Dan Loeb’s letter to Third Point investors for the fourth quarter ended December 31, 2023. Read the full letter here.
Dear Investor:
During the Fourth Quarter, Third Point returned 7.6% in the flagship Offshore Fund.
The top five winners for the quarter were Bath & Body Works Inc (NYSE:BBWI), Microsoft Corp (NASDAQ:MSFT), PG&E Corp (NYSE:PCG), Amazon.com Inc (NASDAQ:AMZN), and United States Steel Corporation (NYSE:X). The top five losers for the quarter, excluding hedges, were Regal Rexnord Corp (NYSE:RRX), Hertz Global Holdings Inc (NASDAQ:HTZ), Option Care Health Inc (NASDAQ:OPCH), Veralto Corp (NYSE:VLTO), and Global Blue Group Holding Ltd (NYSE:GB).
Q4 2023 hedge fund letters, conferences and more
Performance Review and Portfolio Outlook
During the Fourth Quarter, the funds had strong performance that resulted in overall gains for 2023, with contributions from equity longs, risk arbitrage, and corporate credit offset modestly by equity shorts and hedges. Most of our major detractors during the first and second quarters rebounded in the back half of the year, which, along with successful risk-arbitrage investments in Activision Blizzard and US Steel, resulted in equity returns above the indices for the period. For the second half of the year, the funds’ long equity portfolio delivered an ROIC of 11.8% (9.8% net) vs the S&P 500’s 8.8% and the S&P 500 Equal Weighted index return of 5.3%. Absolute returns and alpha generation in our equity portfolio (longs and shorts) improved significantly as the year progressed. Corporate credit generated excellent risk-adjusted returns throughout the year, helped by active trading of the book, which turned over completely two times. Structured credit generated positive returns each month, thanks in part to aggressive hedging of rate risk.
Our efforts in 2023 to improve performance involved significant analysis and scrutiny of not just what we invest in, but how we invest. When we think about Third Point’s competitive advantages in today’s investing landscape, duration, concentration, and our event-driven focus are top of mind. We have found that the long side of the equity portfolio, our best outcomes have tended to be in deeply researched names that represent a large portion of firm capital. Some of these investments have involved significant engagement with the company to improve performance and enhance returns. Having deep fundamental conviction has afforded us patience to see these investments through, even when markets or factors cause temporary underperformance. On the long side, going forward, we expect to further concentrate our long equity portfolio in our highest conviction names.
We applied a similar analytical framework to single name short-selling – focusing more on the how than the what. Analysis of historical results in recent years revealed some telling data on shorts: namely, with the exception of 2020, our hit rate on identifying alpha generating shorts has been excellent, but our monetization of those ideas has been suboptimal, in part due to the extreme volatility in heavily shorted stocks that caused us to shorten duration. As discussed in our Q2 letter, we addressed this by restructuring our single name short portfolio to be far more diversified across industry, market cap, and factor profile, while tightly limiting risk in names with high short interest. This revised strategy has not only yielded alpha since inception, but returns have also come with far less volatility, even during the major short squeezes we saw in July and December of 2023.
Q4 2023 hedge fund letters, conferences and more
Corporate Credit
First half performance was driven by successful investments in cruise lines and by taking advantage of the March market selloff by buying regional banks and CS/UBS debt securities, a joint venture with our equity team that lead to our successful UBS equity investment. Second half performance was driven by exposure to healthcare and telecom credits, as well as a significant tailwind from the “everything rally” during the last two months of the year, when the high yield market generated 9% of its total 13.5% annual performance. While it was more difficult to generate alpha during this period, we had increased our net exposures to our 2023 peak near the October lows and so generated excellent returns on that basis.
Structured Credit
Third Point’s structured credit portfolio outperformed the market in 2023, generating a ~8% gross return (6% net) versus the BBG US Aggregate index’s 5.5% return. Each of the individual strategies within the portfolio were positive except marketplace loans, which were only 1.5% of main fund NAV. Our largest segments – reperforming mezz and senior securities in the residential mortgage space, delivered performance of 7.3% and 7.2% gross return (5.3% net), respectively. We have roughly 10% of NAV in reperforming mortgage securities across 23 distinct deals. Hedges were also a positive contributor, and we actively traded the portfolio throughout the year.
Although performance in 2023 did not meet our expectations, we have begun 2024 with optimism, buoyed by our second half performance, solid start to this year, and our team’s enthusiasm. We are grateful for your partnership and excited for what is to come.
Sincerely,
Daniel S. Loeb
CEO
Third Point Management
Read the full letter here.
