Billionaire hedge-fund manager Dan Loeb said he expects markets to fluctuate more this year, providing chances to add to his portfolio.
Volatility has been below historic averages as stocks rallied in a five-year bull market. The Standard & Poor’s 500 Index jumped 30 percent in 2013, the most in 16 years, and hasn’t posted a decline of more than 10 percent since 2011.
“We believe the market will experience increased volatility this year, and so we will look for opportunities where market draw-downs create attractive entry points,” Loeb said today on a conference call discussing results at Third Point Reinsurance Ltd., a Bermuda-based company that counts on his hedge fund to oversee its portfolio.
The Chicago Board Options Exchange Volatility Index (VIX), which measures investors’ expectations for price swings, closed yesterday at 14.35, below its average of 20.15 since 1990. The S&P 500 fell 5.8 percent from Jan. 15 to Feb. 3 and has since regained its losses.
Loeb focuses on event-driven investing, buying and selling stocks or bonds of companies going through changes like spinoffs or mergers. Through his hedge-fund firm Third Point LLC, he has pushed Yahoo! Inc. and Sony Corp. to shift strategies with the goal of driving up share prices.
He said today that bets on Dow Chemical Co. (DOW) and Ally Financial Inc. helped generate 6 percent investment returns in the fourth quarter at the reinsurer, while a stake in Sony hurt. The Japanese consumer-electronics maker plunged 13 percent in the fourth quarter.
Third Point Re, which Loeb co-founded and went public last year, said late yesterday that net income rose 32 percent to $80.1 million in the fourth quarter from a year earlier as underwriting and investment results improved. The company gained 0.5 percent to $15.15 at 11:23 a.m. in New York.
Hedge-fund managers like Loeb and David Einhorn have established reinsurers to gain access to money that’s less subject to client withdrawals. The companies collect premiums from primary insurers for shouldering some of their risks and can invest the funds that are held in reserve for future claims.
The strategy comes with potential dangers. If the coverage is underpriced, it can saddle the reinsurer with claims costs that are greater than the premiums it collects. John Berger, the chief executive officer of Third Point Re, said competition has made some potential risk-transfer deals unattractive, leading it to look elsewhere.
“We are seeing opportunities that meet our underwriting standards from smaller homeowner companies, non-standard auto writers, mortgage insurers, and workers compensation insurance companies in select states,” Berger said on the call.