Price – 930p
NAV – 1166p
Discount to NAV – 20%
Third Point Offshore Investors Ltd (LON:TPOG) is the biggest holding in my portfolio because I believe it gives me exposure to one of the greatest investors in the world at a substantial discount to the value of his portfolio. Better still, I think his macro aware, event driven, value oriented process is one that will hopefully thrive in a poor broader market environment.
Third Point’s multi asset class, long/short approach also offers an attractive alternative to direct equity investment at a time when I believe broad markets are still looking expensive. Historically the fund has provided better than equity returns and Dan Loeb has commented recently that they feel they have become much better at managing volatility lower.
“A manager who has become overconfident by using a bad process is like somebody who plays Russian roulette three times in a row without the gun going off, and thinks they are great at Russian roulette. The fourth time, they blow their brains out.” Dan Loeb, October 2011
The Listed Vehicle
Third Point Offshore Investors Limited, was IPO’d on the London Stock Exchange in July 2007 and raised $523m, to be invested solely in the Third Point Master Fund via an Offshore Feeder Fund. This may sound complicated but it’s pretty standard hedge fund structuring.
2007 saw a raft of hedge funds listing closed end investment vehicles, some of which have proven successful (Brevan Howard, Bluecrest) and others which have not (Dexion Absolute and Thames River Multi-Hedge). The idea was a means to have permanent capital, with no need to worry about redemptions, and further to raise the profile of the firm through a public listing. There is no additional layer of fees so there is no tracking error between the movement of the company’s NAV and the performance of the offshore hedge fund.
The timing of these listings was poor from the perspective of someone who subscribed at the offering. The market was topping out and hedge funds globally were about to have a pretty tough time through the GFC. Third Point lost 32.6% in 2008 despite being short a large collection of RMBS and banks. It is worth pointing out that while Third Point faced the large redemptions that plagued many hedge funds during the financial crisis, it did not implement a gate or “side pockets”. They met all their redemptions without delay.
Interest in Dan Loeb and Third Point should increase on the back of his featuring in the new book “ The Alpha Masters” by Maneet Ahuja.
In that interview he says “We’ve never defined ourselves as one kind of firm and we’ve never really deviated from that flexible approach. Instead, we’ve deepened our research process, and hired people who brought us expertise in different geographies, different industries, and different asset classes. Our philosophy is to be opportunistic all the way across the capital structure from debt to equity, across industries and geographies. We invest wherever we see some kind of special situation element, an event that will either help create the investment opportunity or help to realize the opportunity.”
The Track Record
Since inception in December 1996 the Third Point Master Fund has compounded at an annual rate of 17.6% relative to the S&P 500 at just 5.9% over the same period. $1m invested in the S&P compounded to $2.57m compared to $14.5m for the Third Point investors.
Fund returns are pretty lumpy and volatile, for example 48% and 53% in 1997 and 2003 or -38% in 2008. As AUM is now much bigger I would imagine that the returns will be a little bit less volatile as they deal in larger, more liquid instruments now.
In 2009 the fund returned 39%, in 2010 they achieved 35% and in 2011 they were flat. The performance in 2009 and 2010 won them consecutive “Event Driven Fund of the Year” awards presented by Absolute Return magazine.
For the year 2012 so far the fund is up around 4%.The fund is currently 50% gross long equity with a net long equity of 40%. Third Point is 40% gross long credit and net 20% long. There is a particular focus on long MBS and long Distressed Credit.
Finally “Other Assets” are 21% long and 9% net long. I imagine that a large part of this is their holding in Gold which is the second biggest holding in the fund.
The shares currently trade at about a 21% discount to NAV. This discount was nil at the IPO, and even traded at a slight premium to NAV before the market crash. The discount was widest in late 2008 when all hedge fund investments and anything that seemed illiquid was getting dumped senselessly.
5 Year View
If we are to imagine that a combination of size, vast wealth and a very choppy macro environment makes it difficult for Dan Loeb and his team to generate the same quantum of returns they have in the past. Let’s assume that the CAGR over the next 5 years is reduced to 10% from the 17.4% CAGR since inception. I think this is a conservative forecast because the funds were still pretty large in 2009 and 2010 where they posted great returns.
From today’s NAV of 1166p at 10% CAGR we would get to a 2017 NAV of 1877p. If the discount remains at the current width then the share price will be just under 1500p. If the discount was to be fully closed to the NAV then we would be looking at a total return from today’s share price of 100%.
A bull case would say Third Point can use their large capital base and knowledge across the capital structure to generate great returns over the next 5 years and therefore maintain that 17% CAGR. That gets TPOG to a NAV of 2556p by 2017, a 178% premium to today’s prices.
Below the Radar
The stocks are fairly illiquid, particularly the Sterling denominated one (TPOG) but across the three major currency share classes there is trading volume of around $450,000 per day on average. Not enough volume for wealth managers to allocate across full client banks and this is often the key target market for these closed ended hedge funds.
Listed hedge funds have definitely become an unloved sector as large wealth managers move away from closed ended vehicles to open ended strategies where they don’t have to deal with the problems of liquidity, discounts and bid/ask spreads.
Furthermore, although Dan Loeb is a rock star in the US hedge fund community I have rarely come across a UK based investor who has heard of him! Third Point is not a well known hedge fund in the UK and therefore that must have some impact on the attention granted to “just another” listed hedge fund.
A further soft factor I would mention that I think keeps the natural buyers of Third Point away is the complexity of their strategy. Wealth Managers can tell clients that Brevan Howard’s listed vehicle is a Global Macro fund and that they trade interest rates and currencies; that can just about be communicated effectively. Allan Howard is also one of the richest men in the UK and therefore has a recognisable name.
Telling private clients that you are investing in a fund they’ve never heard of that “goes anywhere across the capital structure”, “invests in special situations”, likes “distressed credits and mortgage backed securities” and that “lost 30% plus in 2008” probably doesn’t play so well.