As we wrote in our previous article on Third Point Re (TPRE, Financial), Daniel Loeb's investment record is beyond reproach. Since 1995, he has generated one of the best long-term investment track records in history, averaging 19.5% annual returns for over 20 years.
As you can see below, however, the past year or two has been tough for value investors. In 2014 and parts of 2015, his fund lagged the markets. Third Point Re (his reinsurance company that invests in his hedge fund's strategy) is down almost 40% from its highs in 2014. Even if you don't believe that markets will continue to rise, buying into his investment strategy through shares of Third Point Re may be a great idea.
A cheap, easy way to get short exposure
If you believe markets are overheated, the best way to take a position is often through shorting stocks. This requires more skill than simply going long, however, especially given its unlimited risk potential. Not only do you need to get the direction right, but timing is also key. Most individual investors just don't have the upfront capital needed to remain short for years at a time while waiting for a thesis to play out. Third Point does.
Loeb said in November that he’s growing his short bets against companies that are relying too much on accounting trickery.
“There’s been some real sloppiness in accounting, and this move toward using adjusted Ebitda and adjusted earnings has produced some companies that I think are trading on valuations that are not supported by the real numbers,” he said. “We’ve seen some real themes that favor the type of short selling that we do. It’s a lot easier for us to find shorts and not get overcome by a rising market tide that could lift all stocks.”
At the time, Third Point had more single-name shorts than long positions”‹.
Looking at his market exposure today, his portfolio is positioned to relatively outperform the market if things continue to deteriorate. His big short bets mean that he only has a 50% net long exposure to the market. Having a proven, long-term investor able to pick long and short stocks for your portfolio is an incredible advantage, especially with volatile markets. With Third Point Re's stock trading at only 0.85x book value, it looks wise for both bulls and bears to buy into Loeb's hedged portfolio at a discount.
