Dan Loeb’s letter to Third Point investors for the third quarter ended September 30, 2025.
Dear Investor:
During the Third Quarter, Third Point returned 3.2% net in the flagship Offshore Fund.
The top five winners for the quarter were TSMC, Nvidia Corp., CRH PLC, Comfort Systems USA Inc., and Pacific Gas and Electric Co. The top five losers for the quarter, excluding hedges, were Kenvue Inc., DSV A/S, Primo Brands Corp., London Stock Exchange Group PLC, and Flutter Entertainment PLC. Our performance for the quarter and year has been below our expectations due to the weak performance of several of our largest event-driven positions including Kenvue.
Behind the broad equity markets’ rise in 2025 is a story of increasing concentration with particularly strong gains in gold and AI-related stocks. We are observing ample structural problems in many sectors, and our single name short book has benefited from pockets of weakness in consumer, healthcare, information services and software. However, we believe price appreciation in winning companies has largely been underpinned by strong earnings growth, a recession remains far out of sight, and a Fed rate cutting cycle combined with sustained investments in AI bode well for favorable market conditions to remain in place. It remains to be seen whether gains become more broad-based or remain concentrated and thus higher risk as we approach year end.
Portfolio Updates
Equities
Our investments in the semiconductor sector contributed positively to Third Quarter results. Earlier this year, DeepSeek’s breakthroughs in LLM training and inference efficiency, including their use of automated reinforcement learning as well as mixture-of-experts model architectures ignited fears that AI compute demand had peaked. Since then, reality has proven quite different. While efficiency gains for existing models have been substantial, new AI capabilities and architectures have more than offset those efficiencies and led to a substantial acceleration in AI compute demand.
The introduction of reasoning-based models, popularized by OpenAI's o1 and o3, has progressed LLMs beyond simple pattern recognition to executing complex, multi-step tasks critical in applications like mathematics, coding, and scientific analysis. Because of reasoning's chain-of-thought process, where models process a multitude of tokens before producing a final output, reasoning-based LLMs are several orders of magnitude more compute-intensive than their predecessors. In addition to reasoning, LLM training has also evolved. Whereas the initial LLMs largely relied on "pre-training", where models simply studied a vast quantum of data before being released, a key element of model progress today lies in "post-training", where reinforcement learning techniques fine tune models based on a mix of human and automated feedback. To borrow Jensen Huang's framing, AI compute has moved from a single scaling law, pre-training, to three: pre-training, post-training and reasoning.
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SK Hynix
SK Hynix (000660 KS) is part of a global oligopoly in DRAM memory alongside Samsung Electronics and Micron. This cyclical market has historically exhibited both demand and price volatility, but we believe it is in the early innings of de-commoditization. AI workloads have been driving substantial growth in high bandwidth memory (“HBM”) where Hynix is the market leader with over 50% market share. Unlike traditional commodity DDRx DRAM, HBM exhibits greater elements of differentiation and design cycle stickiness which we believe will both enhance through-cycle returns as well as dampen earnings volatility for the industry. Since the beginning of the AI buildout two years ago, HBM bits have been substantially outgrowing GPU units. Despite this growth, AI compute today, in particular inference, continues to be memory constrained, and we expect HBM volumes to continue to outgrow AI XPUs for the foreseeable future. Looking forward to upcoming GPU and ASIC designs, we see larger processors being developed to pack more HBM onto each XPU’s expanded shoreline.
Because of its complexity, HBM carries a 4-5x premium over traditional DDRx DRAM pricing. Therefore, while HBM made up just ~5% of industry bits in 2024, it already accounted for ~20% of DRAM industry revenue. As the market leader, Hynix is overexposed to HBM, where the product contributed to 8% of the company’s DRAM bits but nearly 30% of DRAM revenue last year. The HBM mix continues to grow for Hynix, and as of 2Q25 HBM made up 14% of DRAM bits and over 40% of DRAM revenue. At the same time, complexity for HBM continues to rise as we transition from HBM3e this year and to HBM4 next year, which will provide inflationary ASP pressure offsetting legacy product price declines. In addition, and in spite of growing fears around Samsung’s resurgence in the HBM market, we believe the growing HBM complexity will widen Hynix’s lead over its competitors.
Ebara
Ebara (6361 JP) has a history in Fluid Machinery, selling standard pumps for water and sewage applications into buildings and custom pumps and compressors into energy and power markets. Today, more than half of the company’s profit comes from products serving the semiconductor industry. Ebara is a leading supplier of semiconductor production equipment, with the chemical mechanical planarization ("CMP") tool as its primary product line. CMP tools polish wafers in order to guarantee structural uniformity throughout the manufacturing process. As nodes get smaller and gate structures more complex, CMP intensity is rising, with a particularly sharp rise in N3 to N2 given the introduction of new structures like gate all around and backside power.
CMP is also a major beneficiary of the advanced packaging structures critical in AI semiconductors across both logic and memory, spanning from CoWoS to HBM and in particular 3D / hybrid bonded structures, where increased planarity and uniformity requirements drive a meaningful increase in CMP steps, complexity and process time. In our estimation, this makes CMP a relative AI winner within the Semiconductor Production Equipment space. In the near future, we see several AI XPUs as well as HBM adopting hybrid bonded structures, and Ebara would stand to substantially benefit. The CMP market has been a duopoly between Applied Materials and Ebara, with Ebara specializing in metal CMP while Applied Materials specializes in oxide CMP. As metal layers, where we feel Ebara excels, increase in importance for said structures, we see an opportunity for Ebara to gain share from Applied Materials.
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Credit
While the main credit theme in 2025 has been resilient demand for fixed income assets, specific events this year have created several distressed trading opportunities for hedge funds active in this sector. In September, credit events in subprime auto dominated the market headlines and had ramifications for both auto ABS and CLOs. Given our coverage across asset types within structured credit, we collaborated across our credit business to play offense.
The first opportunity was Tricolor Holdings, a subprime auto loan originator whose primary borrower base was undocumented individuals with limited FICO scores. Tricolor has about $1.5 billion in outstanding securitizations and bank warehouse lines in the approximately $60 billion subprime auto market. While the issues for Tricolor do not appear to be systemic for subprime auto loans, it highlights credit concerns about originators widening the credit underwriting box to chase returns and meet investor demand. After the news, Tricolor bonds were out for auction from several holders. We are spending time evaluating the Company’s capital structure in anticipation of distressed sales and have made some small investments to date.
Corporate Credit Update
Third Point corporate credit was up 4.0% gross (3.7% net) for the Third Quarter, putting our year-to-date performance at 7.2% gross (5.4% net). After lagging the high-yield market for the first half of 2025 (partially due to costs associated with hedges taken on to protect capital during Liberation Day), we rebounded in Q3 thanks to positive performance in several names.
While high-yield spreads continued to grind tighter, now approaching the lows of 2021, the leveraged loan market tells a different story. Defaults, including restructurings, are running above 5%, and recovery rates are more than 20% below levels seen a decade ago. This divergence continues to create opportunities.
Our largest contributor for the quarter was Michaels, the craft retailer. As anticipated, Michaels delivered strong second-quarter results and issued favorable guidance for the remainder of the year. While tariff exposure remains a challenge, the company has been able to raise prices to offset much of this impact. Additionally, the liquidation of competitors Party City and Jo-Ann Fabrics has opened significant whitespace for Michaels to expand product offerings in adjacent categories.
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Structured Credit Update
Against the backdrop of the FOMC’s September rate cut and market expectations of further cuts before year-end, spreads in structured credit generally tightened over the quarter as bank and insurance capital continued to buy investment-grade risk. This rate rally, with the 10-year treasury hovering around 4% and tightening credit spreads, is constructive for our predominately fixed rate asset portfolio. We believe it creates a strong environment to buy whole loans backed by hard assets and access securitization financing.
In our current mortgage portfolio, we own most loans at a discount and have been waiting for expansionary monetary policy to monetize our investments. Both the underlying performing and non-performing loans are expected to rally. As rates drop, the ability to refinance increases for these borrowers who have 40-55% equity in their homes, resulting in a par paydown. With bank de-regulation expected in 2026, bank financing spreads continue to trend lower, which should drive the demand for first-lien, owner occupied residential mortgages even higher. Delinquent mortgage loan prices have risen almost 10 points over the year and are higher than currently paying loans. Since non-performing loan investors can accelerate the liquidation timeline on loans with a high percentage of home equity, the assets are more valuable and should further drive the returns on our residential mortgage portfolio in the coming quarters.
In ABS, we have stayed in senior tranches and have been opportunistic in adding to credit stories like solar and triple net lease ABS. In each case, we saw business models challenged by the steep rise in rates in 2022 and 2023 finally facing bankruptcy or extended maturity dates. While the underlying credits were strong in our view, the negative headlines around the issuers resulted in a distressed trading environment where we could add risk 15-20 points down.
Business Updates
Maarten Bauters and Lukas Schwarzmann joined the equities team during the Third Quarter. Maarten was previously an associate in the Hybrid Value fund at Apollo Global Management and earlier worked in the Industrials investment banking group at Goldman Sachs. He graduated from Columbia University with a Masters in Finance and holds an M.S. from KU Leuven. Lukas was most recently a Senior Associate at Blackstone Private Equity and began his career in the restructuring group at PJT Partners. He graduated from Harvard University with a B.A. in Applied Mathematics.
Sincerely,
Daniel S. Loeb
CEO
Third Point
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