Dan Loeb is bullish on President Trump. Although he admits he didn’t expect the election outcome, the founder of Third Point says in his firm’s fourth quarter letter that the morning after election day his firm “took immediate steps to reorganize the portfolio” around investments it deemed would benefit from Trump’s reported agenda. The event-driven hedge fund firm, which technically signed the letter—not Loeb--believes quantitating easing is now going to end quickly, heralding a new period of fiscal stimulus via tax reform and infrastructure spending. It expects a “significant reduction” in taxes, the elimination of the interest rate deduction, and the removal of the deductibility of state and local income taxes from federal returns. At the same time, Loeb and his firm are looking for “a dramatic pullback in government bureaucracy, red tape, and regulation.” And, of course they anticipate a major infrastructure plan to stimulate the economy, create jobs, and increase the labor participation rate. This plan would be bankrolled, in part by an 8 percent tax on repatriated cash held offshore by U.S. companies, the letter anticipates. “Electing a president who is seen as pro-business (ignoring his protectionist views on global trade) has awakened animal spirits, already demonstrated by the record spikes in both business and consumer confidence since the election,” the letter states. “This economic growth will come at the same time as inflation is starting to inflect upwards and the domestic economy is close to full employment, notwithstanding the low labor force participation rate.”
For investors, this means less correlation between asset classes and even within equities themselves. Third Point also says this kind of environment will be good for activists. “A reflationary environment creates favorable conditions for value and event-driven investing, risk arbitrage, and activism and so our exposure has increased in equities relative to corporate and structured credit,” Third Point states. It also says credit will enjoy “a mini-cycle story like the one we saw last year, where opportunities popped up quickly and only those with the ability to be nimble and move capital quickly generated profits.”
Third Point says the portfolio is primarily focused on the U.S., but stresses an accelerating U.S. economy will help boost global growth as well. At the same time, Third Point acknowledges the is a risk of Trump waging destructive trade wars and/or escalating inflation, which could result in a policy mistake, which could result in a sharp sell-off. So, the hedge fund firm has hedges structured to guard against negative impact from those events.
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Several hedge funds have reported January results.
Third Point Offshore Fund enjoyed a very strong start to the year, posting a 2.2 percent gain in January. Most of the profits were made on the long side of its equity portfolio. Altogether, the overall portfolio fared much better on the long side but losses across the board in the short book offset some of the gains. Entering February Third Point was 57.2 percent net long in its long-short book, up slightly from the previous month.
Bill Ackman’s Pershing Square Holdings was up 0.10 percent in January. At least it didn’t lose money although it was up a lot more than that earlier in the month.
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Och-Ziff Capital Management’s multi-strategy funds got off to a good start. OZ Master Fund rose 2.15 percent, OZ Asia Master Fund rose 2.30 percent while OZ Europe Master Fund climbed 1.97 percent.
The firm also said it had $33.6 billion under management as of February 1, up $100 million from the prior month. However, it suffered another $400 million in redemptions last month.
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Shares of Facebook, the second most possible hedge fund stock, fell 1.8 percent to close at $130.84 even though the social media pioneer reported very strong quarterly earnings. In response to the earnings report, Credit Suisse raised its price target from $165 to $170 and maintained its Outperform rating on the stock. “Street models continue to underestimate the long-term monetization potential of upcoming new products,” the bank tells clients in a note. UBS lifted the price target slightly, from $154 to $155.
