Dan Loeb Q4 2015 letter to investors was finally released. ValueWalk has a full copy which can be seen below (Loeb kept it very short this time).

In Dan Loeb’s 2015 investor letter he notes that he’s bearish. Loeb notes that his Third Point hedge fund is taking defensive measures.

Notably, he’s been cutting exposure to commodities and China, saying, “A renewed focus on generating alpha on both sides of the portfolio has led us to increase single-name equity shorts by four-fold over the past year. Our total equity short exposure is nearly $4.5 billion today.”

Loeb has called this a Wall Street recession, with the troubles confined to Wall Street – however, they could easily spill over to Main Street.

Per Third Point’s 4Q 13F, here are the biggest moves the fund made:

[drizzle]New – ACE (no. 15 largest holding). MS (no. 19). AXTA (no. 20). 

Adds – increased AGN position by 50% (no. 2 largest holding). Added 26% to SJM (no. 13 holding).  

Reductions – dumped 99% of its YUM and KHC stakes, was no. 5 and no. 6 largest holdings in 3Q. Dumped all of TMUS (was no. 8). And sold 55% of EBAY (was no. 12). 

Dan Loeb Q4 2015 letter

Markets are off to a tumultuous start for the year, as many indices show1: the S&P (- 10.3%); the NASDAQ (-14.7%); the DAX (-18.5%); the NIKKEI (-17.4%); and the Shanghai Composite index (-21.9%). Last year’s darlings like Amazon (-25.5%) and Netflix (-24.5%) have fallen meaningfully in 2016, but hardest hit have been some companies seen as “value” stocks like Williams (-48.3%), Bank of America (-33.7%), and Morgan Stanley (- 31.4%). We believe the indices’ drastic declines actually fail to capture the true carnage revealed when you take a closer look at the breadth of S&P companies experiencing massive losses. In some cases, these losses may represent permanent value destruction. The 2015 market we dubbed a “Haunted House” feels about as scary as the Disney kids’ ride “It’s a Small World” when compared to 2016.

Last August, we recognized that a global tidal shift in monetary policy and a reversal in central bank policy would likely cause fund flows out of many asset classes. We reduced our exposure to companies that were economically sensitive or tied to China or to commodity pricing while significantly increasing our short exposure. For the remainder of 2015, we generated profits on the short side but were hurt by our decision to seek safe haven in healthcare names and other companies we believed would remain sheltered from the new world order. We succeeded in avoiding calamitous losses in the portfolio and preserved our clients’ capital in 2015.

So far this year, markets have suffered from a more steady drumbeat of negative news about China’s demise, how-low-can-they-go commodity prices, a possible US recession, high yield credit sell-offs, spiking national deficits, and Fed policy and statements that appear incoherent to many market participants. Additional toxic ingredients have been  added to the mix in February: whispers of instability among major European Financial institutions, unusual currency volatility and negative rates in some major economies, and a massive sell-off in the momentum stocks that sheltered some investors last year. As we look around the world, we see a need to rebalance important parts of the global economy and concurrent industrial over-capacity in some sectors. Imbalances like these create inequality and discontent and we attribute the unusual state of the US election to this sentiment.

There is no doubt that the rise of populism in the Presidential race is creating further market uncertainty. So far, however, this is a “Wall Street” recession, not a “Main Street” recession. It is unclear at what point a falling stock market begins to impact consumer wealth such that American buyers retrench. If we reach this point, there is no doubt that the economic picture in the US becomes grim. Since the event-driven, long equity approach that worked well since 2009 hit a brick wall late last year, we have shifted our portfolio significantly by drawing on our experience in strategies better suited to the current environment. A renewed focus on generating alpha on both sides of the portfolio has led us to increase single-name equity shorts by four-fold over the past year. Our total equity short exposure is nearly $4.5 billion today.

As capital has flowed away from the event-driven space, we have added several interesting risk arbitrage trades. Nearly half of our profits since 2009 have been derived from our credit strategies, which we expect to continue, and our corporate credit team is currently net short. Thanks to this portfolio reorientation, we have held up better than the indices in the recent sell-off. In the past 100 days since the S&P peaked, that index is down -12.7%, the Russell 2000 is down -19.6%, and the NASDAQ is down -16.7%. Third Point has lost -7.7% over the same period.

Despite the difficult conditions, there are fewer shovels in the sandbox and different opportunities from those we have seen over the past few years. While we remain respectful of a market this violent and have significantly dialed back our overall net and gross exposures, we remain poised to pick up bargains which we believe will generate solid 3 risk-adjusted returns for our investors during this period of economic uncertainty and rebalancing

Quarterly Results Set forth below are our results through December 31st and for the year 2015:

Dan Loeb Q4 2015 letter results

Dan Loeb Q4 2015 letter
Dan Loeb Q4 2015 letter

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