Third Point has sharply reduced its risk.
The hedge fund firm headed by Dan Loeb told clients in its third-quarter letter, dated November 3, that it has “significantly” lowered its gross and net exposures and has taken “a more selective approach,” citing a number of concerns.
“We have cut our semiconductor and data center–adjacent positions, as well as the hyperscalers, which we had earlier added to based on our assessment of their strong business models backed by recurring revenue and reasonable valuations,” it said. “We were broadening the portfolio already midyear, seeking more balance, and that continued through the quarter with positions in financials, live events, industrials, commercial aerospace, and consumer-facing companies that we feel are equipped to navigate an air pocket or are actively using it to gain market share.”
Third Point said that on the short side, its gross equity short exposure is currently 21 percent of net asset value and entirely comprises single names. “We think dispersion will continue to present opportunities here,” it added.
As of the end of October, Third Point had a gross exposure of only about 65 percent and a net exposure of 25.3 percent, according to the hedge fund’s October monthly report. In September, it had roughly doubled its net exposure from the previous month to about 24 percent, according to the September monthly tear sheet. It was essentially flat through September after dropping 6.8 percent in the third quarter.
Third Point lost 2.3 percent in October and is down 2.5 percent for the year.
It said its current themes include GLP-1 losers, cable, P&C insurance, and housing. It has also reduced short exposure to AI disruptees — software, information services, IT services — noting that “those shorts were amplifying our AI longs and creating basis risk rather than hedging it.” Third Point noted it has had some success shorting “AI overearners,” but conceded that that is a difficult strategy given the dramatic recent derating.
In the letter, Third Point said the reason for its renewed caution is that it continues to see a tug-of-war playing out between the bulls and the bears.
On the positive side, it cites a strong earnings season, aggregate AI usage that is holding up, and what it still believes are the early innings of AI adoption. On the other side, it mentions the ten-year Treasury hovering north of 5 percent, the unresolved situation in the Middle East, oil prices that remain high, and “investors who are being a lot more circumspect about AI as a monolithic investment theme.”
Third Point said, “With interest rates where they are and a roughly 20 times forward multiple underpinned by 30 percent earnings growth, the index is not where we want our risk. We expect that the opportunity lies underneath it: in the dispersion between the companies that will actually earn a return on the AI buildout and those that are merely levered to it, and in the parts of the market that were sold for reasons that had nothing to do with their fundamentals. . . . We are being equally cautious on the short side as we are on the longs.”
The hedge fund said it is willing to miss the early stages of a market rally or a rotation back into tech to preserve capital, exercise patience, and wait for investments that better fit its event-driven framework, adding: “Our suspicion is that we could be getting close to an environment like we had in March 2020, or toward the end of the [Global Financial Crisis], where the next wave of opportunities will come from credit markets.”
