Aggressive activist Dan Loeb’s hedge fund Third Point is being investigated by the Securities and Exchange Commission over talks its managers regularly have with rivals at other funds.
According to Third Point’s quarterly letter to investors last month, first reported by Alpha magazine, the financial regulator has started a “formal investigation” of the $3.3bn fund after being told of the discussions. Mr Loeb - known for his forthright public letters to executives he disagrees with - wrote:
Such conversations permit us to test our hypotheses and refine our thinking and, as a result, we believe that participating in give-and-take with other managers is in the best interest of our investors. Our outside counsel has examined this matter thoroughly and assured us that our position is consistent with the securities laws and that we have not violated any law in connection with these communications.
Mr Loeb declined to comment further, but his letter is unlikely to endear him to regulators. While he gave a neutral explanation of the SEC’s short-lived short-selling rules and its search for the alleged Lehman and Bear Stearns rumour-mongers, he said the “chorus of ‘blame the shorts’ is generally an excellent indicator of significant underlying problems”.
He goes on to explain that he remains “extremely bearish” about financials:
…the proposed GSE [Fannie Mae and Freddie Mac] bailout is fraught with moral hazard issues. As a friend said to me, “Capitalism without bankruptcy is like Christianity without hell.” Even if the government does not wipe out the subordinated debt and equity in the GSEs, any proposed equity offering would so significantly dilute their value as to effectively let the companies’ management off the hook.
That bearishness hurt Third Point - which has a feeder fund listed in London - badly in July and the first two weeks of August, when a sharp rise in financials and plunging energy stocks saw it drop just under 10 per cent, leaving it down 8 per cent for the year so far.
Mr Loeb told investors he had prudently cut back energy exposure, which was halved to 14 per cent of the fund at the end of July, but continued to believe in the long energy, short financials trade.
Since our largest exposure has been to energy, we sustained losses in the space which, combined with the financials “melt up”, have resulted in losses for the month in the high single digits as of today. As a matter of risk management, we have reduced our energy exposure during the month, although we still have a high conviction in the underlying valuations and expect a snap back in the prices later in the year.
