Third Point Has 2.2% First-Half Gain on Energy, Brexit Bets

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  • Loeb firm wagered against corporate debt, switched as oil fell
  • On Brexit, Third Point covered bearish moves to turn bullish

Third Point, the hedge fund run by Daniel Loeb, said investments in the debt of energy companies and wagers following the Brexit vote helped drive a 2.2 percent gain in the first half of the year.

The firm started 2016 betting against corporate debt and then switched its wager, going long on energy credit in the first quarter after oil prices reached a trough, Third Point said in a letter to investors on Tuesday. After the U.K. referendum to quit the European Union on June 23, the fund said it covered its bearish moves and turned bullish.

“This helped generate positive returns for the month, for the second quarter and so far in July,” Third Point said.

Hedge funds are seeking to revive returns after the worst first-half performance since 2011. Most managers refrained from wagering on the outcome of the Brexit vote while computer-driven funds posted gains. The industry returned 1.4 percent in the first six months of the year, according to Hedge Fund Research Inc.

Game of Thrones

Third Point said the Battle of the Bastards scene in the TV series “Game of Thrones” showed how it felt to manage money in the past year.  

“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,” Third Point said.

Recovery in energy debt has driven high-yield bond market returns that have exceeded 12 percent, on track for the biggest gains since 2009. Energy-company debt, one of the biggest constituents of the speculative-grade market, has jumped 54 percent since the price of oil bottomed in February, Bank of America Merrill Lynch index data show. Since then, the commodity has rallied more than 60 percent despite the declines in July.

Third Point says it saw an opportunity for commodity prices to recover around mid-February when rumors surfaced that OPEC was willing to cut production. That was when oil bottomed around $26 a barrel and a large portion of energy bonds were trading off recovery expectations in a bankruptcy scenario, according to the letter. 

Brexit ‘Groupthink’

The hedge fund said it continues to focus on credit of energy companies that have high-quality assets and offer signs of further debt reduction. Owning such names would allow Third Point to generate returns with limited downside risk even if commodity prices were to stall around the current level.

Third Point said it divested some of its investments in energy companies in which values imply a rosier commodity-price outlook than what the firm expects.

Third Point said it nearly fell prey to the "groupthink" that led investors to incorrectly predict the outcome of the Brexit vote. The firm said during the weekend after the vote it examined the referendum’s impact and concluded that the average predicted scenario was too severe. The fund said that it quickly ended its short equity bets and added to a number of bullish wagers.