Daniel Loeb of Third Point LLC writes in his latest investor letter that increased volatility has turned 2015 into a “haunted house market.”
Already, 2015 has been marked by increasing volatility, prompting a banker friend (hat tip to Jimmy L.) to characterise this as a “haunted house market” where a new scary event lurks around each corner. Out of this year’s 25 trading days, 22 have had intra-day moves in the market of more than 1%.
Haunted house scares so far this year have included: 1) signs of lower growth across the globe despite falling oil prices; 2) the depegging of the Swiss Franc, which caused an overnight 15% move; 3) declining currencies from Japan to Europe putting pressure on US companies’ earnings and competitive position; 4) a disconnect between when the Fed expects to raise rates and what the market is forecasting; 5) the rise of populism and the anti-austerity left in Europe which has underscored how fragile the “union” of this fragmented continent is today; 6) Russian incursions into the Ukraine; 7) chaos in the Middle East; 8) a surprising lack of leadership on the international stage by the United States and an apparent unwillingness to take decisive action to promote democracy abroad; and 9) a seeming decline in government respect for rule of law, shown by numerous executive actions, confiscations of property, and use of various departments — ranging from the IRS to the Treasury — to intimidate citizens and interfere with legal commerce.
In the summer of 2014, Wall Street was begging for volatility so that it could trade. Once markets started getting choppy, however, traders all over the Street found it was too much to handle.
In the letter, Loeb writes his fund had “mediocre” results in 2014. The Third Point Offshore Fund gained 5.7%.
Overall, though, 2014 was an underwhelming year for most hedge funds. According to research firm Preqin, hedge funds on average returned a paltry 3.78%, the lowest annual return since their 1.85% loss in 2011. For comparison, the Standard & Poor 500 rose 13% last year.
Loeb writes that his fund’s lackluster results were “due to a combination of poor trading during market volatility and bad judgment in exiting positions for reasons ranging from ‘overstaying our welcome’ to impatience seeing our thesis through in choppy markets.”
This year, Third Point has lowered its gross and net exposures. Loeb writes that they were “too high for too long” last year.
“Despite recognising that volatility had increased last year, in hindsight, our net exposures remained too high for too long due to conviction in our long stock picks and a small short book,” Loeb writes.
Loeb also acknowledged that for the first time since 2008 Third Point was hurt by the market’s five big drawdowns in 2014. He writes that they missed out on opportunities to buy stocks “cheaply during periods of panic.”