds.
“Our largest loss in the Third Quarter was in Argentine sovereign debt when a surprising outcome in the August 11the presidential primary caused a panic in the capital markets,” wrote Dan Loeb’s Third Point. But the rise to power of an anti-austerity government should not come as a surprise, particularly as the electorate becomes weary of austere economic policies. So the market’s reaction to Argentina’s Fernández center-left government was negative as usual with stocks, bonds and currency all taking a big hit.
Dan Loeb’s Third Point now sees a political vacuum, a run on the Argentine peso and debt restructuring now inevitable. “In this vacuum, investor fears spiraled into a massive sell-off in the currency and reserve depletion, making a restructuring inevitable” wrote Dan Loeb’s Third Point.
Dan Loeb’s Third Point sees an opportunistic play in Argentine bonds when the debt restructuring begins
“When the October 27 election presumably makes Alberto Fernández president-elect, we expect debt restructuring negotiations to begin and while this process will likely lead to more volatility, we anticipate that the bonds will ultimately recover significantly more (30-50%) than current prices,” wrote Dan Loeb’s Third Point.
At the time of writing this piece, Fernández has been elected, Argentina’s has introduced draconian capital controls and the Peso has spiked.
Nevertheless, Dan Loeb’s Third Point has decided to reduce the fund’s exposure to any further downside risk. “Opportunistic investing success comes from having a differentiated view at the right time; in this case, our thesis was left in limbo and to avoid unacceptable downside risk, we reduced our position at higher levels than are prevailing today” wrote Dan Loeb’s Third Point.
“A steepening yield curve also has given life to under-owned assets at the expense of the over-owned” – Dan Loeb’s Third Point
Dan Loeb under performance in Q3 was also attributed to a steepening yield curve
The Fed’s latest asset purchase has focused on short term treasuries, which has pushed their price up and their corresponding yield down. This was a deliberate policy, financially engineering, to steepen the 2-year/10-year yield curve and thereby prevent the yield curve from inverting, which used to be a great recession indicator. The Fed is continuing with its policy of propping up unwanted assets to create a sense of stability and economic vitality. “A steepening yield curve also has given life to under-owned assets at the expense of the over-owned” wrote Dan Loeb’s Third Point.
So what should investors do? Buy the least owned asset, preferably bellwether stocks, or any recession indicating asset class, wait for the gloomy macro data, then buy the dip and sit tight waiting for the Fed’s funny money? A warped game maybe requires a warped strategy.
Dan Loeb under performance in Q3 can be neatly narrowed down to the top five loses for that period
The list is as follows; the Republic of Argentina, Centene Corp., The Chemours Co., Netflix Inc., and PayPal Holdings, Inc.
Conversely, Dan Loeb’s Third Point top five winners for the quarter was Sony Corp., Baxter International, Inc., Campbell Soup Co., Nestlé SA, and EssilorLuxottica.