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Daniel Loeb's Third Point Q2 Investor Letter

Published: Tuesday, 4 Aug 2009 | 1:33 PM ET

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By: Mary Catherine Wellons
Producer

Dan Loeb: The Kid in the Candy Store

Daniel Loeb's Third Point fund, with $1.8 billion in assets under management, has had a successful second quarter. In its most recent letter to investors, acquired by CNBC, the hedge fund reports the following returns:

Q2 2009:

Third Point Partners: 8.0 percent
Partners Qualified: 7.9 percent
Offshore: 10.0 percent
Ultra Funds: 12.2 percent

Year-to-date:

Third Point Partners: 5.6 percent
Partners Qualified: 5.5 percent
Offshore: 7.1 percent
Ultra Funds: 8.5 percent

The hedge fund says that with a “doomsday scenario off the table” in the second quarter, it put capital to work in distressed debt and significantly undervalued turn-around situations.

In terms of asset allocation, the fund reports that by June 30, net exposure in its long/short strategy was 37 percent, up from -3.4 percent on April 1. Allocation to credit grew to over 40 percent and risk arbitrage, 20 percent of the portfolio.

Loeb says that he is “encouraged by the current investment climate, particularly by the opportunities in distressed debt.” The fund is putting capital to work by providing liquidity to companies who need to restructure their balance sheets. Remarking on the current climate, Loeb says, “the concept of kids and candy stores comes to mind.”

A few highlights:

1. Fortis

The fund holds core positions in Fortis, believing its common and mandatory convertibles “continue to be significantly undervalued” ahead of the release of half-yearly financial statements. Third Point reports earning about 160 percent on its invested capital in Fortis over the past four months.

2. Auto industry investments

12 percent of Third Point’s portfolio is in auto-related exposure. This exposure makes up 25 percent of its overall credit book. Third Point is invested in Ford, Ford Motor Credit, Dana Holding, Delphi and Lear. One of the biggest winners for Third Point: investment in Chrysler Financial (Chrysler Finco) 1st and 2nd lien debt.

Third Point offers this caveat: “Investing in this industry is not for the faint-of-heart, and one must be selective (as there will be clear winners and losers), but we think the Funds will benefit from our foray into this market.”

Third Point says that a lack of attractive used car options and early success of “Cash for Clunkers” should lead to increased seasonal-adjusted annual rate of sales (SAAR) and production levels.

3. Bank of America

Third Point continues to hold a position in Bank of America equity and believes it is “significantly” undervalued.

4. Deutsche Boerse

The fund initiated a position in Deutsche Boerse, saying it has “found its fundamentals compelling again.” Additionally, Third Point believes that Deutsche Boerse will likely be at the forefront of an organized European credit derivatives platform, according to the investor letter.

5. Distressed mortgage investments

During Q2, Third Point started making investments in mortgage securities. Since April, Third Point has invested approximately $160 million in securitized mortgage-backed space. With that, it made over $20 million in profits.

The fund says that it may allocate 10-15 percent of invested capital to its distressed investing strategy. It had initially targeted mortgage investments to comprise 5-10 percent.

6. Risk Arbitrage

Finally, Third Points says that this is a “terrific” time to be in risk arbitrage. Pfizer/Wyeth has been one of its biggest positions for the past few months.