THIRD POINT – GET YOURSELF A BOARD SEAT by Caleb by Caleb Gibbons, CFA, FRM,– Originally at IBankCoin. Reposted with permission
The institutional hedge fund space is typically difficult for the average Joe to access. Only accredited investors can buy and the minimums are high ($5mm typical) with smaller dollops (i.e. $100,000) subject to another layer of fees (1% typical via fund of funds). Dan Loeb’s track record running Third Point has been stellar, trouncing the S&P return by almost 9% per year since it’s 1995 start at $3.5mm to $15bln AUM presently:
Loeb’s Third Point fund is closed to new investors, making access a more definitive issue. Enter Third Point Offshore Investors Limited, a London listed (TPOU.L) feeder fund which individuals can buy. This is far from an institutional avenue as typically daily volume is light, but a patient investor can leg into an allocation of a couple of % relatively easily.
The fund is listed as having an Event Driven, Value Focus. Dan Loeb is perhaps best known as an activist investor in recent years, but his background is varied. Long/short equity typically gets a large gross allocation, but credit, asset-backed securities, and macro are all utilized. This strategy diversity gives Third Point a lower correlation to the straight beta of the equity market (S&P), along with smaller drawdown (Sortino ratio of 1.87 reflects the funds ability to limit downside deviation).
For the typical retail investor, bewildered with what to do in a typical year and made more cautious by the -10%+ start we had to 2016, a modest allocations to listed hedge funds is worth further investigation. This is a whole other level from other forms of active investing, of which up to 40% is really “smart beta” (i.e. alternative indexing methodologies).
The expertise does not come cheap at 2/20. 2% of NAV is the Management Fee, which is really more like 2.25% give the persistent discount to NAV evident in the closed-end fund space. Performance fees are 20% of NAV growth, but there is an investor friendly clause whereby fees are cut in 1/2 in the event of a fall in NAV in any given fiscal year (in place until the NAV fall is recouped by a factor of 2.5X). Performance for TPOU.L will track very close to 1:1 with the Third Point Master Fund performance.
Jeffries went positive on the listed hedge fund space in early February, including Third Point’s closed end-fund TPOU.L. Early in his career Dan Loeb (54) was an SVP Distressed Debt Investing with Jeffries, pointing to his multi-disciplined investment acumen. Barron’s also cast an admiring eye to the space last week, but lumping Loeb’s Third Point in with Bill Ackman’s high wire act did not seem to resonate well with readers/investors.
Many hedge funds have found increased regulations burdensome. Dan Loeb has built his sizeable wealth of $2.7bln through his multi-decade success at the helm of Third Point. A common strategy evident in the market is to return 3rd party money and convert to a Family Office structure, mandated to manage the founder and staff’s accumulated wealth. Getting rid of regulatory headaches/cost and re-sizing to more nimble size must be a tempting proposition. In addition to the merits of hiring a proven quantity manager, this is clearly a potential catalyst for the closed end fund discount to close to zero over the medium term (approx. -14% discount to NAV at present after a +1.8% gain in NAV and a better fund performance just reported for March). Third Point Offshore have both announced and executed stock buybacks (5% typically) in the past to assist in controlling the closed-end fund discount.
The listed funds are tiny at approx. $675mm in relation to the $15bln + run in the Master LP, making the closed-end buyback at NAV a finger snap easy proposition. JCG
Disclosure: Long just shy of 2% allocation in TPOU.L from February. A good fit with my other hedge fund exposure which, while multi-strat, does not employ equity long/short and is light on both activist and event driven strategies.