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Dan Loeb Describes Short Selling, Sovereign Debt Bets

Dan Loeb’s talks Third Point Reinsurance first quarter returns and shorting stocks from the conference call as we first reported.

Also see Dan Loeb Q1 Letter To Investors

Dan Loeb – Third Point LLC – CEO

Thanks, Rob, and good morning everyone. The Third Point Reinsurance investment portfolio, managed by Third Point, returned 3% in the first quarter of 2015, net of fees and expenses, versus returns for the S&P and CS event driven indices of 1% and 1%, respectively, for the quarter. The Third Point Reinsurance account represents approximately 12% of assets managed by Third Point LLC. Losses in January were more than offset by strong returns in both February and March, with gains in equities and structured credit accounting for the majority of profits.

Third Point’s equity portfolio returned 3.7% on average exposure during the first quarter, outperforming the S&P meaningfully, with approximately half the exposure at risk. Performance was anchored by strength in several core positions in the industrials and commodities and healthcare sectors. Our top equity contributors for the quarter were Activist PLC, [The Newt] Corp, and Dow Chemical Company. We’re excited about potential investment opportunities in Japan, and met with companies and government officials on our visit a few weeks ago. Our corporate and sovereign credit book was up 5.8% on average exposure in Q1, versus 2.3% performance from the iBoxx high-yield index during the same period.

Both are performing in distressed credit portfolios are down slightly for the year. However, our sovereign credit portfolio has continued to add meaningfully to returns, and was up 9.8% on average exposure during the quarter, led by our sizable position in Argentine government debt. Third Point’s structured credit strategy contributed significantly to profits during the first quarter. The portfolio added 1.8% to Q1 returns, driven by strong demand for US-based mortgage-backed securities.

Dan Loeb Describes Short Selling, Sovereign Debt Bets

Q&A with Dan Loeb

Kai Pan – Morgan Stanley – Analyst

Good morning, thank you. So first few questions for Dan. First one for you, Dan, is your credit portfolio actually contributed about half of the first-quarter gains. So given the sharp rise in some of — like bond yield, recently, has any impact on that portfolio? And how do you like manage the risk, in a more likely and more volatile bond market?

Dan Loeb – Third Point LLC – CEO

Yes, so most of that appreciation was from structured credit and Argentine credit. So these are not securities that are really subjected to — or haven’t been subjected to the movements in the credit market. So we haven’t had any negative reaction as a result of that

Kai Pan – Morgan Stanley – Analyst

Okay. And then, following up on that, in your letter, you said that most likely, [that] property will — first, will raise the rates for the first time in a while, probably in October. So how do you think the market will react to that? And how do you position your portfolio?

Dan Loeb – Third Point LLC – CEO

This is the thing everything is focused, and looking at, and ready for. Rates will go up if the economy is growing. And we think that equities are going to trade on the prospect of earnings appreciations. So we’re not concerned about a rate hike

Kai Pan – Morgan Stanley – Analyst

Okay. Lastly, on your [short] portfolio, it looks like in April, you results, the market was actually up modestly 1%. Yet the short portfolio actually contributed negatively over 60 basis points. A relatively short — like a smaller exposure, about 20%.

So could you talk a little bit more about your short portfolio? And in terms of the velocity of these hedging the long risk? Or like pursuing absolute return on the short side, as well?

Dan Loeb – Third Point LLC – CEO

In the old days, we used to hope to make money on the long book and the short book. I think that’s very difficult to do. Obviously, there will be months, here and there, where we get lucky, and we do manage to do that. Two things happen in April.

First of all — and you asked about our philosophy on this. Some funds just leave — maintain static short positions, and they leave it alone.

We very actively trade our short book, whether it’s indices or options that we have on a declining market. So the appreciation that you see there, on the short side, is a combination of single name shorts that were just idiosyncratic names that paid off for us, and taking advantage of market moves and trading our short book. And taking advantage, mostly, of trading vol, and taking advantage of opportunities that we see in the premium, some of the options that we have on the short side.

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