Dan Loeb Knows What to Short But Sucks At Market Timing

Dan Loeb’s Third Point lost 6% during the second quarter. According to Third Point’s third quarter investor letter, the top five winners for the period were Gold, Peregrine Metals, Auto Supplier Short Basket, Commodity Short A, and Equity Short A. The top five losers were Delphi Corp, Technicolor, Sunoco Inc., CIT Group Inc., and The Mosaic Company (MOS).

We like Dan Loeb. He is a great hedge fund manager. His third quarter results may tell you you something else but don’t rush to judgment. During the third quarter S&P 500 index declined by around 14%. The average return for the long position in Dan Loeb’s portfolio lost only 9%. The average short position lost 30%. This is amazing. Clearly Dan Loeb know what to short. The problem is he doesn’t short enough of them. He sucks at market timing. His portfolio was net long during the third quarter and short positions weren’t big enough to provide a complete hedge.

Another statistics that indicates that market timing wasn’t Dan Loeb’s one of strong points during the third quarter is his net exposure level. Third Point’s net exposure level was the least when the market started to take off at the beginning of October. He was 60% net long at the beginning of July, whereas he was less than 40% net long at the beginning of October. Here is what Daniel Loeb says about his net exposure in Third Point’s 2011 Q3 investor letter:

The main question on every investor’s mind is when we will start to significantly increase market exposure. As in past macro‐driven periods of unusual market volatility, it is impossible to predict precisely when we will feel it is safe to get back in the water, although we have taken small advantage of the optimism regarding the European situation that drove October markets sharply higher. We remain patient and cautious for the moment until we determine it is time to deploy our dry powder decisively.