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DAN LOEB: Managing money in the past year has been like 'Game of Thrones'

Jon Snow in 'Game of Thrones' season 6, episode 9 'Battle of the Bastards' (CREDIT: HBO)
Jon Snow in ‘Game of Thrones’ season 6, episode 9 ‘Battle of the Bastards’ (CREDIT: HBO)

Hedge fund billionaire Daniel Loeb, the founder of Third Point LLC, has eloquently summed up for investors what it’s been like to manage a portfolio in the last year.

It’s just like “Game of Thrones.”

“Watching Jon Snow’s epic ‘Battle of the Bastards’ scene in the penultimate episode of this season’s Game of Thrones gives investors a sense of how it has felt to manage money during some periods over the past year,” Loeb wrote in a letter to investors. “Surging enemies forming a seemingly impossible perimeter, a crush of fellow soldiers on the field, arrows coming in overhead, and the need to avoid panic and deftly use sword and shield to fight your way out of a seemingly impossible situation is a good analogy for the emotional experience of managing assets since last summer.”

He went on to break down what’s been unfolding in the hedge fund space — bad stock picking, too much crowding, and too few fund managers looking at the world through a macro lens.

“Nearly one year into this market cycle, a few truths of hedge fund investing are evident: 1) portfolio positioning matters as much as stock picking skill; 2) factor risk, not beta, has driven hedge fund underperformance in an up market; 3) crowded trades are a symptom of the prevalence of copycat investment frameworks practiced by hundreds of funds formed over the past decade to mimic the success of many of their investing legend mentors and therefore naturally share the same outlooks and biases; and 4) putting money to work in equities and credit today requires a thoughtful perspective on global events. Macro analysis is no longer just for macro traders,” the letter said.

Loeb used the Brexit decision to illustrate his point on macro. Going into the vote, the polls showed that it was going to be a coin toss, but many thought that the “remain” camp would win. Stocks rallied going into the vote. This, of course, caught many investors off guard when UK citizens voted to leave the European Union on June 23, causing a sell-off in global markets.

Over the weekend, Third Point concluded that the “average predicted scenario was too severe.” The fund quickly repositioned its equities portfolio by covering short bets, adding to several longs, and initiating a new position in a European event‐driven situation. Within just six days, stocks rallied back to where they had been trading before the vote.

“As the Brexit episode showed, investing in this market must be viewed through a different lens. This year, we have applied our views about global risks to portfolio management and maintained a highly flexible, opportunistic approach,” the letter said.

Third Point Offshore Fund gained 4.6% in the second quarter, bringing its year-to-date returns to 2.2%. Meanwhile, the S&P 500 gained 2.5% in the second quarter, and is up 3.8% for the first half of the year.

“The year’s positive performance reflects contributions from nearly all of the strategies we employ; the top five winners include a constructive long equity position, a sovereign debt investment, high‐yield debt investments in energy companies, an event‐driven long position, and a short equity position in the pharmaceutical industry,” the letter said.

Back in April, Loeb wrote in his fund’s letter that the first quarter was “one of the most catastrophic periods of hedge fund performance” he’s witnessed in his 20 years running his hedge fund. Third Point, which has produced annualized returns of 15.8% since inception, fell 2.3% in the first quarter.

Loeb wrote: “There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies.”

Hedge funds had a rocky start in 2016 with many posting negative returns in the first quarter. Things began to recover in the second quarter, but funds for the most part are still massively underperforming the index.

Loeb noted in his second quarter letter that the fund was continuing to generate positive returns in the month of July. Since its inception, the fund has produced an annualized return of 15.9%, compared to the S&P’s 7.3% gain in that time.

Julia La Roche is a finance reporter at Yahoo Finance.

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