Third Point, the event-driven firm founder Dan Loeb named after a fast wave on Malibu's famed Surfrider Beach, is seeing fewer perfect south swells than it might like. Ill-timed investments in Target and a tricky merger arbitrage position have helped push the fund to a loss this year. Meanwhile, the firm's investor-friendly stance has made it easy for partners to redeem at a time when liquidity is at a premium.
For the month through April 24, Loeb's flagship Third Point Offshore had lost 2.5%, leaving the fund down 5% for the year thus far. That result comes on top of a 32.18% decline in 2008, a period when the Absolute Return Event Driven Index lost an average 23.35%.
Meanwhile, Third Point's assets have fallen by almost 70%, to $1.8 billion from a peak of $5.9 billion in January 2008. The firm isn't alone in having its capital evaporate over the past 12 months, as many funds have reported poor performance and big investor withdrawals. However, Third Point got hit particularly hard with redemptions because, at the end of 2008, when many investors needed cash to fund other obligations, none of Third Point's capital was subject to a lock - and the firm did not gate or suspend withdrawals. In his fourth quarter 2008 investor letter, Loeb argued that gating violates the social contract managers have with their investors. "I am proud to say that despite redemptions of a significant amount of our capital, we have met all of our obligations timely, in cash."
In recent months one of Third Point's more controversial investments was its position in Pershing Square IV, Bill Ackman's special-purpose vehicle for Target stock. That fund, which has been long Target through options, lending the investment leverage of four times, lost 40% in January as the retailer's shares gave up 9.6% for the month.
Third Point redeemed from Pershing Square IV in February, missing the stock's big comeback in March, when it rose 48%. Third Point's allocation to Pershing Square - at one point Third Point's biggest position, according to investors - was irksome to some limited partners who complained about paying Loeb fees to invest in another manager's fund.
Third Point held another big illiquid position last year - an equity stake in Chrysler. Like Target, that investment lost virtually all of its value, and Third Point has written it down to almost nil. In his most recent investor letter, Loeb acknowledged that he had learned a "very painful lesson" with regard to less liquid positions. "Needless to say, we will not make these types of investments again," he wrote.
Other positions Third Point has held recently: long bets on gold ETFs, which it was buying in last year's fourth quarter, and short bets against European banks and sovereign bonds, largely through credit default swaps.
Event-driven funds, once the darlings of hedge fund strategies, are facing a tough environment as their long-biased portfolios decline along with the stock market and financing for merger arbitrage deals dries up. In their heyday in the middle of the decade, the average activist funds netted double-digit returns. Third Point, for example, posted gains of 51% in 2003, 30% in 2004, 20% in 2005 and 15.6% in 2006. Even after last year's loss, the offshore flagship averages an annual return of 20.1%.
For 2009, Loeb has said he is most optimistic about market-neutral strategies and short selling, particularly in the materials sector and for-profit education stocks. In his own words, his view "is even more bearish than the consensus."
While Loeb earned a reputation for his profitable activist plays, he was also renowned for acerbic letters to chief executives. After such a tough time in 2008, Loeb has turned his pen on himself. "It is too convenient to hide behind the mama's apron of 'challenging market environments,' and 'black swan events' while exhorting clients to ignore poor performance and to think like 'long-term investors.' I make no such excuses. Mistakes were made, but lessons were learned." CS