Hedge funds have been taking a hammering.
Third Point’s Dan Loeb described the start of this year as the “one of the most catastrophic periods of hedge fund performance” in his first quarter letter.
But there is opportunity amid the carnage, according to fund manager.
Speaking Friday on an earnings call for Third Point Reinsurance, Loeb said that while Third Point was in the minus column in terms of returns, the performance wasn’t as bad as many funds. That puts them in a good position to put money to work, he said.
The fund is finding opportunities in distressed debt and distressed credit, he said. The most compelling opportunity is in stocks though. Here is the transcript (emphasis ours):
I think the most interesting space right now is just in equities that are getting oversold or just underappreciated and under-owned that are in the industrial sector. And also, we wrote about it in our letter. Companies going through transformative mergers where I think you really need to look out one to two years and we’re in a market where people have very itchy trigger fingers and they’re selling or they’re not taking positions until these sorts of deals are completed, things like Time Warner-Charter, Dow that we’re involved in. But in a few other of these, sort of — we call them the pro forma situations where companies are going through transformative transactions.
Third Point has a big position in drugmaker Allergan, and took a hit when Pfizer called off its $160 billion merger with the company after the US government proposed new rules to crack down on corporate tax inversions. The deal would have been the largest in pharma history, and the breakup burned a bunch of other hedge fund investors.
Loeb is holding on to that investment, saying he thinks Allergan will bounce back. He said:
I think Allergan has been kind of battered by the one-two punch, first the Treasury changed the rules and the Pfizer-Allergan merger was basically broken up in a way. We really didn’t expect that. We did a lot of research with public policy people and lawyers. This was an unusual situation. We thought there was a good margin of safety in Allergan because the underlying business is very good. Management in Brent Saunders is excellent. So we have confidence in Allergan to get through this.
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