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Loeb's Third Point: 'Bubblelicious' market to see more whipsawing

Early optimism about the economy may have been "misplaced," Dan Loeb's Third Point warned on Thursday, adding that key sectors were showing "bubblelicious valuations" and were poised for more volatility in the months ahead.

In a letter to investors obtained by CNBC, the hedge fund said Federal Reserve Chair Janet Yellen's statement on interest rates was a contributing factor behind the market's dour tone.

As events in Eastern Europe become more perilous and U.S. data has disappointed, investors have turned cautious and asset prices have suffered accordingly. Although the Dow Jones Industrial Average closed at a record high on Wednesday, a clutch of initial public offerings have either been postponed, or fallen sharply from their offering price.

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The correction, however, was "healthy," Third Point said, adding that the economy was beginning to accelerate, after sustaining the dual punch of a particularly brutal winter and heightening rate hike expectations. As the second quarter cranks up, "it now seems evident that investment performance will require a combination of good stock selection, patience, and deft trading," it said.

Daniel Loeb
Simon Dawson | Bloomberg | Getty Images
Daniel Loeb

Meanwhile, the Fed is charging full speed ahead with plans to slowly withdraw its crisis-era liquidity from markets. On Wednesday, the central bank tapered its massive bond buying by an additional $10 billion —a development that Third Point says is likely to boost the whipsaw factor.

Read MoreFed tapers another $10 billion

"As tapering ends, most likely in October, and the discussion shifts to an impending first rate hike…we will have to buckle our seatbelts for an inevitably more volatile environment," the firm said.

--Reporting by CNBC's Kate Kelly; writing by Javier E. David

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